National Flood Insurance Program: Oversight of Policy Issuance	 
and Claims (14-APR-05, GAO-05-532T).				 
                                                                 
According to the National Flood Insurance Program (NFIP), 90	 
percent of all natural disasters in the United States involve	 
flooding. Because of the catastrophic and unpredictable nature of
floods, private insurance companies do not typically cover flood 
losses. Congress established the NFIP in 1968 to provide an	 
insurance alternative to disaster assistance in response to the  
escalating costs of repairing flood damage. During congressional 
hearings on provisions of the Flood Insurance Reform Act of 2004,
several legislators testified on NFIP shortcomings, as reported  
by constituents whose properties had been flooded by Hurricane	 
Isabel in September 2003. The act required GAO to study coverage 
provided under the NFIP. It also required the Federal Emergency  
Management Agency (FEMA), the administrator of the NFIP, to take 
steps to address concerns about coverage and claims procedures.  
Today's testimony is based on work in progress to address this	 
mandate. It provides preliminary information on (1) the types of 
coverage limits, restrictions, and exclusions under the NFIP; (2)
how FEMA, in partnership with private insurers, manages and	 
oversees the NFIP and the views of selected private sector	 
program managers on how the program is working; and (3) the	 
status of FEMA's efforts to comply with provisions of the Flood  
Insurance Reform Act.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-532T					        
    ACCNO:   A21682						        
  TITLE:     National Flood Insurance Program: Oversight of Policy    
Issuance and Claims						 
     DATE:   04/14/2005 
  SUBJECT:   Cost analysis					 
	     Disaster relief aid				 
	     Emergency preparedness				 
	     Federal law					 
	     Flood insurance					 
	     Insurance claims					 
	     Insurance companies				 
	     Insurance premiums 				 
	     Insurance regulation				 
	     Private sector					 
	     Program evaluation 				 
	     Program management 				 
	     National Flood Insurance Program			 

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GAO-05-532T

United States Government Accountability Office

GAO	Testimony before the Subcommittee on Housing and Community
Opportunity,

Committee on Financial Services, House of Representatives

For Release on Delivery

Expected at 10:00 a.m. EDT NATIONAL FLOOD

Thursday, April 14, 2005

INSURANCE PROGRAM

                    Oversight of Policy Issuance and Claims

Statement of William O. Jenkins, Jr., Director, Homeland Security and Justice
Issues

GAO-05-532T

[IMG]

April 2005

NATIONAL FLOOD INSURANCE PROGRAM

Oversight of Policy Issuance and Claims

  What GAO Found

As a result of policy limits, restrictions, and exclusions, insurance
payments to claimants for flood damage may not cover all of the costs of
repairing or replacing damaged property. Some limitations are embedded in
statute and others have been promulgated by FEMA pursuant to its statutory
authority. FEMA officials said that the coverage limitations are necessary
to keep the NFIP self-supporting and actuarially sound. Thus, the program
is designed to strike a balance between premium prices and coverage. For
example, homeowners may choose not to insure personal property under the
program. If they do elect to have this coverage, the value of personal
property is depreciated. Basement coverage does not include payment to
repair or replace finished walls and floors.

The work of selling, servicing, and adjusting claims on NFIP policies is
carried out by thousands of private sector insurance agents and adjusters
under the regulation, management, and oversight of about 40 FEMA employees
assisted by about 170 contractor employees. Agents are the main point of
contact for policyholders. Four private sector NFIP managers we
interviewed said that the agents have varying levels of NFIP knowledge.
While training and support are available, historically neither FEMA nor
the insurance companies have required completion of training or
demonstration of basic program knowledge. Flood-certified adjusters are
responsible for assessing damage and estimating losses when flooding
occurs. Unlike agents, adjusters have mandatory training requirements.
FEMA has oversight mechanisms in place to review the operations of the
insurance companies and the work of adjusters. The private sector NFIP
managers GAO interviewed were generally supportive of the program.
However, they said that FEMA should find ways to make it less complex than
and more similar to other property insurance programs.

