National Flood Insurance Program: Preliminary Views on FEMA's Ability to Ensure Accurate Payments on Hurricane-Damaged Properties
Published: 2007-06-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Disputes between policyholders and property-casualty insurers over coverage from the 2005 hurricane season highlight challenges in determining the appropriateness of claims for multiple-peril events. In particular, events such as hurricanes that can cause both wind and flood damages raise questions about the adequacy of steps taken by the Federal Emergency Management Agency (FEMA) to ensure that claims paid by the National Flood Insurance Program (NFIP) covered only damages caused by flooding. As a result, the Subcommittees asked GAO to provide preliminary views on (1) the information available to and obtained by NFIP through its claims process in determining flood damages for properties that sustained both wind and flood damages, and (2) the information collected by FEMA as part of the NFIP claims reinspection process. GAO collected data from FEMA, reviewed reinspection reports, reviewed relevant policies and procedures, and interviewed agency officials and others knowledgeable about NFIP.
section_title: What GAO Found
paragraphs: NFIP does not collect and analyze both wind and flood damage claims data in a systematic fashion, which may limit FEMA's ability to assess whether flood payments on hurricane-damaged properties are accurate. Instead, NFIP focuses only on the flood claims data to determine whether the amount actually paid on a claim reflects the damages caused by flooding. Flood claims data, collected by NFIP through the write-your-own (WYO) insurers--including those that sell and service both the wind and flood policies--do not include information on total damages to the property from all perils. That is, NFIP does not systematically collect information on wind damages from the WYO insurer when a flood claim is received. FEMA officials state that they do not have authority to collect wind damage claims data from WYO insurers, even when the insurer services both the wind and flood policies on the same property. As a result, for hurricane-damaged properties, such as those damaged by Hurricanes Katrina and Rita, NFIP does not have all the information it needs to ensure that its claims payments were limited to damage caused by flooding. Concerns over the processing of these flood claims are heightened when the same insurance company serves as both NFIP's WYO insurer and the property-casualty (wind) insurer for a given property. In such cases, the same company is responsible for determining damages and losses to itself and to NFIP, creating a potential conflict of interest. The lack of both flood and wind damage data also limits the usefulness of FEMA's quality assurance reinspection program for NFIP flood claims. GAO found that the NFIP reinspection program did not incorporate a means for collecting and analyzing both the flood and wind damage data together in a systematic fashion to reevaluate the extent to which wind and flooding were deemed to have contributed toward damages to the property. Further, we explored whether the wind-related claims data collectively gathered by state insurance regulators would be useful to NFIP to reevaluate damage assessments. We determined that this information would be of limited value to NFIP in reevaluating wind versus flood damage determinations made because such data is not collected in enough geographic detail to match with the corresponding flood claims data on a property- or community-level basis. Without the ability to examine damages caused by both wind and flooding, the reinspection program is limited in its ability to confirm whether NFIP paid only for losses caused by flooding.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our preliminary views on the  National Flood Insurance Program (NFIP) and its access to the data  needed to assess flood claims on properties damaged by both high winds  and flooding in the aftermath of hurricanes. As we begin the 2007  hurricane season, disputes over coverage between policyholders and  property-casualty insurers from the 2005 hurricane season continue to  highlight the challenges of determining the appropriateness of claims for  multiple-peril events. While these disputes center on the extent to which  homeowners’ insurance policies covered damages that resulted from wind,  flooding, or some degree of both, they also bring to light the issues NFIP  faces in servicing and validating flood claims from disasters such as  hurricanes that may involve both flood and wind damages.
Key concerns raised from the 2005 hurricane season include whether or  not some property-casualty insurance claims for wind-related damages  were improperly shifted to NFIP at the expense of taxpayers. For  properties subjected to both high winds and flooding, determinations must  be made to assess the damages caused by wind, which may be covered  through a property-casualty homeowners policy, and the damages caused  by flooding, which may be covered by NFIP. The property-casualty  insurer, NFIP, and the consumer all have a financial stake in the outcome  of these determinations. Under NFIP, most flood damage claims are  adjusted by private property-casualty insurers, known as the write-your- own (WYO) insurers, which sell and service flood insurance policies on  the program’s behalf. Concerns over the processing of these flood claims  are heightened when the same insurance company serves as both NFIP’s  WYO insurer and the property-casualty (wind) insurer for a given property.  In such cases, the same company is responsible for determining damages  and losses to itself and to NFIP, creating a potential conflict of interest.
