Mr. Chair, I rise today in opposition to the amendment offered by Mr. Sherman and would like to make a few points. First, I would like to point out that I fully understand and support the goal of encouraging private sector involvement in…
Mr. Chair, I rise today in opposition to the amendment offered by Mr. Sherman and would like to make a few points.
First, I would like to point out that I fully understand and support the goal of encouraging private sector involvement in offering flood insurance and exploring ways to diminish unnecessary reliance on government programs.
However, I am not convinced that this amendment gets us any closer to achieve this goal. In fact, this Amendment may actually put Congress in the position of picking winners and losers in the market place, interfering with private contracts, and creating millions of dollars in new federal spending.
I would like to make the following points:
Regardless of whether a flood insurance policy is provided through NFIP Direct or through a WYO insurer, the federal government is responsible for all losses covered under the policy. Regardless of whether a policy is issued by NFIP Direct of a WYO insurer, a private company will handle all aspects of policy issuance and claims administration and these services will be paid for through the federal government.
FEMA has informed Congress that private contractors handling NFIP Direct policies can manage the recently transferred policies for $50 million less each year than WYO carriers. This is a savings of $250 million for the life of the bill.
Redistribution of these policies destroys consumer choice and dictates to consumers the company and agent they are required to use for flood insurance while taking property from the agents who produce the business. This redistribution affects flood insurance policy holders and insurance agents in every Congressional District across the country.
The only thing this amendment accomplishes is the forcible transfer of polices from one group to another, with absolutely no cost savings and no improvement in customer service.
There are many questions to answer, and I believe the Committee took the right step in requesting a study before acting on the issue. Unfortunately, we seem to be acting today before we have these answers.
I would like to submit the following statements: (1) A summary of the issue provided to the Senate Banking Committee in connection with their hearings on NFIP authorization; and (2) A letter from FEMA to House Financial Services and Oversight and Investigations Subcommittee Chairman Neugebauer answering questions about the redistribution amendment and highlighting the increased cost to taxpayers of this amendment.
State Farm Insurance--June 30, 2011
State Farm Fire and Casualty Company (State Farm) Views on Efforts to
Redistribute NFIP Direct Policies to Write Your Own Insurers
State Farm supports reauthorizing the National Flood
Insurance Program (NFIP) and would like to take this
opportunity to clear up any confusion surrounding State
Farm's and its agents' participation in the NFIP and the
operational differences between flood insurance policies
distributed through the Write Your Own (WYO) program and NFIP
Direct.
I. The Proposed Redistribution of NFIP Policies Will Not
Decrease the Federal Government's Risk
Unfortunately, under the guise of NFIP ``reform,'' the
attributes of the WYO and NFIP Direct distribution channels
have been mischaracterized in order to pursue an ill-advised
scheme to enlist the federal government's powers to take
insurance business marketed, solicited, and sold by one group
of private insurance agents and redistribute those policies
to other agents and companies who had no role in generating
these policies in the first instance. There are proprietary
rights of insurance agents at stake in this matter.
Characterized as NFIP ``depopulation,'' this scheme hijacks
familiar terminology relating to programs used in several
states that transfer insurance policies out of state-run
insurance pools into the private sector. However, unlike
``depopulation'' at the state level, where the entire risk of
a policy is shifted to the private insurer, the scheme as
advocated for NFIP merely redistributes customers, policies,
and revenues associated with administering those policies
from private businesses connected with NFIP Direct to
selected WYO insurers. No changes are made in the risk
bearing of companies in the
WYO distribution channel. The federal government retains 100%
responsibility for paying all covered flood losses.
Far from being an effort towards privatization reform, the
true nature of WYO participation is captured best in the U.S.
Securities and Exchange Commission filing of a firm that is
the largest WYO insurer--Fidelity National Financial, Inc. As
described in the firm's most recent Form 10-K for calendar
year 2010:
``We earn fees under [the NFIP] program for settling flood
claims and administering the program. We serve as
administrator and processor in our flood insurance business,
and bear none of the underwriting or claims risk. The U.S.
federal government is guarantor of flood insurance coverage
written under the NFIP and bears the underwriting risk.
Revenues from our flood insurance business are impacted by
the volume and magnitude of claims processed as well as the
volume and rates for policies written. For example, when a
large number of claims are processed as a result of a natural
disaster, such as a hurricane, we experience an increase in
the fees that we receive for settling the claims.''
The suggestion that this confiscatory redistribution scheme
would shrink the public sector while growing the private
sector is wrong. It also completely ignores the fact that,
just like the WYO program, NFIP Direct fully utilizes the
private sector in handling flood insurance policies.