FEMA has taken steps to address its mandates in the Flood Insurance Reform
Act, but it did not meet the 6-month timeframe specified. For example, to
establish an insurance agent training requirement, an official said FEMA
is discussing options but has not developed an action plan. To meet the
requirement to provide "simple and complete information" to NFIP
policyholders, FEMA has drafted materials explaining coverage,
deductibles, and claim-and appeals-related procedures that it expects to
have finalized by October 2005.

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to participate in today's hearing to discuss
the National Flood Insurance Program (NFIP) and the Federal Emergency
Management Agency's (FEMA) role in overseeing processes for issuing
policies and adjusting claims after floods occur.1 My testimony is based
on preliminary results to date of our ongoing review of the NFIP, as
mandated by the Flood Insurance Reform Act of 2004.2

According to NFIP statistics, 90 percent of all natural disasters in the
United States involve flooding. However, flooding is generally excluded
from homeowner policies that typically cover damage from losses including
wind, fire, and theft. Because of the catastrophic nature of flooding and
the inability to adequately predict flood risks, private insurance
companies are largely unwilling to underwrite and bear the risk of flood
insurance.

Under the National Flood Insurance Act of 1968,3 Congress established the
NFIP to provide an insurance alternative to disaster assistance in
response to the escalating costs of repairing flood damage. In creating
the NFIP, Congress found that "a program of flood insurance with
large-scale participation of the federal government and carried out to the
maximum extent practicable by the private insurance industry is feasible
and can be initiated."4 Under the NFIP, homeowners with mortgages insured
by federal lenders on property in communities identified to be in special
highrisk flood hazard areas are required to purchase flood insurance on
their dwellings, up to a maximum of $250,000 in coverage for single-family
homes. Optional, lower-cost coverage is also available under the NFIP to
protect homes in areas of low to moderate risk. To insure furniture and

1FEMA, the agency responsible for coordinating the federal response to
disasters, manages and oversees the NFIP. In March 2003, FEMA and its
approximately 2,500 staff became part of the Department of Homeland
Security (DHS). Most of FEMA-including its Federal Insurance and
Mitigation Administration, which is responsible for administering the
NFIP-is now part of the department's Emergency Preparedness and Response
Directorate. However, FEMA has retained its name and individual identity
within the department.

2P.L. 108-264 (June 30, 2004).

342 U.S.C. 4001, et seq.

442 U.S.C. 4001(b).

other contents against flood, property owners must purchase separate NFIP
personal property coverage for up to $100,000.

FEMA, the agency responsible for coordinating the federal response to
disasters, administers the NFIP. FEMA has been generally successful in
keeping the NFIP on sound financial footing. FEMA reports that the NFIP is
self-supporting for the average historical loss year, which means that
operating expenses and flood insurance claims are not paid for by the
taxpayer, but through premiums collected on flood insurance policies. FEMA
has exercised its authority to borrow from the Treasury three times in the
last decade when losses were heavy. However, it has repaid all borrowed
funds with interest.

By 2005, the NFIP is projected to have approximately 4.7 million
policyholders in the nearly 19,000 participating communities, with $699
billion of insurance in force. Since its inception, the program has paid
about $12 billion in insurance claims, primarily from policyholder
premiums that otherwise would have been paid through taxpayer-funded
disaster relief or been borne by the home and business owners themselves.

During congressional hearings held last year on the Flood Insurance Reform
Act of 2004, several legislators testified on NFIP concerns as reported by
constituents whose properties had been flooded by Hurricane Isabel in
September 2003. Problems they reported included inadequate payments and
unclear policies and procedures for filing and adjusting damage claims.
According to NFIP statistical data, NFIP policyholders filed about 23,770
claims for $454.2 million for flood damage as a result of this storm,
primarily in Maryland, Virginia, and North Carolina.

Several months later, the hurricane season that began in August 2004
struck hard in Florida and other East and Gulf Coast states. In Florida
alone, more than one in five homes suffered wind, rain, flood, or other
damage from the hurricanes, according to FEMA. According to NFIP data, the
combined impact of Hurricanes Charley, Frances, Ivan, and Jeanne in August
and September 2004 made them the most costly catastrophes in U.S. history,
surpassing the costs of Hurricane Andrew in 1992 and the World Trade
Center and Pentagon terrorist attacks in 2001. FEMA reported that these
storms resulted in 59,125 NFIP claims for more than $1.3 billion in
payments as of March 2005 on claims that have been closed.

