FEMA and Private Flood Insurance

The government is said to be actively considering ending private insurance companies’ participation in the federal flood insurance model. In the wake of Superstorm Sandy, allegations have emerged about fraud and unjust denials in the handling of claims. According to reports, the Federal Emergency Management Agency (FEMA) is being asked to reexamine its “Write Your Own “Insurance (WYO)  system which  is currently part of the National Flood Insurance Program (NFIP).WYO, which has been in operation since 1983 allows private insurers to write and service their own policies in their own names. The companies receive approximately 30% of premiums to cover their expenses and commissions.

Profit Versus Service

While it is accepted that profit and incentives are both understandable and needed to make participation in the flood insurance program attractive for private players, questions are being asked about whether the quantum of these incentives are commensurate with a federal program that is meantto assist those who suffer from loss due to flooding.

Another factor working against the private insurance companies is that there are about 80 companies selling this insurance using 80 different premium calculation systems and 80 different methods of calculating payouts. This multiplicity of systems leads to a huge amount of confusion and serious lack of clarity in the operations of the program. Additionally, it is also being claimed that since the WYO system does not cover the legal expenses of policy holders, the insurers are tempted into fighting homeowners in the courts.

The FEMA Response

Because of the claims and allegations being made, FEMA has agreed to reopen all the claims filed by Superstorm Sandy victims. These number about 140,000 and include over 2,000 that are presently in litigation.

FEMA also plans to review the complete insurance program in the light of the problems that arose after Sandy. It says that it will consider a wide range of reform options in an attempt to correct the flaws in the system and make it both fairer to policy holders and also more user friendly. A FEMA spokesperson recently said that “We expect WYO companies who partner with us to share FEMA’s values of putting survivors first.” The statement goes on to say that everything is open to evaluation, including the role of WYOs in the program.

What the Insurers Say

Insurance companies have strongly contested these allegations. They have denied any kind of wrongdoing and say that the WYO system does not offer any incentives for lowering payouts. They also state that over 99% of all Sandy claims have been paid and settled in as efficient a manner as is possible.

If you would like to know more about private flood insurance and how changes in FEMA policy will affect its operation, contact an insurance professional. He or she will be able to explain the ramifications of the system and guide you to the type and amount of insurance that is right for you. Flood insurance is a far more complex process than it appears to be on the surface and the guidance of an insurance agent will allow you to make the right decisions.

New Home's Flood Insurance Shocks Floridians

Suppose that you have retired after many years of hard work; that you have been financially prudent all your life and when you call it a day you have enough to buy a home and live comfortably. You may not be rich, but you will be able to live in comfort. And then, after you buy you home and settle in, suppose you find that your flood insurance rates have gone up tenfold. Will you be able to weather the shock? Or will you have to lose your home and watch your plans for a peaceful retired life go up in smoke?

This is not a nightmare “what if….” scenario. It is happening to a vast number of homeowners today. The reason is the Biggert-Waters Flood insurance Reform Act of 2012. After being inundated with claims after Hurricane Katrina, the National Flood Insurance Program was on the verge of insolvency. The act aims to revise flood insurance premiums upwards so that the Program can continue to operate. To clarify the kind of impact that the new rates will have, a home where the flood insurance premium was $1,500 per year may now have to pay$12,000 a year, which is what happened to a Floridian couple who recently bought a home.

Who’s To Blame?

When situations like this arise, it’s natural to look for a person or agency to blame. But in this case, there are no real bad guys. FEMA Director Craig Fugate admits that the homeowners will feel the “sticker shock.” But he says that flood insurance is being provided at below market rates and that the government has been borrowing money to enable the subsidy to continue. This is obviously a situation that cannot remain indefinitely. The removal of the subsidies and making homeowners pay realistic rates will remove this financial burden from the government.

While the economic argument makes sense, the fact that a huge number of homeowners in flood zones will suffer remains. For those who bought their homes before the Act came into force, the shock will be less, but still major – they wills see their rates increase by about 25% a year. But recent home buyers and those insuring secondary homes will have to pay the full increase from the get go. To add insult to injury, many of those affected by the proposed increase do not live anywhere near any body of water. But because they are in low lying inland areas, they are in flood zones.

What Can Be Done?

A bipartisan effort was recently made to introduce a bill that would delay the implementation of the Act for a year. This would have allowed for time for the impact of the increased rates on homeowners to be more fully considered and for strategies to reduce the impact to be found. The search for other alternatives could also have been conducted. But unfortunately, partisan politics and the fight over Obamacare have brought the government to a standstill. By the time a solution is found and the shutdown is over, the move may be lost in a sea of pending legislation and overdue government decisions.

The government can no longer afford to subsidize flood insurance rates. And many homeowners will not be able to pay the new premiums. It is the job of government to find solutions to these problems that offer the greatest good to the greatest number. Hopefully something will emerge before people begin to lose their hone over the rate increases.