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USA - The billion-dollar industry between you and FEMA's flood insurance

Cutting payments to brokers, or selling policies directly to consumers, could save millions. FEMA and insurance companies say it’s not quite that straightforward.

Congress created the National Flood Insurance Program in 1968 as a way for the federal government to bear a risk that private companies wouldn’t. Since then, Uncle Sam has backed the vast majority of flood insurance policies in the United States.

Yet it is impossible to buy or renew such plans directly with the Federal Emergency Management Agency, or FEMA, which administers the program. Instead, the government relies upon a network of private companies to sell and service its policies — and hands them nearly one-third of the premiums the program brings in. Lately, that’s come to almost $1 billion a year.

“It is certainly something that should be examined,” said Stephen Ellis, president of the watchdog organization Taxpayers for Common Sense. “It would be one thing if it were a very high performing program. Certainly that’s not been the case.”

The government’s flood insurance program is plagued by low-participation rates and is deep in debt. How its run has often drawn scrutiny, and earlier this year, a bipartisan group of lawmakers proposed legislation that would, among other things, cap the compensation paid to private brokers, who do not take on any risk. There also have been calls for FEMA to sell policies directly to consumers. Proponents of such changes say they would make it easier, and potentially cheaper, for property owners to obtain coverage, while saving taxpayers money.

“Flood insurance is a government service,” said Rob Moore, director of the Water & Climate Team at the Natural Resources Defense Council. “People should be able to buy it directly from FEMA. No question.”

FEMA and insurance companies say it isn’t quite that straightforward.

The National Flood Insurance Act of 1968 established the National Flood Insurance Program, or NFIP, to fill a gap as the private sector retreated from the market. Five years later, Congress mandated that homeowners in high-risk areas who have a federally backed mortgage buy adequate coverage. In 1979, President Jimmy Carter assigned FEMA the role of overseeing the NFIP. But insurance uptake remained relatively low.

In 1983, FEMA enlisted private insurance agents in the effort to sell more policies. The government agreed to reimburse the cost of writing policies and processing claims. The hope was that allowing homeowners to use the same agents that sold other types of insurance would boost participation.

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