National Flood Insurance Program; Audit Program Revision

FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 62

RIN 3067-AC40

National Flood Insurance Program; Audit Program Revision

AGENCY: Federal Insurance Administration (FEMA).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Federal Insurance Administration (FIA) has amended its

regulations regarding the manner in which its audits are conducted

under the National Flood Insurance Program's (NFIP) Write Your Own

(WYO) Program. The regulations develop a comprehensive, less

burdensome, more efficient audit program. FIA anticipates that these

revisions will result in greater economy of resources and new savings

to the NFIP public.

EFFECTIVE DATE: October 31, 1996.

FOR FURTHER INFORMATION CONTACT: Roland E. Holland, Federal Insurance

Administration, Federal Emergency Management Agency, 500 C Street SW.,

Washington, DC 20472, (tel.) (202) 646-3439.

SUPPLEMENTARY INFORMATION: Recently, after reviewing the programs and

services provided to the NFIP public, the Federal Insurance

Administrator concluded that the services currently being provided

could be enhanced and improved by revising the audit procedures. As a

result, FIA will discontinue the self-audit program, as well as the

triennial claims and underwriting operations reviews. The triennial

audit will be revised to be conducted on a biennial basis, and expanded

to encompass greater claims and underwriting audits that Certified

Public Accountant (CPA) firms, selected by the WYO companies, will

conduct at the companies' expense. These changes are being made to

facilitate improved management control over the audit process. FIA

believes these efforts will result in appreciable program savings to

both the WYO companies and the FIA. FIA published in the Federal

Register a proposed rule to implement these changes on February 1,

1996, 61 FR 3635-3644. A 45-day public comment period expired on March

18, 1996. However, because FIA only received one set of comments, the

comment period was kept open to allow other interested parties

additional time to respond. Since that time, we have not received any

further comments. We concur with the six comments received and,

therefore, the final rule reflects these changes, as well as other

changes made for consistency and for continuity.

Reference in proposed rule: Sec. 62.23(h)(1). ``To expedite

business growth, the WYO Company will encourage its present property

insurance policyholders to purchase flood insurance and to transfer to

the WYO company, at the time of policy renewal, business placed by its

producers with the NFIP Bureau and Statistical Agent.''

[[Page 51218]]

Comment: This section contains information that appears

inconsistent with the present intent of the WYO program and NFIP

Servicing Agent contracts. Since there is no longer a rollover vehicle

to transfer policies from the NFIP to a WYO Company, the references to

this appear in error. This section also refers to ``business placed by

its producers with the NFIP Bureau and Statistical Agent''. However,

the NFIP Bureau and Statistical Agent does not handle policies directly

for business producers.

Revision in final rule: Sec. 62.23(h)(1). ``To expedite business

growth, the WYO company will encourage its present property insurance

policyholders to purchase flood insurance through the NFIP WYO

program.''

Reference in proposed rule: Sec. 62.23(h)(4). ``The WYO company is

expected to meet the recording and reporting requirements of the WYO

Transaction Record Reporting and Processing Plan. Transactions reported

by the WYO company under the WYO Transaction Record Reporting and

Processing Plan will be analyzed by the NIP Servicing Agent * * *.''

Comment: The acronym ``NIP'' at the end of the last sentence is

incorrect.

Revision in final rule: Sec. 62.23(h)(4). ``The WYO company is

expected to meet the recording and reporting requirements of the WYO

Transaction Record Reporting and Processing Plan. Transactions reported

by the WYO company under the WYO Transaction Record Reporting and

Processing Plan will be analyzed by the NFIP Bureau and Statistical

Agent * * *.''

Reference in proposed rule: Sec. 62.23(h)(8). ``NFIP business will

not be assumed by the WYO companies at any time other than at renewal

time, at which time the insurance producer may submit the business to

the WYO company as new business. However, it is permissible to cancel

and rewrite flood policies to obtain concurrent expiration dates with

other policies covering the property. Where the insurance agent or

producer of record of a flood insurance policy issued by the

Administrator has authorized the NFIP, in writing, to release policy

information for the conversion of the NFIP coverage to a designated WYO

company represented by the agent or producer of record, in order to

facilitate policy issuance and reduce administrative burdens upon the

NFIP and WYO companies and their agents and producers, countersignature

requirements in the several States shall not apply.''

