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Why is the NFIP so far in debt?


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Insurance Information Institute President Bob Hartwig denies that insurers are bilking the NFIP




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Cecile Tebo, the head of New Orleans' mental health SWAT team, talks about how lack of response from her insurer has led her to lose faith in the city's recovery.




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Former Federal Coordinator for Gulf Coast Rebuilding Don Powell is asked if he thinks the National Flood Insurance Program has been a good steward of tax-payer money.




What's your opinion on why the NFIP is so far in debt?


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After Hurricane Katrina, the National Flood Insurance Program quickly paid nearly 170,000 claims—$16 billion. FEMA tried to get checks to homeowners as quickly as possible. Read this memo FEMA director David Maurstad sent to the private insurance companies, waiving requirement for proof of loss in cases where a home had been standing in flood waters for days, or had been washed off its foundation.



By the first week in October, 2005, the NFIP couldn't pay for all of the claims. Hurricanes Katrina, Rita, and Wilma bankrupted the program. Congress increased FEMA's borrowing authority from $1.5 billion to $20.8 billion. As of May 2007, FEMA owed the US Treasury $18 billion. There's no way they'll ever repay that bill.

The NFIP is in debt is because it has never been financially sound-see our section on "Problems with the NFIP" for more information on why. But in the months after Katrina, as they looked more carefully at flood claim settlements, homeowners, government officials and lawyers began to wonder if FEMA's relaxed rules might have created an opening for private insurers to swindle the Flood Insurance Program.


As noted in our "how the flood program works" private insurers don't bear the risk for flood insurance; the federal government does. By downplaying the amount of wind damage charging off flood damage, industry-watchers say the Write Your Own companies (WYOs) that administer the flood policies saved the private insurers money. 2005 was a record year of profits for the industry - they made over $55 billion dollars - and that was after paying out more than $20 billion in Katrina/Wilma claims.

Industry critics say the WYOs took advantage of a clause in Director Maurstad's memo that said FEMA would not go after companies that overcharged the NFIP, so long as they had followed the procedures laid out in the memo. They also note that FEMA, which rarely audits the WYOs, wouldn't have the ability to catch offenders within the insurance industry.


Representatives from the insurance industry and FEMA have called these charges bogus from the beginning.

In response to allegations that the NFIP overpaid claims that should have been attributed to wind, Butch Kinerney, FEMA Mitigation Directorate's Chief of Communications, points out that, "There are numerous reports from the Government Accountability Office, the Department of Homeland Security's Office of the Inspector General and internal audits which put that rumor to bed long ago. Each report notes changes which could be made to improve oversight (many of which we're making, by the way), but there is simply no evidence, after multiple investigations, to bolster those accusations by a few who had no first-hand knowledge of the program."

The September 2008 DHS report, which looked at both the wind and flood sides of 131 Katrina settlements (out of almost 200,000 claims) found that "the NFIP did not pay for wind damage for structures included in our sample." The NFIP made an improper payment in only two of the sample cases, or 1.5%, in the amount of $432,600. The report also found that, in fact, few adjusters took advantage of FEMA's expedited claims process, and instead in most cases conducted on-site inspections.

The report did note, however, the difficulty of distinguishing between wind and flood damage when both occur, and said they "cannot rule out the possibility" that "WYOs attributed wind damage to flooding."




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NFIP - The National Flood Insurance Program.  The federal program that guarantees homeowners are covered for flood losses.

FEMA - The Federal Emergency Management Agency.  Administers the NFIP.

WYO - Write Your Own insurance:  FEMA's name for outsourced flood insurance policies. FEMA contracts with existing insurance companies to sell, adjust, and settle flood claims.