Accordingly, questions have been raised about the information NFIP  collects or has access to in these types of claims that would allow it to  understand and validate the extent of damages caused by wind and  flooding as a way to ensure that the allocation of damages and, as a result,  the claims paid for flooding are accurate. As I indicated, knowing how  both wind and flooding contributed to damages is particularly important in  addressing the potential conflict of interest that can arise when the same  company is determining the wind and flood damages for itself and for  NFIP, respectively. My remarks today focus on two aspects of the NFIP  claims process. First, I will discuss the information available to and  obtained by NFIP through its claims process in determining flood damages  for properties subjected to both high winds and flooding. Second, I will  discuss the information collected by the Federal Emergency Management  Agency (FEMA) as part of the NFIP claims reinspection process.
My remarks today are based on our preliminary review of hurricane- related claims data systematically collected by NFIP for flood losses and  by state insurance regulators for losses reported by property-casualty  insurers for the 2005 hurricane season. Due to broad-based interest, the  work supporting this statement is being done under the authority of the  Comptroller General and is part of a larger effort being completed for the  Ranking Member of the House Financial Services Committee. Our ongoing  work addresses insurance issues related to wind versus flood damages and  includes a review of how such determinations are made, who is making  these determinations and how they are regulated, and the accuracy of  claims payments based on the wind and flood damage determinations.
To complete our work, we have identified and reviewed the specific data  elements and level of geographic detail available to NFIP on hurricane  claims payments. In addition, we reviewed a statistically valid sample of  files of reinspections that NFIP conducted on selected properties. We have  also discussed information and issues associated with claims processing  activities with NFIP, state insurance regulators, the National Association  of Insurance Commissioners (NAIC), property-casualty insurers, state- sponsored wind insurers, insurance agents, claims adjusters, and industry  associations. We conducted our work in accordance with generally  accepted government auditing standards.
Limited information is collected by NFIP to understand both the wind and  flood damage determinations made for hurricane-damaged properties,  limiting NFIP’s ability to know whether claims paid under the flood policy  were always limited to only flood damages. For a given hurricane-damaged  property, because NFIP does not know how much of the damages were  caused by wind and how much were caused by flooding, NFIP cannot  determine whether the amount it paid accurately represents payment only  for flood damage. This information is lacking even when the same  property-casualty insurance company serves as both the NFIP WYO  insurer and the wind insurer. For properties experiencing both wind and  flood damages, NFIP does not consistently collect information that would  enable it to determine, either at the time the NFIP claim was paid or later,  whether the amount paid on a flood damage claim reflects only the  damages caused by flooding. Claims data collected by NFIP from WYO  insurers, including those that sell and service both the wind and the flood  policies, do not include information on total damages to the property from  all perils—that is, they do not report the existence of wind damage nor the  amount of damage caused by wind when servicing a flood claim on the  same property. FEMA states that “claims paid by a WYO company that do  not involve flood insurance proceeds (and the data related thereto) are not  accessible by FEMA.” Hence, NFIP does not systematically collect data on  wind damages for properties for which a flood claim has been received. As  a result, for hurricane-damaged properties subjected to both high winds  and flooding, NFIP may not have all the information it needs to ensure that  its claims payments were limited to only flood damages.
We found that the lack of both flood and wind damage data also limited  the usefulness of FEMA’s quality assurance reinspection program on NFIP  flood claims when wind damage was also a factor. Specifically, the FEMA  reinspection program did not incorporate a means for collecting and  analyzing both the flood and wind damage data together in a systematic  fashion to reevaluate the extent to which wind and flooding were deemed  to have contributed toward damages to the property. We also explored  whether the wind damage claims data that were collectively gathered by  state insurance regulators after the 2005 hurricane season could provide  information useful to NFIP to reevaluate damage assessments made and  how they were apportioned between wind and flooding. We found that  such data were not collected in sufficient geographic detail to match with  corresponding flood claims data for a particular property, or even a  neighborhood or city. Without the ability to examine damages caused by  both wind and flooding, the reinspection program is limited in its  usefulness as a tool to assess whether NFIP paid only for losses caused by  flooding.
subsections: section_title: Background
paragraphs: Property owners in certain coastal regions subject to hurricanes and  flooding may have to purchase at least two, and sometimes more, different  types of insurance policies. Flood insurance is offered by NFIP, while  insurance for wind-related damages is generally offered by private  insurance companies or state-sponsored insurers. NFIP was established in  1968 in part to provide some insurance protection for flood victims  because the private insurers were and still are largely unwilling to insure  for flood risks. The National Flood Insurance Act of 1968, as amended,  allows homeowners to purchase up to $250,000 of NFIP coverage on their  dwellings and up to an additional $100,000 for personal property such as  furniture and electronics. Business owners may purchase up to $500,000 of  coverage for dwellings and $500,000 on the contents. Exclusions under the  flood policy include damages caused by wind or a windstorm. FEMA,  which administers NFIP, is responsible for the management and oversight  of NFIP and is assisted in performing these functions by a program  contractor.