To be clear:
(1) Regardless of whether a flood insurance policy is
provided through NFIP Direct or through a WYO insurer, the
policy provides federal insurance coverage and the federal
government is responsible for all losses covered under the
policy;
(2) NFIP redistribution is a confiscatory scheme that does
not diminish federal obligations on a flood insurance policy
placed with a WYO insurer;
(3) Whether a policy is issued by NFIP Direct or a WYO
insurer, a private company will handle all aspects of policy
issuance and claims administration and these services will be
paid for through the federal government;
(4) Since NFIP costs are funded entirely with federal
monies and FEMA utilizes private parties for handling
policies under both the WYO program and NFIP Direct, there
are no demonstrated federal savings from redistributing
federal flood insurance policies from NFIP Direct to WYO
insurers;
(5) Redistribution of NFIP Direct policies to WYO insurers
does nothing to increase consumer participation rates which
are critical to program solvency; redistribution actually
creates disincentives for more than 17,000 agents to increase
such participation rates; and
(6) Redistribution destroys consumer choice and dictates to
consumers the company and/or agent they are required to use
for flood insurance while taking property from the agents who
produced the business.
Following is more detailed background information.
II. Background on NFIP
a. The WYO Program and State Farm's Participation
The NFIP program has been in place since 1968. The NFIP's
WYO program began in 1983 through statute and federal rule as
a financial arrangement between participating property and
casualty insurers and the Federal Emergency Management Agency
(FEMA). The WYO program permits participating property and
casualty insurers to sell and service the NFIP's standard
flood insurance policies in their own names. Although
participating insurance companies receive an expense
allowance for policies written and claims processed, the
federal government retains full responsibility for
underwriting losses and all premiums paid by purchasers of
flood insurance go into the US. Treasury. Currently, about 88
insurance companies participate in the WYO arrangement with
FEMA; this is a decrease from previous years.
Insurers participate in the program through a WYO
Arrangement. FEMA publishes the WYO Arrangement, which is a
federal rule, in the Federal Register before the end
of August every year. Each WYO insurer considers annually
whether or not to sign the WYO arrangement.
State Farm began its WYO participation in 1985. Following
its entry in the program, each year State Farm carefully
evaluated its continuing participation in the WYO
Arrangement. In recent years, NFIP has presented a more
challenging landscape of changing requirements and directives
which requires the expenditure of resources with varying
degrees of notice and clarity of instruction. In addition,
the WYO program's continuing existence became more uncertain
with each gap in authorizations and there were numerous
occasions when the program was allowed to lapse. These
situations complicated our ability to serve our customers'
needs. Subsequently, State Farm made a very difficult
business decision to no longer participate in the WYO
Arrangement.
b. Transition to NFIP Direct and Meeting Customer Needs:
Based on existing regulations, State Farm's orderly
transfer plan was structured in a way that permitted State
Farm agents to continue servicing their customers' needs
through NFIP Direct, regardless of whether State Farm itself
participated as a WYO insurer. For example, under the
Arrangement, a WYO company has the option to sell its book of
business to another WYO insurer (subject to FEMA approval) or
to transfer policies to the NFIP Direct program. State Farm
exercised the option to transfer the policies to the NFIP
Direct Program, which avoided the potential for substantial
customer confusion and disrupting the relationship customers
have with their State Farm agent. More specifically, in
utilizing NFIP Direct, the State Farm agent remains the agent
of record on transferred policies. This means that State
Farm's decision to discontinue participation in the WYO
Arrangement did nothing to undermine our exclusive
independent contractor agents' ability to continue servicing
the needs of their flood insurance customers who maintained
or sought federal flood insurance protection in the future.
From a consumer perspective, this seamless transition of the
policies was effortless; renewal of flood insurance coverage
did not require any additional steps by policyholders. The
customer placed their coverage as they did previously--
through their State Farm agent, an individual who was a
familiar face to the customer and had an existing
understanding of the customer's property and needs.
State Farm did not receive any compensation for its orderly
transfer of policies to NFIP Direct. Of approximately 800,000
policies, State Farm has transferred to date over 550,000
policies. Each State Farm WYO policyholder has already
received a notice regarding the transfer plan. Each
policyholder has also received or will receive a second
notice prior to the policy transfer.
c. The Critical Role of State Farm Agents
Perhaps more important to the functioning of NFIP, active
agent participation in the marketing and selling flood
insurance is a significant issue of concern to FEMA. It is
widely recognized that one major shortcoming of the NFIP is
that the purchase of flood insurance is often limited to only
those who need coverage or are mandated to purchase coverage
in connection with the purchase of a home. This limited
demand impedes the ability of the NFIP to broaden its
insurance base to satisfy a fundamental tenet of insurance
underwriting--spreading the risk of loss among a larger and
more diverse pool of policyholders who are unlikely to
experience losses at the same time. Consequently, an agent
workforce actively engaged in marketing and soliciting NFIP
policies is a critical component of making the program more
actuarially sound.
