FEMA Does Not Systematically Consider WYOs’ Actual Expenses When Setting Payment Rates

FEMA does not systematically consider actual flood insurance expense  information when it determines the amount it pays WYOs for selling and  servicing flood insurance policies and adjusting claims. Since the  inception of the WYO program, FEMA has used proxies to determine the  rates at which it pays WYOs. We found that FEMA’s  payments exceeded the companies’ actual expenses by $327.1 million, or  16.5 percent of total payments made. FEMA Has Not Aligned Its Bonus Structure with Its Long-Term Goals for NFIP

FEMA has not aligned its bonus structure for WYOs with its goals for  NFIP, such as increasing penetration in low-risk flood zones, among  homeowners without federally-related mortgages in all zones, and in  geographic areas with repetitive losses and low penetration rates. This  formula primarily rewards companies that are new to NFIP, when it is  easiest to increase the percentage of net policies from a small base. Further, we found that most WYOs generally offered flood insurance when  requested but did not strategically market the product as a primary  insurance line. When program results could be influenced by external factors, agencies  can use intermediate goals to identify the program’s discrete contribution  to a specific result. FEMA Followed Some but Not All of Its Internal Control Requirements and Procedures

FEMA has explicit financial control requirements and procedures for  overseeing the WYO program. FEMA’s Control Plan provides guidance for  WYOs that is intended to ensure compliance with the statutory  requirements for NFIP and that contains several checks and balances to  help ensure that taxpayers’ funds are spent appropriately. For the 10 WYOs in our sample, FEMA followed some but not all of the  requirements and procedures of the Control Plan and did not  systematically track the outcomes of the various audits, inspections, and  reviews. Biennial audits and underwriting and claims triennial reviews were also  mostly implemented. Other audits, including audits for cause, state insurance department  audits, and marketing, litigation, and customer service triennial operation  reviews, were rarely or never implemented. Because FEMA does not implement all  aspects of the Control Plan, it cannot ensure that the WYOs are fully  complying with program requirements. We examined three alternative  administrative structures that could replace NFIP’s payment arrangement  with a competitively awarded contract that could lower costs for selling  and servicing flood insurance policies and administering claims:    contracting with one or more insurance companies,    contracting with a single vendor (similar to the NFIP Direct program), or    contracting with multiple vendors and maintaining the WYO network. Each of these alternatives has advantages and disadvantages in terms of  the potential impact on the basic operations of administering flood  insurance policies and adjusting claims, as well as on FEMA’s oversight of  the program and its contractors. As a result, FEMA does not have the information it  needs to determine whether its payments to WYOs are reasonable. FEMA has not tied its bonus structure to the long-term strategic goals for  the program. Recommendations for Executive Action

To provide transparency and accountability over the payments FEMA  makes to WYOs for expenses and profits, we recommend that the  Secretary of Homeland Security direct the Under Secretary of Homeland  Security, FEMA, to    determine in advance the amounts built into the payment rates for  estimated expenses and profit;    annually analyze the amounts of actual expenses and profit in relation to  the estimated amounts used in setting payment rates;    consider the results of the analysis of payments, actual expenses, and  profit in evaluating the methods for paying WYOs; and  in light of the findings in this report, immediately reassess the practice of  paying WYOs an additional 1 percent of written premiums for operating  expenses. To improve oversight of the WYO program and compliance with program  requirements, we recommend that the Secretary of Homeland Security  direct the Under Secretary of Homeland Security, FEMA, to    consistently follow the Control Plan and ensure that each component is  implemented;    ensure that any revised Control Plan include oversight of all functions of  participating WYOs, including customer service and litigation expenses;  and    systematically track insurance companies’ compliance with and  performance under each component of the Control Plan and ensure  centralized access to all the audits, reviews, and data analyses performed  for each participating insurance company under the Control Plan.
Why GAO Did This Study

Since 2004, private insurance companies participating in the Federal Emergency Management Agency's (FEMA) Write-Your-Own (WYO) program have collected an average of $2.3 billion in premiums annually and, of this amount, have been paid or allowed to retain an average of $1 billion per year. Questions have been raised about FEMA's oversight of the program in light of the debts FEMA has incurred since the 2005 hurricanes. GAO placed NFIP on its high-risk list and issued several reports addressing the challenges the program faces. This report addresses the methods FEMA uses for determining the rates at which WYOs are paid, its marketing bonus system for WYOs, its adherence to financial control requirements for the WYO program, and alternatives to the current system. To do this work, we reviewed and analyzed FEMA's data and policies and procedures and obtained the views of select WYOs and flood insurance experts.

What GAO Found

FEMA does not systematically consider actual flood insurance expense information when it determines the amount it pays the WYO for selling and servicing flood insurance policies and adjusting claims. Rather, since the inception of the WYO program, FEMA has used various proxies for determining the rates at which it pays the WYOs. Consequently, FEMA does not have the information it needs to determine (1) whether its payments are reasonable and (2) the amount of profit to the WYOs that are included in its payments. When GAO compared expense payments FEMA made to six WYOs to the WYOs' actual expenses for calendar years 2005 through 2007, we found that the payments exceeded actual expenses by $327.1 million, or 16.5 percent of total payments made. Considering actual expense information would provide transparency and accountability over payments to the WYOs. FEMA has not aligned its bonus structure with its long-term goals for the program. The WYOs generally offered flood insurance when requested but did not strategically market the product as a primary insurance line. FEMA has not set explicit marketing goals beyond a 5 percent goal of increasing policy growth each year, and the WYO program primarily rewards companies that are new to NFIP for sales increases that may result from external factors, including flood events. The Government Performance and Results Act states that when results could be influenced by external factors, agencies can use intermediate goals to measure contributions to specific goals. Paying bonuses based on such intermediate targeted goals could bring the bonus structure more in line with FEMA's goals for the NFIP program. FEMA has explicit financial control requirements and procedures for the WYO program but has not implemented all aspects of its Control Plan. FEMA provides guidance for WYOs that is intended to ensure compliance with the statutory requirements for the NFIP and contains checks and balances to help ensure that taxpayer funds are spent appropriately. FEMA did most of the required biennial audits and underwriting and claims reviews but did not do most of the required audits for cause; state insurance department audits; and marketing, litigation, and customer service operational reviews. In addition, FEMA did not systematically track the outcomes of the various audits, inspections, and reviews that it performed for the 10 WYOs included in this review of FEMA's oversight of the program. Because FEMA does not implement all aspects of the Control Plan, it cannot ensure that the WYOs are fully complying with program requirements. Three alternative administrative structures could replace NFIP's payment arrangement with a competitively awarded contract that could lower costs for selling and servicing flood insurance policies and administering claims: (1) contracting with one or more insurance companies, (2) contracting with a single vendor, or (3) contracting with multiple vendors and maintaining the WYO network. Each alternative involves trade-offs in terms of the impact on the program's basic operations that would have to be considered.