Insurers Will Be Found Not Guilty of Fraud in Sandy Payouts, Expert Says

Insurers will be vindicated of accusations of fraud for rejecting flood damage claims made by Superstorm Sandy victims, an insurance industry expert predicts.

New York’s Attorney General Eric Schneiderman has opened an investigation into accusations against insurers Wright National Flood Insurance Co., units of Travelers Cos. and Hartford Financial Services Group Inc., which contract with the government’s National Flood Insurance Program (NFIP), of rejecting property flood damage claims of Sandy victims based on falsified engineering reports, Bloomberg reported this week.

Called a Write Your Own program (WYO), the Federal Emergency Management Agency (FEMA) allows participating property and casualty insurers to write and service the Standard Flood Insurance Policy in their own names.

Under the WYO program, insurers receive an expense allowance for policies written and claims processed while the federal government retains responsibility for underwriting losses. The WYO Program operates as part of the NFIP, and is subject to its rules and regulations, according to FEMA, which oversees the flood insurance program.

“I am confident that the attorney general will be satisfied that insurers involved with the Write Your Own program were operating in a manner consistent with NFIP guidelines,” said Robert P. Hartwig, Ph.D., president of the Insurance Information Institute.

Lawsuits in federal court accuse the insurers of colluding with engineering firms and others to deny or reduce damage payouts based on fraudulent reports. Schneiderman is investigating whether any crimes were committed. According to The Hartford Courant, more than 1,000 lawsuits are involved, alleging that homeowners were underpaid by insurance companies. Attorneys said insurers accepted altered engineering reports in a “peer review” process.

Insurers point out that the property disputes involve only about 1% of all flood claims and that the peer-review process is common practice—a quality control measure to make sure the federal government doesn’t overpay on flood claims.

Regarding the lawsuits that have been filed, Hartwig said, “I am equally confident that the evidence will indicate once again that insurers were operating in a manner consistent with NFIP guidelines.”

He explained that the lawsuits lodged against insurers alleging that certain insurers and firms hired to perform engineering analyses on flood-damaged properties were acting together to reduce or deny claims, “reflect a fundamental  misunderstanding of how the NFIP WYO program works. Engineering firms routinely and appropriately use a peer review process to review work performed. Occasionally, that process leads to additional opinions being reflected in an engineering report, which can thus impact the dollar amount received by claimants. This is part of a routine and necessary quality-control process.”

Hartwig said that this process is “no different than peer review in other technical and scientific disciplines. Using medicine as an example, test results are routinely reviewed by more than one medical professional before a diagnosis and course of treatments are rendered.”

Moreover, he added, insurers and the engineering firms hired are not financially motivated “to pay claimants anything other than a fair and accurate assessment of the losses compensable under the NFIP policy purchased. Insurers that consistently underpay or overpay claims can be removed from the program by the NFIP/FEMA.”

FEMA Releases Premium Guidelines for “High-Risk” Flood Zones

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Insurers have historically used FEMA’s Specific Rating Guidelines to calculate premiums for properties at high risk of flooding, particularly those built with the lowest floor elevation below the Base Flood Elevation (BFE). Prior to the National Flood Insurance Program’s extension in 2012 owners of these properties received subsidized rates well below the true flood risk. Many of these properties will now be rated using the Specific Rating Guidelines which FEMA released to the public last Wednesday.

The use of these new guidelines will undoubtedly result in significantly higher premium rates for many property owners in high risk zones. In its report FEMA stated that people whose properties are four feet below base flood elevation will see premiums totaling $95,000 over a 10-year period. These rates have many property owners and elected officials speaking out strongly against the reforms. Members of the Louisiana congressional delegation, including Senator Mary Landrieu (D), Rep. Bill Cassidy (R), and Rep. Cedric Richmond (D), have urged Congress to pass legislation that will delay or lower the rate increases. “I remain very concerned about the impacts these rate increases will have on homeowners and small businesses throughout our nation,” said Sen. Landrieu. Michael Hecht, president and CEO of Greater New Orleans, Inc., went every further stating that “flood insurance will be unaffordable for home and business owners across coastal and riverine America.”

In its guidelines FEMA did provide suggestions for property owners affected by the rate increases which include elevating the property above base flood level; however, this is often easier said than done. Flood insurance policies in the northeast offered an extra $30,000 to allow owners to elevate properties that had been damaged during Hurricane Sandy, but many property owners found that this amount would not cover all of the costs associated with elevating an entire property several feet above its original base. Other FEMA suggestions include adding flood vents to the property’s foundation, taking on higher deductibles, and working with local officials about community wide mitigation strategies.

The NFIP has become a major point of contention in light of the program’s fiscal crisis which was only exacerbated by Hurricane Sandy in 2012. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) went as far as to vow that his committee would take up legislation to privatize the flood insurance market. The program is sure to draw more and more attention as rate increases go into effect October 1, 2013.

