Congress Questions Flood Insurance Compensation

As Congress seeks to reform the NFIP before it expires on Sept. 30, it’s examining lowering the compensation that insurance companies and independent agents earn for administering the program.

Last week, the U.S. House of Representatives Financial Services Committee, Housing and Insurance Subcommittee held a hearing in which Subcommittee Chair Rep. Sean Duffy (R-Wisconsin) inquired about how much the NFIP pays WYO insurers. Rep. Duffy alleged annual compensation topped $1 billion and implied that total was too high given that the companies do not share in the underlying risk. Others at the hearing raised similar concerns over compensation rates for renewal business. 

On Tuesday, the U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing during which Sen. Bob Menendez (D-New Jersey) mimicked that line of questioning. Sen. Menendez claimed that WYO companies earn as much as $0.43 of every policy dollar for administering the NFIP, and suggested earnings were too high considering that the WYOs do not take on any of the underlying risk.

Roy Wright, deputy associate administrator for the Federal Insurance and Mitigation Administration, which oversees the NFIP, testified at both hearings. In response to both lines of questioning, Wright noted that the compensation WYOs receive is not all profit and is based on industry standards.

Currently, WYO companies receive approximately 31% of policyholder premiums before the addition of various federal fees and surcharges for administering the NFIP. From that amount, WYOs pay about half to agents, in addition to paying vendors and state premium taxes, among other costs. The 31% is based on an average of various private industry property-casualty expense ratios, with consideration of the program’s complexity.

In addition to the possibility of legislation regarding NFIP-related compensation, FEMA is currently working on a rule to streamline the WYO reimbursement rate, pursuant to a 2012 flood insurance reform law. Any rule could seek to lower or otherwise alter program reimbursement standards and methods. FEMA is also currently reworking the contractual arrangement under which WYOs operate.

Both hearings noted the vital role of independent insurance agents. Wright commented that independent insurance agents are small businesses across the country and serve as the sales force for the NFIP.

The Big “I” will continue educating Congress on the essential role agents play in delivering flood insurance. To help with this effort, the Big “I” has prepared the following documents, which members must log in to view:

The Big “I” also led the charge in drafting and coordinating joint testimony from the major agent trade associations on flood insurance commissions. The Big “I” will submit the testimony to the House Financial Services Committee, Housing and Insurance Subcommittee as they conduct another hearing on the NFIP today.

Flood insurance and the reauthorization of the NFIP will be a major topic at the Big “I” Legislative Conference, to take place May 3-5 in Washington, D.C.

Jennifer Webb is Big “I” federal government affairs counsel.