Joe Rossi

The National Flood Insurance Program (NFIP) has been in the national news recently in a series of unsympathetic reports. One story was critical of how the NFIP is using insureds’ premiums to deny claims and overpay insurance companies; another censured a proposed FEMA rule change allowing homeowners to rebuild after receiving a demolition grant for a flood-prone home. 

The news media has condemned FEMA and the NFIP without sufficient research and explanation. There are issues with the NFIP’s administration and FEMA’s grant proposals, but going just below the surface clarifies the story beyond the initial sensational headlines. 

A few weeks ago, a national news station ran a scathing piece about how two-thirds of NFIP premium dollars go to private insurance companies and their lawyers. This makes the NFIP sound extremely dysfunctional. 

The NFIP is administered by private insurance companies called Write Your Own companies (WYO). The WYOs manage about 80 percent of flood policies within the NFIP, while the NFIP manages the remaining 20 percent. Premiums are collected by the companies and deposited to the federal government, where all NFIP administrative costs are then paid. Over time, the WYOs found that it was too costly to administer the NFIP program themselves, so service providing companies were born. Now almost all of the approximately 75 WYO companies use service providers. WYOs pay the service providers to underwrite policies, handle claims and support customer needs, improving the flood program consumer experience. 

The WYOs receive 30 percent of each policy sold through the NFIP to reimburse them for their expenses and pays out approximately 18 percent to its agents. This leaves the WYO with near 12 percent to handle all other expenses. While the agent appears to make plenty on a flood policy, the average flood policy costs a little over $900. The cost of support leaves little to no excess. At the end of the day, the WYO’s average profit is 2 to 5 percent of the original 30 percent and the agent receives no more than average reimbursement. 

In the national news piece on the NFIP, the reporter focuses on two apparent underpaid flood claims. One with dwelling coverage written for $176,000, claimed to have been underpaid by $40,000. The insureds in this example may have a right to more funds, but the report fails to describe how the policy was written, possible exclusions and other standard NFIP rules. Also, more money can be submitted for a claim if damage is found after the initial claim is filed.  

Frivolous Lawsuits 

There are legitimate issues that arose from the poor handling of some Hurricane Sandy claims, and some insured were treated unfairly. We should not ignore the problem. But less than one half of 1 percent of NFIP claims end in court, with a large percentage of lawsuits coming from profiteering trial lawyers looking to sack a government program. After Hurricane Harvey, one firm stated, “In the event that your insurance carrier refuses to fully and timely compensate you … we’ll immediately begin preparing your case for trial.” This type of incentive, regardless of scenario, entices frivolous lawsuits against the NFIP. 

FEMA was criticized in February for a proposed policy allowing homeowners to receive a demolition grant that allowed rebuilding on a demolished site. FEMA would allow those with significant flood damage to directly apply to FEMA for a grant. However, the proposal states that after the structure is demolished, the property owner could either sell the land to the local government as open space, or rebuilt to new, better standards, which would avoid the continued flood losses. 

FEMA does not currently offer this type of grant directly to property owners, but rather only after the community applies on their behalf. If the community does not apply, then no grant is awarded. The proposal requires some improvement, such as requiring the grant to serve community-wide planning objectives. However, this concept remains good in theory. 

As a nation, we should not be apologists for a federal program that, despite its pitfalls, is the largest and most successful floodplain management and mapping program in the world. It saves taxpayers $2 billion annually simply due to good land use management. While there are certainly issues with the program, the NFIP has saved billions in taxpayer funding, paid out over $60 billion in flood claims and, if reformed properly, could return to a sustainable NFIP that truly functions like an insurance program. 

Joe Rossi is a flood specialist with South Dennis, Massachusetts-based Rogers & Gray Insurance. He is also chairman of the Massachusetts Coastal Coalitions and sits on the board of directors of the National Flood Association.