Comment: This section contains references to a ``conversion of the

NFIP coverage to a designated WYO Company * * *'' which appears to be

former practice of rollover conversion.

Revision in final rule: Sec. 62.23(h)(8). ``NFIP business will not

be assumed by the WYO companies at any time other than at renewal time,

at which time the insurance producer may submit the business to the WYO

company as new business. However, it is permissible to cancel and

rewrite flood policies to obtain concurrent expiration dates with other

policies covering the property.''

Reference in proposed rule: Sec. 62.23(I)(1). ``Under the terms of

the Arrangement set forth at Appendix A of this part, WYO companies

will adjust claims in accordance with general Company standards, guided

by NFIP Claims manuals. The Arrangement also provides that claim

adjustments shall be binding upon the FIA. For example, the entire

responsibility for providing a proper adjustment for both combined wind

and water claims and flood-alone claims is the responsibility of the

WYO company.''

Comment: The Appendix A referenced is Article II, Secs. C.1.0,

C.2.0, C.3.0, and C.4.0, the requirements of the Single Adjuster

Program. The example given in the last paragraph appears to be

inconsistent with these changes.

Revision in final rule: Sec. 62.23(I)(1). ``Under the terms of the

Arrangement set forth at Appendix A of this part, WYO companies will

adjust claims in accordance with general company standards, guided by

the NFIP Claims manuals. The Arrangement also provides that claim

adjustments shall be binding upon the FIA. For example, the entire

responsibility for providing a proper adjustment of flood-alone claims

is the responsibility of the WYO company. The responsibility for

providing a proper adjustment for combined wind and water claims is to

be conducted in concert with the Single Adjuster provisions listed in

Appendix A.''

Reference in proposed rule: p. 3639, Appendix B, Part 1, para.

A.4.:

``To facilitate financial reconciliation, transaction records which

do not pass various edits employed by the NEIP to review the quality of

submitted data will be so identified, but will be maintained whenever

possible until the error is corrected by the company in order to

reconcile all financial data submitted to the NFIP.''

Comment: The acronym ``NEIP'' in the first sentence is a

typographical error.

Revision in final rule: Part (1)(A)(4) ``To facilitate financial

reconciliation, transaction records which do not pass various edits

employed by the NFIP to review the quality of submitted data will be so

identified, but will be maintained whenever possible until the error is

corrected by the company in order to reconcile all financial data

submitted to the NFIP.''

Reference in proposed rule: page 3642, Appendix B, Part 3, para.

B.1.e.: ``Problems with Rollover from National Flood Insurance Program

(NFIP) to WYO (duplication of coverage, timeliness of changeover).''

Comment: The Rollover provision no longer is available to WYO

companies.

Revision in final rule: We deleted this reference entirely and

redesignated paragraphs 1.f. and 1.g. as paragraphs 1.e. and 1.f.,

respectively.

Reference in proposed rule: Appendix B, Part 3, para. B.3.j.:

``Repeated failure to respond fully in a timely manner to questions

raised by the NFIP or its servicing agent concerning monthly financial

reporting.''

Comment: The use of the phrase ``its servicing agent'' is somewhat

misleading since the October 1, 1993 contract changes that named a

Bureau and Statistical Agent and an NFIP Servicing Agent as separate

contracts.

Revision in final rule: Appendix B, Part 3, para. B.3.j.:

``Repeated failure to respond fully in a timely manner to questions

raised by the NFIP Bureau and Statistical Agent concerning monthly

financial reporting.''

National Environmental Policy Act

This final rule is categorically excluded from the requirements of

44 CFR Part 10, Environmental Consideration. No environmental impact

assessment has been prepared.

Executive Order 12898, Environmental Justice

The socioeconomic conditions relating to this final rule were

reviewed and a finding was made that no disproportionately high and

adverse effect on minority or low income populations result from this

final rule.

Executive Order 12866, Regulatory Planning and Review

This final rule is not a significant regulatory action within the

meaning of Sec. 2(f) of E.O. 12866 of September 30, 1983, 58 FR 51735,

and has not been reviewed by the Office of Management and Budget (OMB).