While NFIP provides the flood insurance policy and holds the risk, private  property-casualty insurers, known as WYO insurers, sell and service  approximately 95 percent of NFIP’s flood policies. WYO insurers retain a  portion of the premium for selling flood policies and receive fees for  performing other administrative services for NFIP, but do not have any  exposure to claims losses. A WYO insurer may or may not also provide  coverage for wind-related risks on the same property. After an event  occurs, policyholders normally contact a WYO insurer to initiate a flood  damage claim. If the claimant also has a policy for wind damage from the  same WYO insurer, the company generally adjusts losses pertaining to  both types of damages, those caused by wind and those caused by  flooding. In such cases, the WYO insurer must determine and apportion  the damages caused by wind that it insures, along with those caused by  flooding, insured by NFIP.
To settle flood claims, insurance companies work with certified flood  adjusters. When flood losses are reported, the WYO insurers assign flood  adjusters to assess damages. The WYO insurers may use their own staff  adjusters or contract with independent adjusters or adjusting firms to  perform the flood adjustments. These adjusters are responsible for  assessing damage, estimating losses, and submitting required reports,  work sheets, and photographs to the insurance company, where the claim  is reviewed and, if approved, processed for payment.
Both the insurance industry and NFIP incurred unprecedented storm  losses from the 2005 hurricane season. State insurance regulators  estimated that property-casualty insurers had paid out approximately  $22.4 billion in claims tied to Hurricane Katrina (excluding flood), as of  December 31, 2006. However, industry observers estimate that insured  losses tied to Hurricane Katrina alone (other than flood) could total more  than $40 billion, depending on the outcome of outstanding claims and  ongoing litigation. NFIP estimated that it had paid approximately $15.7  billion in flood insurance claims as of January 31, 2007, encompassing  approximately 99 percent of all flood claims received.
section_title: NFIP Does Not Systematically Collect and Analyze Data on Related Wind Damages When Collecting Flood Claims Data
paragraphs: For hurricane-damaged properties, NFIP does not know whether both  wind and flooding contributed toward damages nor the apportionment of  damages between them, limiting its ability to monitor the accuracy of  flood payments and address potential conflicts of interest that may arise in  certain damage scenarios. Based on our preliminary review, we found that  NFIP did not systematically collect and analyze data on wind-related  damage when collecting flood claims data on properties subjected to both  high winds and flooding, such as those damaged in the aftermath of  Hurricanes Katrina and Rita. Further, such information is not sought even  when the same insurance company serves as both the NFIP WYO insurer  and the insurer for wind-related risks, posing a potential conflict in certain  damage scenarios where properties are subjected to both types of perils.  Without information on both wind and flood damages to the property,  NFIP may not know on certain hurricane-damaged properties whether the  amount it paid for a claim was limited to flood damage.
As mentioned earlier, NFIP’s WYO insurer may also insure the same  property for wind-related damages. In this situation, a potential conflict of  interest can materialize because the WYO insurer has a financial interest in  the outcome of the claims adjustment it performs on behalf of NFIP.  Conversely, if the policy for wind-related risks were issued by another  insurer, the same potential conflict of interest would not exist because the  flood and wind damages would be assessed and determined separately by  different insurers.
WYO insurers are required to submit flood damage claims data in  accordance with NFIP’s Transaction Record Reporting and Processing  (TRRP) Plan, for inclusion into NFIP’s claims database. In our review of  data elements in NFIP’s claims database, we found that NFIP does not  require WYO insurers, which are responsible for adjusting the flood claim,  to report information on property damages in a manner that could allow  NFIP to differentiate how these damages (to the building or its contents)  were divided between wind and flooding, even when the WYO insurer is  also the wind insurer for the property.
Specifically, the TRRP Plan for WYO insurers instructs them to include  only flood-related damages in the data fields on “Total Building Damages”  and “Total Damage to Contents.” Further, the “Cause of Loss” data field  does not incorporate an option to explicitly identify property damages  caused by wind or partially caused by wind (e.g. combined wind and flood,  hurricane, windstorm, etc.). As a result, WYO insurers do not report total  property damages in a manner that 1) identifies the existence of wind  damage or 2) discerns how damages were divided between wind versus  flooding for properties that were subjected to a combination of both  perils. Further, NFIP program contractors stated that they do not  systematically track whether the WYO insurer processing a flood claim on  a property is also the wind insurer for that property. This lack of  transparency over both the wind and flood damages on hurricane- damaged properties limits NFIP’s ability to verify that damages paid for  under the flood policy were caused only by the covered loss of flooding.
