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Awash in debt, U.S. flood insurance under scrutiny

WASHINGTON (Reuters) - Swimming in red ink and scheduled to expire within months if not renewed, the troubled National Flood Insurance Program (NFIP) is about to encounter another round of criticism this week on Capitol Hill.

Congressional investigators are expected to call for closer scrutiny of how insurers handle homeowners’ damage claims from storms in which both wind and water play a destructive role, as they did in the hurricanes of 2005, said sources familiar with the preparation of a report set for release within days.

The Government Accountability Office (GAO) report is expected to focus especially on insurers that sell both wind and flood policies to the same homeowner, a situation the GAO previously has said poses a potential conflict of interest.

The Bush administration’s handling of the flood program is also expected to be questioned by the GAO, the sources said.

Insurers are bracing for the report, hoping it will not feed disputes over ‘wind versus water’ damage. Such disputes have plagued State Farm, Allstate Corp and other top insurers since Hurricane Katrina slammed into the Gulf Coast in August 2005 with 140-mph winds and a massive flood surge.

“Study after study has come back with the same results, showing there is no evidence insurance companies improperly attributed wind damage from Hurricane Katrina to water,” said Justin Roth, senior federal affairs director at the National Association of Mutual Insurance Companies, an industry group.

“We fully expect this report to reach the same conclusion,” Roth said, adding that several “constructive efforts” are under way to reform the NFIP flood program.


The GAO report comes as bills in both the Senate and the House of Representatives propose incremental changes to the badly crippled NFIP, which was set up in 1968.

Under the program, about 90 private insurers sell and service flood policies on the government’s behalf. The companies process claims and collect premiums, which are passed along to the Federal Emergency Management Agency (FEMA).

The government is involved in the market because the private sector on its own does not adequately cover flood risk. Most homeowners’ policies cover wind damage, but not flooding.

The GAO has previously criticized FEMA’s stewardship of the program and questioned how much money the agency pays private insurers for flood claims. Katrina and the other hurricanes of 2005 left the NFIP $17.3 billion in debt to the U.S. Treasury.

A FEMA spokeswomen declined to comment on the report.

With the NFIP widely seen as incapable of ever repaying it, the post-Katrina debt would be forgiven under a flood insurance bill approved in October by the Senate Banking Committee.

The Senate bill would extend the NFIP for five years and improve flood maps used in the program. But a vote by the full Senate on the bill has been blocked by lawmakers from Louisiana who are concerned that it would boost insurance rates there.

The Senate bill would not expand the NFIP to cover wind damage, as was proposed in a bill approved by the House in September. In another difference with the Senate, the House bill would not forgive the NFIP’s debt.

The Bush administration has threatened to veto the House bill. The insurance industry opposes expansion to cover wind.

The NFIP is scheduled to expire on September 30 if Congress does not renew it. While that outcome is not widely expected, the debt and the wind hurdles still have to be cleared.

“The House and Senate bills are quite different,” said Robert Hunter, director of insurance for the Consumer Federation of America and former federal insurance administrator in the 1970s in charge of the NFIP.

Flooding is involved in about 90 percent of all U.S. natural disasters. But the nation has yet to find a way to protect vulnerable homeowners at a reasonable cost, avoid taxpayer subsidies to well-to-do beach house owners and not encourage overdevelopment in flood-prone areas.

After Katrina, some homeowners accused insurers of refusing to provide coverage by blaming hurricane damage on flooding.

Reporting by Kevin Drawbaugh; Editing by Jeffrey Benkoe