Indeed, FEMA recognized that having State Farm agents
actively market and sell NFIP Direct policies is a major
benefit to the program. However, if the federal government
were to redistribute policies brought into NFIP by an agent
to another company or agent (which includes commissions), the
incentive for agents to originate policies in NFIP Direct
would be removed without any commensurate benefit, which
would undermine the entire program. Equally pernicious, it
would be tantamount to a government taking of business
property from individual businessmen and businesswomen solely
for the benefit of another private party.
III. Proposed Redistribution Scheme Offers No Cost Advantage:
Private Parties Handle the Servicing of all NFIP Policies
Regardless of Who Distributes Them
Contrary to the assertions made by supporters of NFIP
``depopulation,'' the confiscatory redistribution of NFIP
Direct policies to WYO insurers will not create smaller
government, increase the role of the private sector, or
diminish the government's risk of loss on flood insurance
policies. All NFIP policies have an agent of record that
handles the sales and some aspects of servicing. These agents
may or may not be associated with a WYO company, but they are
paid a commission through NFIP, regardless of whether they
are affiliated with a WYO company or not. A similar pattern
is followed for claims handling where private sector parties
service all NFIP claims regardless of how they are
distributed.
Claims handling for NFIP Direct policies is done by a
private contractor, Computer Sciences Corporation (CSC),
through a competitively bid contract. Furthermore, as
described in its own marketing materials, CSC provides
identical services to several WYO carriers, including some of
the largest. As a result, there is a strong probability that
the so-called ``reforms'' achieved through confiscatory
redistribution would do nothing more than transfer the
handling of flood insurance policies from CSC under its NFIP
Direct hat to CSC wearing its WYO hat. Significantly, the
proponents of confiscatory redistribution have not produced
any evidence suggesting that their servicing will save the
NFIP money. Indeed, the only difference for policies so
redistributed would be that insurance agents--primarily small
businesspeople who sold the flood policy in the first
instance, would see their book of business confiscated by the
federal government and simply handed over to another company.
This is not reform and is not about ``making the government
smaller.''
IV. Proposed Redistribution Scheme Destroys Consumer Choice
Another insidious result of NFIP confiscatory
redistribution is the elimination of consumer choice and
engaging the federal government to forcibly require consumers
to accept companies and/or agents with whom they have no
prior relationship, or, even worse, whom they have
affirmatively rejected in the past. Far from creating a
seamless transition for consumers, redistribution
generates several problems. For example, if a consumer has
chosen to work with an agent and has been with an agent for
many years, should the federal government overrule the
consumer's choice through redistribution? What if a policy
has been redistributed to a company with whom the consumer
does not want to do business? Does the consumer have any
control? Does the federal government really want to be
involved in this type of decision?
V. Conclusion
``Depopulation'' of NFIP is a myth. Current efforts along
these lines are nothing more than a scheme to use the federal
government's authority to redistribute existing policies from
one group of private insurance agents and give that business
to other private entities. This confiscatory redistribution
scheme makes no changes in the federal government's risk
exposure under NFIP, fails to increase participation rates in
purchasing flood insurance, provides no demonstrated savings
to the federal government, and destroys consumer choice. Such
measures should be opposed.
I thank the distinguished sponsor and would preface my comments by saying I am strongly in support of Congresswoman Biggert's superb piece of legislation.
However, I rise today in opposition to this amendment offered by Representative Sherman. I would like to point out first that I fully understand and support the goal of encouraging private sector involvement and exploring ways to diminish unnecessary reliance on government programs. However, I am not convinced, in fact I am unconvinced, this amendment gets us any
closer to achieving that goal. In fact, this amendment may put Congress in the position of choosing winners and losers in the marketplace, interfering with private contracts, and creating millions of dollars in new Federal spending.
I would like to make the following points: regardless of whether a flood insurance policy is provided through NFIP Direct or WIO, the Federal Government's responsible for all the losses incurred under the policy. FEMA has informed Congress that private contractors handling NFIP Direct policies can manage the recently transferred policies for $50 million less, which is a saving of $250 million over the life of the bill. I don't have to tell any individuals in today's world what that means.
Redistribution of these policies destroys, in my judgment, consumer choice, dictates to consumers the company and agent they are required to use for flood insurance, while taking property from the agents who produce the business. This redistribution affects flood insurance policyholders and insurance agents in every district in the country.
Really, the only thing this amendment does is the forcible transfer of policies from one group to the other with not only no cost savings, with significant costs to the Federal Government. A lot of questions to answer.
I believe the committee and Representative Biggert took the right approach in requesting a study before acting on the issue. Unfortunately, today, we seem to be acting contrary-wise before we have these answers. With all due respect again to the sponsor of the amendment, and certainly in concert with the sponsor of the bill, I urge a ``no'' vote on this amendment.