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Insurers Find Bridge Over Troubled Waters and Profit from Flood Insurance

For property casualty insurers, flood insurance is supposed to be - excuse the pun - a wash. The federal government provides it because insurers won't. It's a money loser, particularly in hurricane years. But some insurers do sell the federal program, at cost, generally to customers who buy other coverage.
Now the Alabama Press-Register reports that insurers have found a way to make money from flood insurance in a "sweetheart deal" that involves overcharging for their claims agents. These are the people who go out after the flood and assess the damage so the federal government can pay off.

"Those companies - which include industry heavyweights such as State Farm and Nationwide ... were paid more than $750 million for their services in fiscal 2008, almost a quarter of the total premium payments," says the Press-Register.

The paper also cited a General Accounting Office study which found that half a dozen insurers had received overpayments of $327 million between 2005 and 2007 from the Federal Emergency Management Agency. As we all know from 2005's Hurricane Katrina, FEMA is hardly a model of efficiency and its flood insurance program is now $19.3 billion in debt.

FEMA has acknowledged its shortcomings, the paper says, but argues that improving too much could compromise its goal of making flood insurance "widely available." Perhaps it's a good thing that FEMA doesn't run the federal unemployment program.

In fairness, it should be noted that some of the program's harshest critics, such as Mississippi Congressman Gene Taylor, had their homes washed away by Katrina. It's also true that 2005 to 2008 was a tough time for the Gulf Coast, starting with Hurricane Katrina and ending with Hurricane Gustav.

The lobbying group American Insurance Association challenged the industry's critics, noting that some of the 90 participating insurers were bowing out of the flood insurance program. If it was "such a gravy train," there would be more carriers, says the AIA.