The Times-Picayune, New Orleans, Louisiana, on flood policies
The Times-Picayune, New Orleans, Louisiana, on flood policies:
FEMA administrator Craig Fugate appeared before a Senate banking subcommittee July 30 to answer questions about the handling of flood insurance claims from Hurricane Sandy.
But while he had a chance, Louisiana Sen. David Vitter pressed Mr. Fugate on what his agency is doing to trim the program’s administrative costs and to ensure everyone required by law to buy flood coverage does so.
Both efforts could help make the National Flood Insurance Program, which FEMA administers, financially sustainable over the long term and keep rates down for policyholders.
The private insurers who handle policies for the flood insurance program get a large percentage from each premium sold. A 2009 Government Accountability Office report found that FEMA allowed private insurers to pocket 30 percent or more of the cost of premiums for managing the policies. GAO said the government was overpaying by as much as 16.5 percent.
As Sen. Vitter pointed out during the subcommittee hearing, the insurers bear none of the risk because the flood insurance program or federal taxpayers pay the cost of claims. “I know there is work involved, but 30 percent seems like a huge margin,” he said.
Fugate said he has asked the administrator of the flood program to work with insurers on structuring fees so that companies don’t get a windfall. Consumer groups should be brought into the conversations as well.
Inflated administrative costs could drive up policy costs and take money out of the flood insurance program that could help keep it in the black. A low rate of participation also undermines the flood program and makes it more likely taxpayers will have to pay more for disaster recovery.
A 2006 study by RAND Corp. for FEMA found that only 49 percent of people nationally who are required by law to have flood coverage were actually buying policies. Sen. Vitter said he found that figure “amazingly low.” It is hard to fathom that more than half of people are flouting the law.
That tells you that the flood insurance program and FEMA haven’t been very aggressive in making sure lenders require the coverage or in tracking down scofflaws.
Congress increased the penalty for failure to buy insurance, but Mr. Fugate said that change is just kicking in. FEMA has focused on being sure lenders understand that flood insurance is required in high-risk zones on federally backed mortgages, he said.
But Sen. Vitter pointed out that mortgage companies already should have known that. The awareness clearly is high in Louisiana. RAND’s study found that 85 percent of homeowners here who fall under the law had flood insurance.
The homeowner affordability act includes language urging FEMA officials to “strive to minimize the number of policies with annual premiums that exceed 1 percent of the total coverage provided by the policy.” For $200,000 in coverage, that would be $2,000 per year.
That language isn’t as strong as it should have been. But it sent the message that Congress intends for FEMA to keep costs reasonable for property owners as premiums increase over time.
It is a myth that the flood insurance program — which has a roughly $24 billion debt — has historically had trouble paying claims. The program was solvent before Hurricane Katrina in August 2005, when the failure of federally built levees caused massive flooding in the New Orleans area.
Sen. Vitter said during the subcommittee hearing that from 1978 to 2013, the program took in 13 percent more money in premiums than it had in claims.
The senator is right to focus on these issues. Mr. Fugate must ensure that the flood insurance program is as efficient as possible to keep costs down for homeowners.