NFIP’s normal claims processing activities, which do not incorporate a  means to systematically collect information on wind-related damages,  were further stressed during the 2005 hurricane season. For both  Hurricanes Katrina and Rita, FEMA estimates that it has paid  approximately $16.2 billion in claims, with average payments of over  $95,000 and $47,000, respectively. As we reported in December of 2006, in  an effort to assist policyholders, NFIP approved expedited claims  processing methods that were unique to Hurricanes Katrina and Rita.  Some expedited methods included the use of aerial and satellite  photography and flood depth data in place of a site visit by a claims  adjuster for properties where it was likely that covered damages exceeded  policy limits. Under other expedited methods, FEMA also authorized  claims adjustments without site visits where only foundations were left  and square foot measurements of the dwellings were known. Such  expedited procedures facilitated the prompt processing of flood claims  payments to policyholders following the unprecedented damage of the  2005 hurricanes. However, once these flood claims were processed, as was  the case for other flood claims on hurricane-damaged properties, NFIP did  not systematically collect wind damage claims data tied to flood-damaged  properties on an after-the-fact basis. Hence, NFIP does not know the  extent to which wind contributed to total property damages.
FEMA officials stated that they do not have access to wind damage claims  data from the WYO insurers. Specifically, a letter from FEMA to GAO  stated that:  “FEMA’s opinion is that, where flood insurance payments have been  made, FEMA is permitted to review the background claims data in  order to ensure that insurance claims payments are appropriately  allocated to flood losses as opposed to wind-related losses.  Such data  may include the adjuster’s report(s) and any engineering reports that  support (or fail to support) the allocation of loss to flood versus wind  damage.  FEMA may request summaries and analyses of this  information at any time to ensure proper processing of flood claims.   Conversely, claims paid by a WYO company that do not involve flood  insurance proceeds (and the data related thereto) are not accessible  by FEMA, and indeed, do not need to be, as there would have been no  improper allocation of flood insurance proceeds for wind losses.   Moreover, the attempt to access this unrelated data may be found to  violate various privacy protections.”
Hence, NFIP does not systematically collect data on wind damages for  properties for which a flood claim has been received. As a result, for  hurricane damaged properties subjected to both high winds and flooding,  NFIP may not have all the information it needs to ensure that its claims  payment was limited to only flood damage.
section_title: FEMA’s Reinspection Program Has Limited Ability to Validate the Accuracy of Payments on Hurricane- Damaged Properties
paragraphs: FEMA’s reinspection program, which helps validate the adjustment  process and flood payments made, provides limited information that could  enable FEMA to better validate the claims payments it makes for flood  damage when wind is also a factor. Based on our preliminary review, the  reinspection program does not systematically evaluate the apportionment  of damages between wind and flooding, even when a potential conflict of  interest may arise with the WYO insurer. Along with flood claims data  collected from WYO insurers that service flood policies, FEMA, through its  program contractor, operates a reinspection program to monitor and  oversee claims adjustments and address concerns about flood payments.  The stated purpose of the reinspection program is to reevaluate the flood  adjustment and claim payment made on a given property to determine  whether or not NFIP paid the correct amount for flood-related damages.  This is accomplished through on-site reinspections and reevaluations of a  sample of flood claim adjustments. However, we found that FEMA’s  reinspection program did not systematically incorporate a means for  identifying whether nor the extent to which wind-related damages  contributed to the losses. Without the ability to examine damages caused  by both wind and flooding, the reinspection program is limited in its ability  to assess whether NFIP paid only the portion of damages it was obligated  to pay under the flood policy.
During our study, we reviewed hundreds of reinspection files for  properties with flood claims tied to Hurricanes Katrina and Rita. We found  that the reinspection files did not confirm that the claim paid actually  reflected only the damage covered by the flood insurance policy versus  damage caused by other, uncovered damages, such as wind. Rather, the  reinspection files generally contained limited and inconsistent  documentation concerning the presence or extent of wind-related  damages on properties without additional documentation that would  enable FEMA to evaluate both the wind and flood damage information  together.
