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. FEMA Still Relies on Insurance Industry Proxies for Setting Compensation and Has Not Yet Revised Its Practices in Response to the Biggert-Waters Act

FEMA continues to lack the information it needs to determine whether its  compensation payments are appropriate and how much profit is included  in what it pays WYO companies. But we found inconsistencies in how companies  reported federal flood data to NAIC, which limits the usefulness of the  data for setting compensation rates. Efforts Have Resulted in Some Improvements to Federal Flood Financial Data Critical to Revising Compensation

Efforts by FEMA, NAIC, and WYO companies have resulted in some  improvements to federal flood financial data reported to NAIC that are  critical to a revised compensation methodology. Among the 10  recommendations in the report, we made the following five relating to  compensation methodology and data quality that have not been fully  addressed:
We recommended that FEMA (1) determine in advance the amounts  built into the payment rates for estimated expenses and profit; (2)  annually analyze actual expenses and profit in relation to the  estimated amounts used in setting payment rates; and (3) consider  the results of the analysis of payments, actual expenses, and profit in  evaluating methods for paying WYO companies. Our 2009 recommendations to FEMA remain relevant as FEMA seeks to  develop a compensation methodology as required by the Biggert-Waters  Act. These reviews examine  NFIP policies written by WYO companies as well as those written by the  DSA. Most WYO companies we  interviewed preferred the current WYO arrangement over any of the three  potential alternatives we identified. Trade-offs of Current Arrangement Include Advantages for Consumers and Insurers from WYO Company Competition but Disadvantages for FEMA Oversight

Based on our analysis and interviews with FEMA, WYO companies, and  stakeholders (relevant organizations and vendors), the current WYO  arrangement has trade-offs (see table 9). This stability could  continue to encourage WYO participation. All three potential alternatives involve FEMA contracting  with participating companies (WYO companies or vendors), a status that  most WYO company representatives cited as creating more regulatory  burden because of federal contract requirements. The vendor would sell flood insurance policies through  independent insurance agents, and insurance companies would not  be involved. Alternative 1, in which FEMA would contract with one or more insurance  companies to sell and service flood policies and adjust claims, would  maintain the WYO company network to some extent but likely would  involve fewer participating WYO companies (see table 10). Fully addressing these recommendations will  help FEMA meet the Biggert-Waters Act requirement to develop a  methodology for determining appropriate compensation for WYO  companies that uses the companies’ actual flood expenses. Recommendations for Executive Action

To improve the transparency and accountability over the compensation  paid to WYO companies and set appropriate compensation rates, the  FEMA administrator should take into account WYO company  characteristics that may impact companies’ expenses and profits when  developing the new compensation methodology and rates. GAO staff who made key contributions to this  report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

Our objectives in this report were to describe the (1) Federal Emergency  Management Agency’s (FEMA) current compensation practices for Write- Your-Own (WYO) companies and the extent to which FEMA revised its  practices in response to the Biggert-Waters Flood Insurance Reform Act  of 2012 (Biggert-Waters Act); (2) information on over- and  underpayments of National Flood Insurance Program (NFIP) policy  claims; and (3) the trade-offs of selected potential alternatives to FEMA’s  current arrangement with WYO companies for selling and servicing flood  insurance policies. We also interviewed officials from FEMA  and representatives from 10 WYO companies with varying NFIP premium  bases. We also interviewed National Association of Insurance  Commissioners (NAIC) officials about expense data WYO companies  report to NAIC. To compare FEMA compensation paid to WYO companies to actual  expense data WYO companies reported to NAIC, we obtained and  analyzed premium, loss, and compensation data for all WYO companies  for fiscal years 2008–2014 from FEMA and premium, loss and expense  data for all WYO companies from SNL Financial and NAIC for calendar  years 2008–2014. From our prior work, we identified three potential alternative approaches  to the current WYO arrangement: (1) FEMA contracts with one or more  insurance companies; (2) FEMA contracts with one vendor; or (3) FEMA  contracts with multiple vendors and maintains the WYO network. In the WYO  program, private insurers sell and service flood insurance policies and  adjust claims for NFIP under an arrangement with the Federal Emergency  Management Agency (FEMA).
Why GAO Did This Study