Nonetheless, this final rule adheres to the regulatory principles set

forth in E.O. 12866.

Paperwork Reduction Act

In accordance with the provisions of the Paperwork Reduction Act of

1995, 44 U.S.C. 3501 et seq., the collections of information contained

in this final rule

[[Page 51219]]

have been submitted to and approved by the Office of Management and

Budget. To request additional information or copies of the OMB

submissions, contact the FEMA Information Collections Officer, Muriel

B. Anderson, by calling (202) 646-2625, or by writing to FEMA, 500 C

Street SW., Washington, D.C. 20472. The approved collections of

information are:

OMB Number 3067-0169, Write Your Own (WYO) Program. To maintain

adequate financial control over Federal funds, the National Flood

Insurance Program requires each WYO company to meet the requirements of

the WYO Transaction Record Reporting and Processing Plan and to submit

monthly financial and statistical reports as required in FEMA

regulation 44 CFR, part 62, Appendix B. The number of respondents is

estimated at 105. The burden estimates per respondent are as follows:

Reconciliation Report, 30 minutes; Biennial Audit Administrative Review

Checklist, 1 hour; Monthly Financial and Statistical Reconciliation

Reports Certification Statement, 3 minutes; and Monthly Statistical

Transaction Reports Certification Statement, 3 minutes.

OMB Number 3067-0229, Mortgage Portfolio Protection Program (MPPP).

Lending institutions, mortgage servicing companies and others servicing

mortgage loan portfolios can bring their mortgage loan portfolios into

compliance with the flood insurance purchase requirements of the Flood

Disaster Protection Act of 1973. The number of respondents is estimated

at 6,526. The burden estimates per respondent are as follows: 150 hours

for WYO companies to set up initial operations under the MPPP; 30

minutes per lender to sign an agreement with a WYO company to

participate in the program; 30 minutes per WYO company to notify each

mortgagor (3 notices at 10 minutes per notice); and 30 minutes for each

mortgagor to ask questions and respond to the notices.

Executive Order 12612

This final rule involves no policies that have federalism

implications under Executive Order 12612, Federalism dated October 26,

1987.

Executive Order 12778, Civil Justice Reform

This final rule meets the applicable standards of Sec. 2(b)(2) of

Executive Order 12778.

List of Subjects in 44 CFR Part 62

Flood insurance.

Accordingly, 44 CFR part 62 is amended as follows:

PART 62--SALE OF INSURANCE AND ADJUSTMENT OF CLAIMS

1. The authority citation for Part 62 continues to read as follows:

Authority: 42 U.S.C. 4001 et seq.; Reorganization Plan No. 3 of

1978, 43 FR 41943, 3 CFR, 1978 Comp., p. 329; E.O. 12127 of Mar. 31,

1979, 44 FR 19367, 3 CFR, 1979 Comp., 376.

2. Section 62.23 is revised to read as follows:

Sec. 62.23 WYO Companies authorized.

(a) Pursuant to section 1345 of the Act, the Administrator may

enter into arrangements with individual private sector property

insurance companies whereby such companies may offer flood insurance

coverage under the Program to eligible applicants for such insurance,

including policyholders insured by them under their own property

business lines of insurance pursuant to their customary business

practices including their usual arrangements with agents and producers,

in any State in which such WYO Companies are licensed to engage in the

business of property insurance. Arrangements entered into by WYO

Companies under this subpart shall be in the form and substance of the

standard arrangement, entitled ``Financial Assistance/Subsidy

Arrangement'', a copy of which is included in appendix A of this part

and made a part of these regulations.

(b) Any duly licensed insurer so engaged in the Program shall be a

WYO Company.

(c) A WYO Company is authorized to arrange for the issuance of

flood insurance in any amount within the maximum limits of coverage

specified in Sec. 61.6 of this subchapter, as Insurer, to any person

qualifying for such coverage under parts 61 and 64 of this subchapter

who submits an application to the WYO Company; coverage shall be issued

under the Standard Flood Insurance Policy.