To meet our legislative mandate, as modified and expanded to include
information on the 2004 hurricane season, and as discussed with your
committee and the Senate Committee on Banking, Housing, and Urban

Affairs, we are reviewing several issues related to NFIP claims and FEMA's
oversight role. Today, we are prepared to provide preliminary information
on (1) the types of limits, restrictions, and exclusions to coverage that
exist under the NFIP; (2) how FEMA, in partnership with private insurers,
manages and oversees the NFIP, and the views of selected private sector
NFIP program managers on how the program is working; and (3) the current
status of FEMA's efforts to comply with provisions of the Flood Insurance
Reform Act that mandate it establish insurance agent education and
training requirements, new processes for explaining coverage to
policyholders when they purchase and renew policies, and an appeals
process for claimants.5 In addition, appendix I presents data on policies
in force and payments claimants received under the NFIP for flood events
over the life of the program through 2004.

To address these issues, we collected data from the NFIP management
information system, examined program documentation, and interviewed
officials of FEMA and its program contractor. We also interviewed four
private sector NFIP program managers for insurance companies and managers
at one vendor-a company that subcontracts with insurance companies to
handle all or part of their flood business. Using a semistructured
interview instrument, we asked these managers how their operations are
managed and reviewed, how they believe the program is working, and what
suggestions they have for improvements. In consultation with FEMA
officials, we selected the interviewees because they are among the largest
private sector partners for the NFIP. We observed FEMA-sponsored training
of insurance agents and adjusters and a FEMA oversight review of the
management of a private insurance company's NFIP business.

Our work that forms the basis of the preliminary observations presented in
our testimony today is still in progress. For example, we have not yet
completed our review of the NFIP program and the claims made after
Hurricane Isabel and the 2004 hurricane season. Among the ongoing work to
be completed prior to issuing our report later this year are (1) an
assessment of the reliability of FEMA's management information system, (2)
interviews with the general adjusters who supervised claims adjustments in
Maryland after Hurricane Isabel and in Florida during the 2004 hurricane
season, (3) observations of FEMA's monitoring and oversight activities,
and (4) a review of the operational reviews FEMA has

5See P.L. 108-264, Sections 202-205, 207.

done over the last several years. Our work is being done in accordance
with generally accepted government auditing standards.6

In summary, we found:

o  The NFIP is not designed to cover all flood losses. Some limitations
are embedded in statute and others have been promulgated by FEMA pursuant
to its statutory authority to keep the program self-supporting and
actuarially sound. For example, the limited coverage allowed for basements
does not include payment to repair or replace finished walls, floors,
furniture, and other personal property.

o  The work of selling, servicing, and adjusting claims on NFIP policies
is carried out by thousands of private sector insurance agents, adjusters,
and other employees. The private sector effort is regulated, managed, and
overseen by about 40 FEMA employees with the assistance of about 170
contractor employees. The private sector program managers we interviewed
said that the NFIP has many positive aspects, but its implementation is
complex for policyholders, agents, and adjusters. Each of the four
interviewees, when asked how the NFIP could be improved, said that FEMA
should look for ways to make the program less complex and more similar to
other property insurance programs.

o  Although its 6-month deadline elapsed in December 2004, FEMA continues
its efforts to comply with mandates of the Flood Insurance Reform Act that
it establish (1) insurance agent education and training requirements, (2)
new processes for explaining coverage to policyholders when they purchase
and renew policies, and (3) an appeals process for claimants who are
dissatisfied with the settlement of their claims. FEMA officials said that
the rule-making process required for two of the initiatives takes more
than 6 months to complete. On the third initiative, FEMA is awaiting DHS
approval of materials it has prepared to explain coverage to
policyholders. A FEMA official estimated that it would be after October
2005 before it has fully complied with the mandates.

6We plan to issue a final report in September 2005 on the issues we
discuss today and the results of our examination of actions taken by FEMA
on a representative sample of Hurricane Isabel claims for which claimants
requested reviews of initial determinations.

