How can this be? The short version is that FEMA which is the federal emergency management agency typically pays close to 20% more than it should pay for flood insurance claims. These payments are made to the individual participating insurance companies. Last year that meant close to $350 million in overpayments as reported by the (GAO) Government Accountability Office in expenses to insurance entities that were considered overpayments for their expenses.

The Government Accountability Office says that this is excessive. Over 97% of the national flood policies are in place and are managed by just 87 insurance companies. These 87 companies control roughly 89% of the insurance premium for flood policies in the United States. The government's participation with private insurance companies with regards to flood insurance began in 1983 as a co-op.

As insurance premiums continue to rise especially in the coastal areas, the government is now pressing the private insurance companies to produce ongoing reports comparing their actual expenses in comparison to the 34% the government allocates for every premium dollar in expenses for flood premiums.

This over payment of close to $350 million of budgeted expenses compared to actual expenses is definitely within the radar of the GAO. The GAO also found that claims expenses are adjusted based on the size of the claim. The government has unknowingly incentivized the insurance companies in that the greater the claim the greater the reimbursement. This tends to organically inflate claims to newer and higher levels as the government is paying for damages and not private insurance company. The insurance companies are only adjusting the claims and being reimbursed for their expenses albeit in the form of overpayments.

As is the case in most government programs there is fat and abuse and clearly this over payment of approximately 20% for reimbursed expenses needs to stop.