The National Flood Insurance Act of 1968 created NFIP. According to FEMA, NFIP was designed to address a number of policy objectives, including offering affordable insurance premiums to encourage program participation and community-based floodplain management and reducing the reliance on federal disaster assistance. The act provided the federal government with the authority to work with the private insurance industry, and since its inception NFIP has largely relied on the private insurance industry to sell and service flood policies. In 1983, FEMA established the WYO program with the goals of increasing the NFIP policy base and geographic distribution, improving service to policyholders, and providing the insurance industry with direct operating experience with flood insurance. FEMA also sells and services flood insurance through the DSA, which a contractor operates. Private insurers become WYO companies by signing a Financial Assistance/Subsidy Arrangement with FEMA under which the insurers agree to issue flood policies in their own name, adjust flood claims, and settle and defend all claims arising from the flood policies. Private insurers must meet FEMA’s established criteria for becoming a WYO company. Requirements for a company to participate in the WYO program include, among others, 5 years of experience in property and casualty insurance lines, good standing with state insurance departments, and the ability to meet NFIP reporting requirements to adequately sell and service flood insurance policies. Each year, FEMA publishes in the Federal Register the terms for participation in the WYO program, including amounts WYO companies will be paid to sell and service flood policies and adjust and pay claims. The compensation FEMA pays WYO companies is one factor it considers in setting premium rates for flood policies. This Federal Register notice also states that WYO companies are to comply with the provisions of NFIP’s WYO Financial Control Plan Requirements and Procedures (Financial Control Plan). The Financial Control Plan outlines WYO companies’ responsibilities for program operations, including underwriting, claim adjustments, cash management, and financial reporting, as well as FEMA’s responsibilities for management and oversight. WYO companies employ, contract, or work with other parties to sell and issue flood policies and receive, process, and pay claims. Insurance agents for one or more WYO companies are the main point of contact for most policyholders seeking to purchase an NFIP policy, find information on coverage, or file a claim. Based on information the insurance agents submit, the WYO companies issue policies, collect premiums from policyholders, deduct an allowance for expenses from the premium, and remit the balance to the National Flood Insurance Fund—into which premiums are deposited and from which claims and expenses are paid. WYO companies typically contract with flood insurance vendors to conduct some or all of the day-to-day processing and management of flood insurance policies. WYO companies work with certified flood adjusters to settle NFIP claims. When flood losses occur, policyholders report them to their insurance agent, who notifies the WYO company. To assess damages, the WYO company assigns a flood adjuster, who may be independent or employed by an insurance or adjusting company. The adjuster is responsible for assessing damage; estimating losses; and submitting required reports, work sheets, and photographs to the WYO company, where the claim is reviewed and, if approved, processed for payment. FEMA reimburses the WYO company from the National Flood Insurance Fund for the amount of the claims and expenses paid. Claim amounts may be adjusted after the initial settlement is paid if claimants submit documentation that costs were different than estimated. Current WYO compensation is structured primarily as allowances to pay for policy sales and servicing, claims adjusting and processing, and other services FEMA requires that participating companies provide. This service-oriented compensation structure, with uniform rates generally based on insurance industry average expense ratios (proxies) and fee schedules, allows WYO companies to earn a profit to the degree that compensation exceeds their actual expenses. Most of FEMA’s payments to WYO companies under the current compensation structure are not reimbursements of actual expenses incurred, but allowances on which the companies can either make a profit or incur a loss. Since the inception of the WYO program, FEMA has generally used proxies to determine the rates at which it pays WYO companies, and the payments FEMA makes are determined by applying these proxy rates to either premiums written or claim losses (see table 1). Commission and operating expenses are based on a proxy of a WYO company’s net written premiums. FEMA established a commission expense allowance at 15 percent in 1983 after consulting with industry representatives. This percentage has not changed since and is written into the Financial Assistance/Subsidy Arrangement. The percentage used for calculating operating expenses is generally provided annually to WYO companies as part of the