  NFIP Is Not Designed to Cover All Flood Losses

As a result of coverage limits, restrictions, and exclusions in NFIP
policies, insurance payments for flood damage may not pay all of the costs
of repairing or replacing flood-damaged property. Certain NFIP limitations
are embedded in statute; others have been promulgated by FEMA pursuant to
its statutory authority. FEMA officials said that the coverage limitations
are necessary to keep the NFIP self-supporting and actuarially sound.
Thus, the program is designed to strike a balance between premium prices
and coverage.

The following are several examples of NFIP coverage limitations,
restrictions, and exclusions that affect the premium and amount a claimant
could expect to receive for flood damage:

o  Homeowners are required to insure their homes for the amount of their
federally backed mortgages. If a home is insured for less than 80 percent
of its full replacement cost or the maximum coverage amount of $250,000,
or it is not a primary residence, NFIP will pay the actual cash value for
the damage. The actual cash value represents the original cost of the
structure less depreciation and, in most cases, will not cover the full
cost to repair damage to or replace the dwelling. The value of physical
depreciation is based on the age and condition of the item.

o  If a home is insured for 80 percent or more of its full replacement
cost or the maximum coverage amount of $250,000 and is a primary
residence, NFIP will pay replacement costs for damage to the dwelling. The
policy defines replacement cost as coverage to replace the damaged part of
the dwelling with materials of like kind and quality to what was damaged.
The policy will pay the amount actually spent for this repair or
replacement up to its limit.

o  A homeowner may choose not to insure personal property under the
program.

o  A deductible amount is applied against claims for dwellings and
personal property.

o  Basements, which are defined as building areas below grade level on all
sides, have limited coverage that does not include payment to repair or
replace finished walls, floors, furniture, and other personal property.

o  The personal property limit paid for jewelry, artwork, and home
business equipment is $2,500 for all items combined. No coverage is
provided on these items if they are located in a basement.

o  Actual cash value, not replacement value, is paid on all covered
furniture and other personal property. Thus, personal property is also
depreciated.

o  A detached garage is covered by the dwelling policy only if it is used
solely for vehicles and storage. If the garage is improved (e.g., a sink
is installed), flood damage to the structure is not covered under the
NFIP.

In a hypothetical property adjustment we developed with the assistance of
FEMA's director of claims, a poorly maintained 30-year-old home located in
a designated flood zone had flood damage when a nearby river overflowed.
The property was valued at $60,000. It was insured under the NFIP for
$30,000. Although a contractor estimated it would cost $40,000 to repair
damages to the structure and personal property losses totaled another
$10,000, a NFIP adjuster determined that payment on the claim was $8,000.

The following circumstances reduced the amount of coverage:

o  The homeowner had chosen not to insure his personal property.

o  Because the homeowner did not insure the structure for at least 80
percent of its value, actual cash value will be paid for repairs or
replacement of damage to the dwelling. Since the condition is poor, the
actual cash value will be low.

o  A $1,000 deductible will be applied.

o  The adjuster determined that some problems that needed to be addressed
had not been caused by the flood (e.g., leaking pipes in the bathroom and
preexisting mold in the basement).

o  Only limited coverage is allowed in the basement of the home, where the

  Private Insurers Sell, Service, and Adjust Claims under FEMA Management and
  Oversight

largest amount of damage occurred.

The work of selling, servicing, and adjusting claims on NFIP policies is
carried out by thousands of private sector insurance agents and adjusters
who work independently or are employed by insurance companies or vendors
under subcontract to insurance companies to handle their flood business.
In contrast, according to a FEMA official, about 40 FEMA employees are
responsible for regulating, managing, and overseeing the program, which is
expected to grow to about 4.7 million policies in 2005. FEMA is assisted
in this effort by about 170 contractor employees.

According to FEMA, about 95 percent of the NFIP policies in force are
written by agents who work for or represent 94 private insurance companies
that issue policies and adjust flood claims in their own names. The
companies, called write-your-own companies, receive an expense allowance
from FEMA of about one-third of the premium amounts for their services and
are required to remit premium income in excess of this allowance to the
National Flood Insurance Fund.7 The insurance companies share the FEMA
expense allowance with the agent selling and servicing the policy and a
vendor, if the company has subcontracted with one to handle all or part of
its flood insurance business.