Specifically, the reinspection files reviewed did not consistently document  whether or not damages were caused by a combination of both wind and  flooding. The reinspection activities focused on reevaluating the extent to  which building and content damages were caused by flooding. While some  of the reinspection files included documentation as to whether or not  damage was caused by a combination of wind and flooding, most did not.  Information reviewed from 740 reinspection files revealed that nearly two- thirds of these reinspection reports did not include documentation to  indicate whether damages were caused by a combination of both wind and  flooding or only flooding. We found that approximately 26 percent  included documentation indicating damage was caused only by flooding,  while approximately 8 percent of the reinspection files included  documentation that damages were caused by a combination of wind and  flooding. In cases where reinspectors indicated that damages were caused  by a combination of wind and flooding, insufficient data existed to assess  the extent that wind contributed to the damages. That is, information  about the wind damage during the reinspection process was not  documented or analyzed in a systematic fashion. Hence, the reinspection  activities did not systematically document or validate the presence or  extent of wind damage in combination with flood damage in order to  verify that flood payments were limited to flood damage. Moreover, as we  have previously reported, FEMA does not choose a statistically valid  sample for its reinspection process.  Therefore, the results could not be  projected to the universe of properties for which flood claims were made.
We also noted that on-site reinspections of properties with flood claims  tied to Hurricanes Katrina and Rita were generally conducted several  months after the event. Such delays, while understandable considering the  scope and magnitude of devastation resulting from these hurricanes in  2005, further limited NFIP’s ability to reevaluate the quality and accuracy  of the initial damage determination, given the ongoing natural and  manmade events that continued to alter the damage scene.
Finally, we explored whether NFIP could use data collectively gathered by  state insurance regulators on property-casualty claims resulting from the  2005 hurricane season to match with NFIP flood claims data. We found  that while Florida, Mississippi, Louisiana, Alabama, and Texas collected  some aggregate information about claims from the property-casualty  insurers, such data would have been of limited value to NFIP to evaluate  the accuracy of its flood claims payments in any systematic way. Except  for Florida, which had previously collected aggregate claim data from  property-casualty insurers for major hurricane events, the other states  used a special data call, based on Florida’s system, to collect this  aggregate claims data from the property-casualty insurers. However, the  information collected was not in sufficient geographic detail to allow a  meaningful evaluation of wind versus flood damage assessments and  apportionments made by insurers. That is, claims data reported by  property-casualty insurers through this mechanism were either reported  on a statewide or county/parish-level basis that did not allow it to be  matched with corresponding flood claims data on a community-level (e.g.  zip code) or a property-level basis.
In summary, based on our preliminary review, NFIP does not collect the  information it needs to help evaluate whether it has paid only what it is  obligated to pay under the flood policy for properties subjected to both  high winds and flooding, such as those damaged by hurricanes Katrina and  Rita. For these properties, NFIP did not systematically collect enough  information to know whether there was wind damage, much less enough  to understand how much of the damage was determined to have been  caused by wind and how much was caused by flooding. Without the ability  to collect information that documents both the flood and wind damage,  NFIP’s capacity to evaluate the accuracy of its payments is limited. As  mentioned earlier, this is particularly important in situations where the  WYO insurer also insures the property for wind damages. This creates a  potential conflict of interest when the same insurer makes both the wind  and flood damage assessments, because the insurer is effectively  apportioning losses between itself and NFIP. Obtaining both the flood and  wind adjustment claims data, whether from the same WYO insurer that  services both or from different insurers, would be necessary to NFIP to  verify the accuracy of the payments made for flood claims.
Information collected and assessed through FEMA’s claims reinspection  program is also of limited usefulness in confirming or validating the  accuracy of flood payments made by NFIP on properties damaged by both  wind and flooding. Without the additional information about wind damage  on properties for which flood claims were also filed, NFIP may not be  certain whether it has paid only for the flood damages to these properties.  Finally, we determined that using hurricane claims data collected by state  insurance regulators would not have provided data on a property- or  community-level basis to help NFIP determine how much damage was  caused by wind versus flooding, and how these damages were apportioned  between the two perils. The lack of both wind and flood claims data limits  NFIP’s ability to assess whether payments made on flood claims from the  2005 hurricane season were accurate.
Mr. Chairmen, this concludes my prepared statement. I would be pleased  to respond to any questions that you or other members of the  Subcommittees may have.
section_title: Contacts and Acknowledgments
paragraphs: For additional information about this testimony please contact Orice M.  Williams on (202) 512-8678 or at williamso@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found on  the last page of this statement. Individuals making key contributions to  this testimony include Lawrence D. Cluff, Assistant Director; Tania  Calhoun; Emily Chalmers; Rudy Chatlos; Chir-Jen Huang; Barry Kirby; and  Melvin Thomas.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.