Private insurers (WYO companies) sell and service flood policies and adjust claims for NFIP under an arrangement with FEMA. In GAO-09-455 , GAO made recommendations on FEMA's WYO compensation methodology and data quality. The Biggert-Waters Act built on these recommendations and required FEMA to develop a methodology for determining appropriate amounts WYO companies should be reimbursed. GAO was asked to review the status of FEMA efforts. This report examines, among other issues, (1) the extent to which FEMA revised compensation practices, and (2) trade-offs of potential alternatives to the WYO arrangement. GAO reviewed laws and regulations, analyzed FEMA data and data on expenses reported to NAIC for 2008–2014 (most recent available), and interviewed FEMA and NAIC officials, stakeholders (11 organizations with flood insurance expertise, three vendors), and 10 selected WYO companies with varying NFIP premium bases. To compare FEMA compensation with actual expenses, GAO examined information on accounting and reporting practices from a second selection of 10 WYO companies (in this case, insurers wiithin10 insurance groups) that received about 60 percent of compensation in 2008–2014.

What GAO Found

The Federal Emergency Management Agency (FEMA) has yet to revise its compensation practices for Write-Your-Own (WYO) companies to reflect actual expenses as required by the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act), and as GAO recommended in 2009. FEMA continues to rely on insurance industry expense information for other lines of property insurance to set compensation rates for WYO companies. Efforts by FEMA, the National Association of Insurance Commissioners (NAIC)—which collects data by line of insurance from insurance companies—and the WYO companies have resulted in some improvements to financial data on National Flood Insurance Program (NFIP) expenses that WYO companies report to NAIC. But GAO found inconsistencies among how 10 selected WYO companies (which received about 60 percent of the compensation FEMA paid in 2008–2014) reported federal flood data to NAIC that limit the usefulness of these data for determining expenses and setting compensation rates. For example, GAO analysis showed that adjusting for inconsistencies due to unreported expenses significantly reduced WYO company profits. Consequently, without quality data on actual expenses, FEMA continues to lack the information it needs to incorporate actual flood expense data into its compensation methodology as well as determine how much profit WYO companies make and whether its compensation payments are appropriate. FEMA has not clarified what other analyses it will undertake to address GAO 2009 recommendations concerning data quality. GAO also found the ways in which WYO companies operate, including how companies compensate agents and third-party vendors (with which some companies contract to conduct some or all of the management of their NFIP policies) can affect a company's expenses and profits. Considering company characteristics would allow FEMA to more effectively develop its compensation methodology and determine the appropriate amounts to reimburse WYO companies as required by the Biggert-Waters Act.
According to WYO companies and stakeholders, the current WYO arrangement and three potential alternatives GAO identified all involve trade-offs. Private insurers become WYO companies by signing a Financial Assistance/Subsidy Arrangement with FEMA and FEMA annually publishes terms for participation in the WYO program, including amounts companies will be paid for expenses. The current arrangement includes benefits for consumers from competition among approximately 75 WYO companies, but poses oversight challenges for FEMA due to the large number of companies. The three potential alternatives involve FEMA contracting with (1) one or more insurance companies to sell and service flood policies; (2) one vendor that would sell policies through agents and insurance companies would not be involved; or (3) multiple vendors to service policies while maintaining the WYO network to market and sell flood policies. All three potential alternatives would involve FEMA contracting with either WYO companies or vendors as federal contractors, a status that most WYO company representatives cited as creating more regulatory burden because of federal contract requirements. Representatives of most WYO companies and several stakeholders GAO interviewed preferred the current arrangement because of its predictability and noted that this characteristic would continue to encourage WYO company participation.

What GAO Recommends

GAO maintains that its 2009 recommendations remain valid and will help FEMA meet Biggert-Waters Act requirements. In this report, GAO recommends that FEMA take into account company characteristics when developing the new WYO compensation methodology. FEMA agreed with the recommendation.