    Independent Agents Are the Main Point of Contact for Policyholders

Flood program managers for each of the four write-your-own companies we
visited said that insurance agents were the main point of contact for
policyholders and those seeking to purchase flood insurance. The managers
we interviewed noted that agents had varying levels of knowledge about the
NFIP. For example, one flood manager noted:

It is clear that some agents do not understand the program. It is very
complex and different from the other lines of insurance. Flood insurance
is much more complex than automobile and homeowners insurance. Some items
of specific concern are definitions of elevated buildings and basements.

Officials at FEMA, the four insurance companies, and the vendor said that
they offered support to the insurance agents who sell and service NFIP
policies. Reported support included training, help from telephone hotline
customer service representatives, development of rate quotes, and Web
sites with NFIP information. However, other than requiring that agents
meet basic state insurance licensing requirements, neither FEMA nor the
four insurance companies have historically required that agents complete
training or demonstrate a basic level of knowledge of the NFIP to sell
flood policies.

Adjusters Are the Eyes and When losses occur, flood adjusters employed by
insurance companies or

Ears of the NFIP independent contractors become the eyes and ears of the
NFIP. Claims adjusters are assigned to policyholders by their insurance
companies after the policyholders have notified their agents of a flood
loss and the agents

7The other 5 percent of policies are sold and serviced by state-licensed
insurance agents and brokers who deal directly with FEMA.

have written loss reports. Adjusters are responsible for assessing damage;
estimating losses; and submitting required reports, work sheets, and
photographs to the claimants' insurance company, where the claim is
reviewed and, if approved, processed for payment. They work under the
coordination of a general adjuster assigned to manage claims adjustments
for the flood event.

Unlike agents who sell flood insurance policies, adjusters must be
certified by FEMA to work on NFIP claims. To be approved to adjust
residential flood losses, an adjuster must have at least 4 consecutive
years of full-time property loss adjusting experience and have attended an
adjuster workshop, among other requirements. To keep their certifications
current, adjusters are required to take a 1-day refresher workshop each
year and pass a written examination testing their knowledge each year.

FEMA's program contractor maintains a database of independent adjusters
who are qualified to adjust flood claims. A FEMA official said that 4,844
flood-certified adjusters are registered in the database, as of April
2005. A NFIP official noted that the adjuster community is stretched thin
when a major flood event occurs.

Adjusters and insurance companies are paid for claims settlements from the
National Flood Insurance Fund based on the size of the losses they settle.
The write-your-own company receives about 3.3 percent of the incurred
loss, according to FEMA's NFIP claims director. Adjusters are to be paid
at the time claims are settled based on a standard fee schedule. For
example, an adjuster receives $1,000 for a claim of between $25,000 and
$35,000.

FEMA Oversees Work of FEMA's primary method of overseeing the work of
write-your-own Insurance Companies and companies is to conduct an
operational review of every participating Adjusters company at least every
3 years. In addition, FEMA relies on about

10 general adjusters8 employed by its program contractor to check the

8According to the FEMA director of NFIP claims, general adjusters are
experienced property adjusters who operate in the manner of supervisory
adjusters. Resident general adjusters are responsible for surveying an
area that has flooded either immediately before or after a flood event to
estimate the number of claims that will be made. General adjusters
coordinate claims adjustment activities at disaster locations, do adjuster
training, and respond to questions from adjusters in addition to their
oversight roles.

work of claims adjusters9 in reinspections of a sample of adjustments done
after every flood event.

According to the FEMA director of NFIP claims, one or two employees from
FEMA's NFIP Claims and Underwriting sections go on-site to review the
operations of write-your-own companies at least every 3 years. They do
reviews more frequently, if necessary, to follow up on any findings from a
previous visit.10 The auditors are to request that a random sample of 100
files be pulled for them to review. Files that are closed without payment
and those with particularly large settlements are to be included in the
sample of files reviewed. Auditors are to check the files for completeness
and accuracy. For example, they must make sure that there are photographs
to document damage. Auditors are also to look at internal controls in
place at the company.