NFIP, TRIA and FIO: Points of Focus for House Financial Services Committee

The House Financial Services Committee has released its oversight plan for the 113th Congress. This is a nonbinding plan that each standing committee must submit at the start of each new legislative session spelling out the committee’s agenda for the session. While much of the House Financial Services’ plan includes review of Dodd-Frank implementation and other banking related issues, it also includes three issues of importance to risk management: extension of the Terrorism Risk Insurance Act (TRIA), the National Flood Insurance Program (NFIP) and the Federal Insurance Office (FIO).


“The Committee will examine the private sector’s capacity to assess and price for terrorism risk. The Committee may also consider proposals that would phase out the Terrorism Risk Insurance Program by encouraging private industry to develop dedicated capital for underwriting terrorism risks, and significantly reducing the potential Federal exposure and participation in terrorism insurance over time.”

TRIA is set to expire on December 31, 2014 with many in the industry, including RIMS, pushing for an extension of the program to 2019. The committee’s plan signals that the fight for an extension will not be an easy one.

On the NFIP:

“The Committee will monitor the implementation of the Biggert-Waters Flood Insurance Reform Act of 2012, paying particular attention to the reforms that encourage more private sector participation in the flood insurance market. The Committee will also review and consider further reforms to the National Flood Insurance Program with the goal of ending taxpayer bailouts of the program and transitioning to a private, innovative, competitive and sustainable flood insurance market. Since 2006, the GAO has designated the NFIP as a high-risk program because of its potential to incur billions on dollars in losses and because the program faces serious financial, structural, and managerial challenges. Due to extraordinary losses incurred following the hurricanes in 2005 and Superstorm Sandy in 2012, the program carries a debt of well over $20 billion as of January 1, 2013.”

The debate over the NFIP, which many assumed was settled in 2012, was renewed following the destruction caused by Superstorm Sandy. Committee Chairman Jeb Hensarling (R-TX) has expressed his opposition to the NFIP in the past so it comes as no surprise that the committee plans to continually review the program’s viability and sustainability.

On the FIO:

The committee’s plan also scrutinized the FIO for missing deadlines on several reports to Congress related to the insurance industry. The FIO is being urged to release “these long overdue reports without further delay.” Two of the more anticipated reports include recommendations to modernize and improve the insurance regulatory system and a report on the global reinsurance market. Treasury Department Under Secretary for Domestic Finance Mary Miller recently testified before the Senate Banking Committee that the modernization report would be released soon and that the FIO will be releasing other reports in the coming months.

It’s going to be a busy legislative session.

Hurricane Sandy Revives Debate Over NFIP

A building in Sheepshead Bay, Brooklyn, is flooded from Hurricane Sandy.

When the five-year extension of the National Flood Insurance Program (NFIP) was signed by President Obama in July 2012, the debate over whether the federal government had a vital role in the flood insurance market seemed to be settled. From 2008 to the signing of the long-term extension, the NFIP had been given an estimated 17 short-term extensions and been allowed to lapse on two separate occasions. Supporters, including RIMS, hoped that the long-term extension’s passage would finally bring certainty to the market, but Hurricane Sandy has once again revived debate over the program.

The NFIP was originally created in 1968 as a way to provide affordable flood insurance to those who lived in the most flood prone areas. The program remained solvent until 2005 when Hurricane Katrina put the program $18 billion in debt. It remained alive by borrowing from the Treasury, but Hurricane Sandy has again placed it in financial crisis.

As the New York Times reports, “Early estimates suggest that Hurricane Sandy will rank as the nation’s second-worst storm for claims paid out by the National Flood Insurance Program. With 115,000 new claims submitted and thousands more being filed each day, the cost could reach $7 billion at a time when the program is allowed, by law, to add only an additional $3 billion to its onerous debt.”

Several reforms were included in the 2012 long-term extension that were meant to place the program on more financially solid ground, including: removing subsidized rates for non-primary residences, businesses or severe repetitive loss properties; increasing the limit for annual rate increases from 10 to 20%; and phasing in rate increases until actuarial rates are achieved. The legislation also requires the Federal Emergency Management Agency and the Government Accountability Office to study potential privatization of the NFIP, while the Federal Insurance Office is required to study the current market for natural catastrophe insurance, including issues of affordability.

Supporters of the NFIP argue that these reforms should be allowed to take effect before any further changes to the program are considered, but many critics argue that more drastic reforms are needed immediately. Some critics go so far as to argue that the program should be entirely privatized.

House Financial Services Committee Chairman Jeb Hensarling has vowed to take up legislation that would do just that, stating, “As Chairman of the Financial Services Committee, I wish to inform all members in this Congress, our committee will take up legislation to transition to a private, innovative, competitive, sustainable flood insurance market.”

As long as the NFIP remains in financial trouble, expect this debate to continue.