Flood insuranceFEMA considering overhauling the National Flood Insurance Program

Federal legislators and officials with the Federal Emergency Management Agency (FEMA) are trying to overhaul the National Flood Insurance Program which relies on eighty-three companies to sell policies, collection premiums, and calculate damages after disasters. The move comes just as FEMA is in talks to settle almost 1,800 lawsuits filed by homeowners claiming they were underpaid on flood insurance claims after Superstorm Sandy.

In addition, reports from the Government Accountability Office (GAO) have accused the flood insurance program of exerting little oversight over the companies it contracts, while paying them large fees and bonuses. Federal lawmakers also claim that some Sandy-affected homeowners and businesses were denied claims by private insurers who were overly focused on reducing the number of payouts instead of ensuring storm victims received fair settlements.

FEMA, which insures via the national flood program, roughly 5.2 million homes and businesses nationwide, is getting ready to reopen claims for about 142,000 policyholders flooded during Sandy.

Newsday reports thatFEMA has asked Democratic New York senators Charles Schumer and Kirsten Gillibrand, along with Robert Menendez (D-New Jersey) for recommendations on overhauling the flood insurance program. The lawmakers have yet to propose an alternative to the current system, saying they want to ensure Sandy victims are properly paid before focusing on long-term reforms.

Insurance industry professionals say it would be devastating to terminate the flood insurance program’s partnerships with private companies. The consequences for consumers would be fewer options, said Robert Hartwig, president of the Insurance Information Institute.

The flood insurance program was launched in 1968 after private insurers increased their coverage prices due to newer risk assessments, leaving most homeowners unable to afford them. The federal government then offered policies at subsidized rates and instead of hiring insurance staff, outsourced the work to the private sector. By 1977, the federal government concluded that the 132 companies managing flood policies were overcharging the government and underpaying homeowners.

The program’s director, J. Robert Hunter, cut ties with the companies and issued a contract to bid winner Electronic Data Systems, to manage every flood insurance policy covered by the federal government. The arrangement, however, was temporary. A federal audit found that Electronic Data Systems “neglected fundamental accounting responsibilities” and issued reports that contained errors. In 1983, the flood program launched into its current form.

Interviewed this week by Newsday, Hunter said the move to a single company saved the flood program millions of dollars and it made it easier for government oversight. It is time to rethink the program’s current system, said Hunter, now the director of insurance for the Consumer Federation of America.