compensation package (see table 1). The percentage is determined annually based on A.M. Best Company’s aggregates and average industry operating expenses for five lines of property insurance—fire, allied lines, farm owners multiple peril, homeowners multiple peril, and commercial multiple peril. Further, WYO companies receive payment for three types of claim adjustment expenses. Allocated loss adjustment expenses (ALAE). These are claim expenses to adjust specific claims. FEMA determines payment for ALAE based on information it periodically collects from independent adjusting firms on the cost of adjusting losses in other lines of insurance business, and presents the payment amount to WYO companies through a fee schedule. Unallocated loss adjustment expenses (ULAE). These are claim expenses that are incurred by the WYO company for routine operations not associated with a specific claim such as salaries, overhead, and maintenance. FEMA bases payment for ULAE on a percentage of net written premiums and a percentage of claim losses. Before May 2008, FEMA calculated the amount for ULAE as 3.3 percent of claim losses but changed its methodology to 1.5 percent of claim losses plus 1 percent of net written premium, which was further reduced to 0.9 percent in fiscal year 2013. According to FEMA’s statements in the Federal Register, the flat rate of 3.3 percent of claim losses resulted in payments far greater than expenses during catastrophic loss years and payments below actual expenses during low-loss years. Special allocated loss adjustment expenses (SALAE). These are claim expenses related to litigation, engineering, appraisals, other experts, and additional claim adjustments. FEMA calculates SALAE based on actual expenses. In March 2015, FEMA eliminated the previous $2,500 approval threshold for SALAE expenses for experts (Type 1) and required WYO companies to submit specific information to FEMA, including information on the claim, policy limits, and an explanation and justification for the reimbursement. FEMA staff must review the information submitted and approve the expenditure before the WYO is allowed to incur any Type 1 expenses. In July 2016, FEMA removed the $5,000 threshold for Type 3 expenses (litigation- related) and required WYO companies to seek approval for reimbursement of such expenses and pre-approval if they wished to take more than three depositions in a case. In addition, FEMA pays WYO companies that meet certain policy growth goals a percentage of net written premiums as a marketing bonus. In 2009, we found that FEMA’s marketing goals were not aligned with FEMA’s NFIP goals. As a result, FEMA changed the formula for how WYO companies earn bonuses in the fiscal year 2013 compensation arrangement. A growth bonus is intended to provide an incentive for WYO companies to continue to grow the NFIP program by adding new policies. FEMA officials told us that the agency changed the program’s growth bonus to better link it to new business—if a WYO company acquires another company’s business, the number of transferred policies is added to the company’s beginning number of policies and the total merged number of policies is used when calculating aggregate growth for the purposes of the bonus. Therefore, the WYO company is receiving a growth bonus based only on new business since the number of transferred policies is added to the existing policies in place before the percentage of growth is calculated. This allows FEMA to recognize WYO companies for actual growth and not for transferring policies from one company to another. With the new formula, WYO companies can receive a higher percentage of net written premiums as a growth bonus when the policy growth is tied to three supporting goals for selling policies: (1) in underserved areas, (2) for residential preferred risk policies, and (3) for nonresidential policies. Within FEMA, the Federal Insurance and Mitigation Administration (FIMA) manages NFIP. According to FEMA staff, about 70 staff within FIMA are dedicated to managing and overseeing the WYO program and claim processes. Their management responsibilities include establishing and updating NFIP regulations, analyzing data to actuarially determine flood insurance rates, and offering workshops and conferences to insurance agents and adjusters to explain NFIP requirements. In addition, FEMA is responsible for monitoring and overseeing the performance of the WYO companies to ensure that NFIP is administered properly. FEMA has processes for monitoring and providing oversight of NFIP claims that are outlined in its Financial Control Plan. Under the current plan, the processes include triennial claims operation reviews, biennial financial statement audits, and underwriting reviews. The agency also is responsible for reinspecting claims and monitoring company performance as needed. Claims operation reviews. FEMA is to conduct these reviews at every WYO company on a 3-year rotating basis, according to the Financial Control Plan. The stated purpose of these reviews is to evaluate a WYO company’s processes for administering flood claims, NFIP data reporting, and the accuracy and service the company provides customers when handling claims.