Remarks by Jo Ann
Federal Insurance Administrator
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.
TYPES OF FRAUD EXPERIENCED
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
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
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
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
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
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.
FRAUD MANAGEMENT INITIATIVES
We are working to improve fraud management in the National Flood
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
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.
PROSPECTS FOR THE FUTURE
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
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
"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
- 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.]