FEMA Management and Oversight. Payments to WYO Insurance Companies Comprised Up to Almost Two-Thirds of Total Premium Revenue in Recent Years Based on Payment Methodologies Established in 1983

FEMA’s payments to WYO insurance companies for operating costs  ranged from more than a third to almost two-thirds of the total premiums  paid by policyholders to the NFIP for fiscal years 2004 through 2006. FEMA  establishes a schedule of operating costs for WYO insurance companies  participating in the NFIP based on industry averages for operating  expenses for other lines of insurance, such as homeowners, commercial  and fire; past practices; and discussions with WYO insurance company  participants and other insurance industry representatives. FEMA  negotiated these payment methodologies with insurance industry  representatives when it established the WYO program in 1983. In fiscal years 2005 and  2006, payments were larger than for fiscal year 2004 because the WYO  insurance companies received payments in these years for settling the  unprecedented number and amount of claims for damages resulting from  flood events including Hurricanes Charley, Ivan, Frances, and Jeanne in  Florida and other East Coast and Gulf Coast states in 2004 and Hurricanes  Katrina, Rita, Wilma, and other flood events in 2005. FEMA’s Long-standing Approach for Establishing a Schedule of Operating Costs Cannot Ensure That WYO Insurance Company Payments Are Based on Reasonable Estimates of Actual Expenses

FEMA’s methodologies for determining WYO’s operating costs, rooted in  policies established about 25 years ago, cannot provide assurance that  payments are based on reasonable estimates of actual expenses because  actual expenses incurred by the companies for their services to the NFIP  are not considered. Although FEMA has the authority to collect expenses  information and FEMA officials said that they have considered alternative  methodologies for paying WYO insurance companies, the officials raised  concerns about collecting expense information from WYO insurance  companies. The methodologies  FEMA currently uses to determine payment amounts for the WYO  insurance companies for services rendered do not meet the federal  internal control standard that agencies be held accountable for, among  other things, stewardship of government resources. Although it has authority to do so, FEMA does not  collect data on actual WYO flood insurance expenses that could provide a  basis for ensuring that the WYO schedule of operating costs is based on a  reasonable estimate of expenses. Financial Management Controls Did Not Provide Assurance That Payments to WYO Insurance Companies Were Proper and in Accordance with Program Requirements

Biennial financial statement audits—FEMA’s primary management control  mechanism to provide assurances that it receives complete and accurate  financial management information from the WYO insurance companies— were not performed on a consistent basis as required by regulation. However, many insurance companies  participating in the WYO program did not comply with the schedule. Nonetheless, without having the biennial audits  conducted as required by regulation, FEMA lacks assurance that WYO  insurance companies have financial systems in place to ensure that proper  payments are made and controls are in place for the services of the WYO  insurance companies. Biennial financial statement  audits were not completed as required by FEMA regulation. 2. Appendix I: Scope and Methodology

To assess how much the Federal Emergency Management Agency (FEMA)  paid in recent years to the Write Your Own (WYO) insurance companies  that sell and service NFIP policies and adjust claims and how FEMA  determines the amount of these operating costs, we analyzed data on  amounts paid to WYO insurance companies for fiscal years 2004-2006. Flood Insurance: Information on the Financial Condition of the  National Flood Insurance Program.
Why GAO Did This Study

Extraordinary recent flood events raise serious questions about the solvency of the National Flood Insurance Program (NFIP), which is administered by the Federal Emergency Management Agency (FEMA). The NFIP is largely implemented by private insurance companies that sell and service policies and adjust claims under the Write Your Own (WYO) Program. This report, prepared under the authority of the Comptroller General, examines (1) how much FEMA paid the WYO companies in recent years for operating costs and how FEMA determined payment amounts; (2) how FEMA's approach to determining operating costs assures that payments are reasonable estimates of companies' expenses; and (3) how FEMA assures that financial and management controls are in place for the WYO program and operate as intended. To do these assessments, GAO interviewed FEMA and insurance officials, and analyzed statutes, regulations, payment data, methodologies, and audits of WYO companies.

What GAO Found

FEMA's payments to WYO insurance companies for operating costs ranged from more than a third to almost two-thirds of the total premiums paid by policyholders to the NFIP for fiscal years 2004 through 2006. In fiscal years 2005 and 2006, larger payments to WYO insurance companies were the result of settling an unprecedented number and dollar amount of claims for damages resulting from major hurricanes and flood events including Hurricane Katrina. To determine the amount of these payments, FEMA negotiated payment approaches with insurance industry representatives when it established the current WYO program in 1983 based on industry averages for operating expenses for other lines of insurance (such as homeowners, commercial, and fire), past practice, and discussion. The approach FEMA uses to determine operating costs for WYO insurance companies, rooted in policies negotiated and established about 25 years ago, cannot ensure that payments are based on reasonable estimates of actual expenses because actual expenses incurred by the companies for their services to the NFIP are not considered. Although it has authority to do so, FEMA does not collect data on actual WYO flood insurance expenses that could provide a basis for insuring that the WYO payments are based on a reasonable estimate of actual expenses. FEMA officials said that they have not asked WYO insurance companies to provide expense information due to concerns that the approach would increase FEMA's administrative costs and cause a decline in WYO program participation. However, some data on expenses WYO insurance companies allocate to flood insurance are available. FEMA officials said that they cannot use this information due to reporting inconsistencies. Also, there is some precedent in two similar public-private insurance partnerships for collecting actual expense information. FEMA's decision to rely on long-standing practices does not meet federal internal control standards that agencies be held accountable for, among other things, stewardship of government resources. Biennial financial statement audits--FEMA's primary mechanism to provide assurance that it receives complete and accurate financial management information from the WYO insurance companies--were not performed consistently as required by regulation. FEMA regulations require each participating company to arrange and pay for these audits by independent certified public accounting firms. However, many WYO insurance companies did not comply with the schedule in recent years. For example, for fiscal years 2005 and 2006, 5 of 94 participating companies had biennial financial statement audits performed. FEMA officials said they allowed some companies to delay having the audits done because they were in the process of contracting with new subcontractors to perform their financial reporting responsibilities. Nonetheless, without the required biennial audits, FEMA lacks an appropriate internal control mechanism for effective program oversight.