If a write-your-own company does not pass an operational review, FEMA
requires that it develop an action plan to correct the problems and
schedules a follow-up review in 6 months to determine whether progress has
been made, according to the NFIP director of claims. If the company
continues to have problems and fails to implement an action plan, it can
ultimately be withdrawn from the NFIP. According to FEMA officials, a
company has been asked to withdraw from the NFIP once in the program's
history. About 3 years ago, a write-your-own company was withdrawn from
the NFIP in part because of issues raised in operational reviews and in
part to other financial problems.

Three of the four flood program managers for write-your-own companies whom
we interviewed thought operational reviews were an effective way for FEMA
to ensure that the NFIP is run according to established legislation and
regulation. The fourth manager said that he had no opinion one way or the
other. Interviewees noted that the reviews caught problems, and while FEMA
had a small audit staff, the auditors were knowledgeable and provided
about the right level of review. Two of the four flood program managers
said that recent operational reviews had identified problems on policies
they had recently purchased from other

9In addition, financial reviews of the write-your-own companies are done
and data submitted for payment and statistical reporting are edited.

10Some operational reviews are done at vendor locations rather than at the
write-your-own company.

companies and that they were working to rewrite some policies and address
other oversight issues.

General adjusters are to do reinspections of open claims. FEMA chooses a
random sample of about 4 percent of the claims for every flood event to
reinspect, according to the NFIP claims director. If the general adjuster
determines that a company paid for an expense that should not have been
covered, FEMA is to be reimbursed by the write-your-own company. If a
general adjuster finds that an adjuster missed an item in the original
inspection, the general adjuster is to add it back into the claims report
so that the policyholder will be compensated for it.

The instructors at an adjuster refresher training session we attended
noted the following as common errors identified in reinspections of
claims:

o  improper measurement of room dimensions;

o  improper allocation of damage between wind and flood (homeowners'
policies cover wind damage, while the NFIP covers flood losses);

o  poor communication with homeowners on the process they are following to
inspect the property and settle the claim.

    Stakeholders Said the NFIP Has Many Positive Aspects but Implementation Is
    Complex

The flood program managers for the write-your-own companies and the vendor
managers we interviewed were generally supportive of the NFIP and found
many positive aspects to the program. One write-your-own company program
manager said:

"I am in the flood insurance business because I believe in the program. It
does a lot of good. Floods are horrible occurrences. A homeowner sees the
water coming but can do nothing to stop it. The smell is horrible. Whole
communities are affected, and the emotional toll is tremendous. I have
seen the NFIP do great good for many people."

Each of the interviewees, when asked how the NFIP could be improved, said
that FEMA should look for ways to make the program less complex and more
similar to other property insurance programs. For example, a vendor
manager noted, "if the customers, the agents, and the adjusters all have
difficulty understanding the program, it is too complicated."

A flood program manager said:

  FEMA Continues Efforts to Comply with Legislative Mandates

"As FEMA has tried to make the flood program more actuarily sound, it has
made it more complex. FEMA has required of us more information, more
forms, and more photos to be scanned into files. Those requirements cost
money to implement. As an industry, we are looking at how the flood line
might be more compatible with other lines of insurance business to be more
cost-efficient. Now the flood business is so unique that it requires
special handling."

FEMA officials said that some documentation (i.e., elevation certificates)
is required because the NFIP is part of FEMA's broader flood plain
management strategy that combines insurance protection with hazard
mitigation to reduce future flood damage to homes. The officials noted
that, while the NFIP has different requirements than homeowners insurance,
it is not necessarily more complex and that the more familiar agents
become with the requirements of the NFIP, the easier it becomes for them
to routinely handle documentation requirements.

Congress mandated that within 6 months of the enactment of the Flood
Insurance Reform Act, FEMA establish (1) insurance agent education and
training requirements, (2) new processes for explaining coverage to
policyholders when they purchase and renew policies, and (3) an appeals
process for claimants who are dissatisfied with the settlement of their
claims. The 6-month mandated deadline elapsed on December 30, 2004, but
FEMA is still working to complete these mandated efforts. According to
FEMA officials, in order to address the requirements to establish
insurance agent education and training and for explaining coverage to
policyholders, the agency must go through the rule-making process. FEMA
officials also said to address the requirement for explaining policy
coverage, they are waiting for DHS approval before finalizing the draft
materials that will accompany the flood insurance policy. When DHS
approves the draft materials, they will be published in the Federal
Register as part of the rule-making process. Regarding the requirement for
an appeals process, the agency must initiate and complete formal rule
making. FEMA officials said that this process takes more than 6 months and
could not be completed within the mandated time frame.

