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Flood Insurance - National Flood Insurance Program

NAIC Fraud Meeting

Remarks by Jo Ann Howard,
Federal Insurance Administrator
Dallas, Texas
Sunday, September 10, 2000


First of all, I would like to thank Robert Ober for inviting me to speak to you today.

I would also like to recognize Ed Connor, our Industry Liaison [and FEMA IG staff].

It is an honor. With fraud estimated to cost the property/casualty industry more than $20 billion per year (Source: Insurance Services Office, Inc.), preventing and combating insurance fraud is critical. It is central to protecting our customers --- the over 4.2 million property owners across the country who insure themselves against the devastating effects of flooding -- and the viability of the National Flood Insurance Program.

Today I would like to first talk briefly about the challenges we face in fraud management; the systems we currently have in place and what we are doing to improve fraud-fighting in the future. Then, I would like to open it up for discussion about how we can work together to reduce fraud.


The complex structure of the NFIP-the largest single-line insurer in the world -- makes us subject to added risk and provides some special challenges in fraud management. We don't just have to worry about one company. Our program operates largely through 92 private so-called "Write Your Own" companies under a partnership arrangement with the Federal Government. The Mitigation Division sets the premium rates, but relies on these private companies to use their marketing talents to sell and service our flood insurance policies and adjust the claims. In return for these services, the companies retain a portion of the premiums they collect.

A small proportion of our business - about 6% -- is conducted through our Direct Operations, in which insurance is written by agents who deal directly with the Federal government.

So this is our challenge -- protecting ourselves against fraud in a program spanning over 90 companies. And those bent on gaining from deception have used this to their advantage.

Many of the Write Your Own companies have excellent fraud management programs. Fraud hits their "bottom line". However, unlike their other lines of business, the Federal Government reimburses the private companies for flood losses. There is limited economic incentive to reduce fraud in their flood business.

We are fortunate that from the inception of the program, Congress provided us the means to borrow money from the U.S. Treasury to honor claims following periods of heavy flood losses. But we share a common reality: the more fraud there is, the higher the premiums have to be raised to cover the costs.


We know we have a problem with fraud. Most of the cases we see come up at the time of loss, the majority resulting from fraudulent claims filed by policyholders. But occasionally, brokers, agents and adjusters are investigated for wrongdoing.

We have successfully prosecuted an insurance broker who misappropriated $3.2 million in premiums. contractors who falsified receipts. homeowners with multiple policies with different companies or who fabricated claims or falsified documents or attempt to bribe adjusters. . agents who backdated policies . . and adjusters who made fraudulent claims. We also have seen fraudulent cash management practices. These are just some of our cases.


Our product - flood insurance - is a promise. A promise that when floods drench our families or destroy their homes, we will be there.

A promise that we will deliver the best customer service - and preserve the highest standards of integrity.

But with promise, comes obligation. . Obligation by our policyholders to furnish accurate information and comply with the terms and conditions set forth in the policy . . Obligation by our Write Your Own companies to report suspected cases of fraud to us . . and our obligation to make sure that we have effective systems in place to prevent and detect fraud and aggressively pursue the perpetrators.

Our partners in fraud prevention and detection are the Write Your Own companies, with their Special Investigative Units, which serve as the foundation on which our fraud management program is built.

Another partner is the FEMA Inspector General, with whose Office we interface on a routine basis. Preventing and detecting fraud, waste and abuse in Agency programs and operations is a key part of their mission. The IG has Special Agents looking into allegations involving many of the programs of the Federal Emergency Management Agency, including the National Flood Insurance Programs.

In addition to the IG, FEMA partners with other Federal investigative and prosecutorial agencies such as the FBI and the Department of Justice (U.S. Attorneys).

Not all investigations result in criminal prosecutions. Many times, and for many reasons, the cases will not be prosecuted. They may involve a low dollar amount, have poor jury appeal, or no prosecutorial merit. When criminal prosecutions are declined, it doesn't stop us from pursuing the case. We work with the Inspector General to recover funds and resolve the case administratively. Over the years, hundreds of thousands of dollars have been recovered through this process.

The Office of the Inspector General maintains a toll-free fraud hotline (1-800-323-8603), receives referrals from FEMA program staff in headquarters and in the field, and receives, through the Mitigation Division, referrals from insurance agencies and companies.

The Inspector General even maintains a separate Spanish fraud hotline in Puerto Rico. During a one-year period after Hurricane Georges struck the island, they received almost 5,000 complaints on that hotline alone. Many were from relatives reporting relatives, neighbors reporting neighbors, and concerned citizens reporting everyone.

Last, but certainly not least, among our partners are the State Departments of Insurance. Our customers are your customers. So we have a common interest in protecting them from fraud.


We are working to improve fraud management in the National Flood Insurance Program.

We have recently created a fraud management task force to re-look our risks and identify any gaps in our systems and operations, and changes needed to keep pace with the threats of today and reduce our vulnerability.

Over the next several months, we will be compiling the best practices of Write Your Own company Special Investigative Units to see what we can learn and share with other Write Your Own partners. We will incorporate what we learn in a Seminar for the WriteYour Own companies and into our on-going Operational Reviews, which will be expanded to incorporate fraud management concerns into the review of company operations. Adjuster training will also help heighten fraud awareness and prevention.

We have launched a programmatic initiative that will help reduce our risks. Our repetitive loss strategy, designed to reduce the over $200 million per year in losses to repeatedly flooded buildings, will provide better oversight of our high-risk properties. We are centralizing management of 10,000 of the highest risk properties into one portfolio for more effective tracking and assessment of their risk. This will allow us to improve our information about these properties, exert greater control on underwriting the coverage and adjusting claims, and reduce the potential for fraudulent claims on these high-risk properties.


We are also looking to the future, and the role that financial incentives in our WYO Agreement could play in providing an incentive for detecting and reporting fraud.

Technology is transforming the insurance business. Never in history has a single technology-or even a new medium-taken hold so quickly or transformed our economy so completely as the Internet.

Technology is a powerful weapon against fraud. Gathering information on the longitude and latitude of insured properties, which we are doing for the 10,000 worst repetitive loss properties and will have for the others in a couple of years, will cut down on duplicate claims and help us identify patterns of claims activity.

"Data mining", taking advantage of the latest technological innovations to check for suspicious patterns in claims activity holds out the promise for improved fraud detection.


So, each of us - and each of you -- is united in a common purpose. We want to work with you to get your ideas on how to better enhance our fraud management program.


  • How many States have internal fraud units? How do they investigate? What is the mechanism that they use?
  • How do you see us interacting with one another to reduce fraud?
  • How can we work better with the Special Investigative Units of the Write Your Own Companies?
  • What are the opportunities for us to share information, to detect fraud or patterns of fraud ? [For example, running our data base of agents through the State Insurance Department data bases to make sure they are licensed and check for any suspensions and violations.]

Last Updated: Monday, 30-Jun-2003 14:27:36 EDT
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