Can Flood Insurance Set a Precedent?

The months-long swirling controversy over the federally subsidized flood insurance-program between the insurance industry and the Department of Housing and Urban Development (HUD) is highlighting these two major issues:

Can the government defend the taxpayer by re­quiring corporate contractors to be either more efficient or be replaced in subsidized activities? Will the government stand firm on flood insurance accountability and thereby set a solid precedent for safeguarding the taxpayer’s rights if there should ever be a joint industry-government health insurance system?

The flood insurance program started in 1969 be cause many homeowners and small businesses could not secure such insurance at other than prohibitive rates, especially in flood-prone areas. Congress provided for HUD to oversee the pro­gram and require certain area precautions to be taken to reduce the flood damage. A group of 130 insurance companies, organized as the National Flood Insurance Association (NFIA), became the fiscal agent for HUD.

NFIA COLLECTS the premiums and handles the claims. In return for these services, NFIA members receive five percent of premiums as profit. In addition, individual members receive profits from subcontracts handed out by NFIA.

Presently, the federal government pays about 60 percent of the premiums for the policies in force, with the policyholder (homeowners, businesses, etc.) paying the rest. There are 1.3 million policies totaling $35 billion in coverage now in force.

When Deputy Federal Insurance Administrator J. Robert Hunter started noticing abuses and waste in the way NFIA operated the flood insur­ance program, he resolved to do something about it. And HUD Secretary Patricia Harris has backed him up.

Hunter asserted that valid claims in too many instances were not being handled fairly. He saw inefficiency in NFIA’s practice of not awarding its servicing contracts under competitive bidding. In almost all cases, NFIA awarded the contracts to its own member companies. Most importantly, an efficiency-minded Hunter wanted to enforce that part of the law which would have made NFIA sub­ject to federal regulations, such as a requirement for prior approval of expenditures.

The flood insurance lobby objected to the government’s telling it how to spend the taxpayers’ money for greater efficiency. Not content with making, its position known at HUD, this corporate contractor and its insurance company allies took the case to its friends in Congress. Letters, tele­grams, and the usual intimations of campaign con­tributions inundated Congress and the pressure spilled over to HUD.

IN THE MIDST of this propaganda battle, several points have been obscured. First is the fact that the NFIA companies have virtually nothing at risk. Although NFIA makes much of its $98 million of pledged risk capital, it is neither in escrow nor is it seriously at risk.

Second, a Texas computer firm has submitted a detailed bid to operate the program in place of NFIA for $15 million less annually. The proposal would eliminate the “risk” profit now paid to NFIA and would effect sizeable cost reductions in servicing policies and claims.

Third, profligate use of the phrase “federal takeover” of the flood insurance program should make the NFIA blush with shame. After all, it is a federal program already paid for largely by tax­payers. Why should the taxpayer guarantee a profit to corporations without seeking proper ac­countability and the most efficient way to run operations. There are limits which should be placed on corporate contracting demands made on Uncle Sam before the demands produce a corpo­rate welfare system.

A lesson to be learned here is that joint industry-government program costs may be difficult to con­trol because the industry partner may have a vested interest in taxpayer waste. Another lesson is that sometimes taxpayers have friends in gov­ernment like J. Robert. Hunter who need support from citizens. If you wish to support his cost-cut­ting efforts or ask any questions write him or Secretary Patricia Harris at the U.S. Department of Housing and Urban Development, Wash., D.C. 20410.