FEMA Is Coordinating To address the requirement in the Flood Insurance
Reform Act of 2004 to with the States to establish insurance agent
education and training requirements, FEMA is Establish Training and
working with state insurance commissions. An official said FEMA is still
in

the planning stages of meeting the requirement and is discussing
optionsEducation Requirements with state insurance commissions, but has
not yet developed an action plan.

    FEMA Has Drafted New Materials on Consumer Policy Information

When a customer purchases a flood insurance policy, the main document he
or she is to receive from the insurance agent is the policy. A
congressional report accompanying the Flood Insurance Reform Act stated
that the NFIP did not provide "simple" forms or claims guidelines for
flood victims to follow, making access to information about flood
insurance policies difficult to obtain.11 To address this concern, the act
requires FEMA to provide simplified forms and a flood insurance claims
handbook to policyholders at the time of purchase or renewal and at the
time of flood loss.12 FEMA has drafted new materials that would be
provided to the policyholder at the time of purchase or renewal of the
flood insurance policy. The draft material includes:

o  a supplemental form that would explain the policy, such as the amount
of deductibles, the exact coverage being purchased, exclusions from
coverage, and an explanation of how lost items and damages will be valued
under the policy at the time of loss;

o  a flood insurance handbook to describe procedures to be followed to
file a claim and provide detailed information on an appeals process that
FEMA is to develop; and

o  an acknowledgment form that the policyholder has received the flood
insurance policy and that the policy only covers building property for the
dwelling and does not provide coverage for contents or personal property.

Before the materials are finalized, FEMA must go through rule making and
publish them in the Federal Register. FEMA expects to have these forms and
handbook finalized by October 2005.

    FEMA Is Establishing a Formal Appeals Process to Address Consumer Complaints

If a policyholder has a grievance about a flood insurance claim, proof of
loss, or loss estimate, he or she may informally appeal to the insurance
agent, to the insurance adjustor's supervisor, or to a hotline where a
customer representative is to provide assistance. There is currently no
official recourse for the policyholder. To provide official recourse to
policyholders, section 205 of the Flood Insurance Reform Act requires that
FEMA establish a formal appeals process through which policyholders may
appeal decisions on their claims. FEMA is developing a formal

11Senate Report No. 108-262 (2004). 12See P.L. 108-264, Sections 202-204
(June 30, 2004).

appeals process for a policyholder to follow if he or she has a grievance.
The proposed new appeals process must go through the rule-making process
with publication of a draft and a final set of procedures in the Federal
Register. A FEMA official was uncertain when the process would be
completed, but said that it would be after October 2005.

Mr. Chairman and Members of the Committee, this concludes my prepared
statement. I would be pleased to answer any questions you and the
Committee members may have.

For further information about this statement, please contact William O.
Jenkins, Jr. Director, Homeland Security and Justice Issues, on (202)
512-8777 or [email protected] or Christopher Keisling, Assistant Director,
Homeland Security and Justice, on (404) 679-1917 or at [email protected].

Major contributors to this testimony included Christine Davis, Pawnee
Davis, and Deborah Knorr.

  Contacts and Staff 	Acknowledgments 	

Appendix I: NFIP Payments Made to Claimants and Policies in Force, 1972-2004

             Figure 1: Total NFIP Payments to Claimants, 1972-2004

                   Total payments made (dollars in millions)

1,800

1,600

1,400

1,200

1,000 1972-1976 1977

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
               1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Calendar year

                                 Source: NFIP.

Note: Data compiled and available as of February 28, 2005.

Figure 2: Policies In Force, 1978-2004

Policies in force 5,000,000

4,500,000

4,000,000

3,500,000

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000 0 1978

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
                  1995 1996 1997 1998 1999 2000 2001 2002 2003

Calendar year

                                 Source: NFIP.

Note: Data compiled and available as of December 31, 2004.

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