(d) A WYO Company issuing flood insurance coverage shall arrange

for the adjustment, settlement, payment and defense of all claims

arising from policies of flood insurance it issues under the Program,

based upon the terms and conditions of the Standard Flood Insurance

Policy.

(e) In carrying out its functions under this subpart, a WYO Company

shall use its own customary standards, staff and independent contractor

resources, as it would in the ordinary and necessary conduct of its own

business affairs, subject to the Act and regulations prescribed by the

Administrator under the Act.

(f) To facilitate the marketing of flood insurance coverage under

the Program to policyholders of WYO Companies, the Administrator will

enter into arrangements with such companies whereby the Federal

Government will be a guarantor in which the primary relationship

between the WYO Company and the Federal Government will be one of a

fiduciary nature, i.e., to assure that any taxpayer funds are accounted

for and appropriately expended. In furtherance of this end, the

Administrator has established ``A Plan to Maintain Financial Control

for Business Written Under the Write Your Own Program'', a copy of

which is included in appendix B of this part and made a part of these

regulations.

(g) WYO Companies shall not be agents of the Federal Government and

are solely responsible for their obligations to their insureds under

any flood insurance policies issued under agreements entered into with

the Administrator.

(h) To facilitate the underwriting of flood insurance coverage by

WYO Companies, the following procedures will be used by WYO Companies:

(1) To expedite business growth, the WYO Company will encourage its

present property insurance policyholders to purchase flood insurance

through the NFIP WYO Program.

(2) To conform its underwriting practices to the underwriting rules

and rates in effect as to the NFIP, the WYO Company will establish

procedures to carry out the NFIP rating system and provide its

policyholders with the same coverage as is afforded under the NFIP.

(3) The WYO Company may follow its customary billing practices to

meet the Federal rules on the presentment of premium and net premium

deposits to a Letter of Credit bank account authorized by the

Administrator and reduction of coverage when an underpayment is

discovered.

(4) The WYO Company is expected to meet the recording and reporting

requirements of the WYO Transaction Record Reporting and Processing

Plan. Transactions reported by the WYO Company under the WYO

Transaction Record Reporting and Processing Plan will be analyzed by

the NFIP Bureau & Statistical Agent. A monthly report will be submitted

to the WYO Company and the FIA. The analysis will cover the timeliness

of WYO Company submissions, the disposition of transactions that have

not passed systems edits and the reconciliation of the totals generated

from transaction reports with those submitted on the WYO Company's

reconciliation reports.

[[Page 51220]]

(5) If a WYO Company rejects an application from an agent or a

producer, the agent or producer shall be notified so that the business

can be placed through the NFIP Servicing Agent, or another WYO Company.

(6) Flood insurance coverage will be issued by the WYO Company on a

separate policy form and will not be added, by endorsement, to the

Company's other property insurance forms.

(7) Premium payment plans can be offered by the WYO Company so long

as the net premium depository requirements specified under the NFIP/WYO

Program accounting procedures are met. A cancellation by the WYO

Company for non-payment of premium will not produce a pro rata return

of the net premium deposit to the WYO Company.

(8) NFIP business will not be assumed by the WYO Companies at any

time other than at renewal time, at which time the insurance producer

may submit the business to the WYO Company as new business. However, it

is permissible to cancel and rewrite flood policies to obtain

concurrent expiration dates with other policies covering the property.

(i) To facilitate the adjustment of flood insurance claims by WYO

Companies, the following procedures will be used by WYO Companies.

(1) Under the terms of the Arrangement set forth at appendix A of

this part, WYO Companies will adjust claims in accordance with general

Company standards, guided by NFIP Claims manuals. The Arrangement also

provides that claim adjustments shall be binding upon the FIA. For

example, the entire responsibility for providing a proper adjustment

for both combined wind and water claims and flood-alone claims is the

responsibility of the WYO Company. The responsibility for providing a

proper adjustment for combined wind and water claims is to be conducted

by listing in concert with the Single Adjuster provisions listed in

appendix A.

(2) The WYO Company may use its staff adjusters, independent

adjusters, or both. It is important that the Company's Claims

Department verifies the correctness of the coverage interpretations and

reasonableness of the payments recommended by the adjusters.

(3) An established loss adjustment Fee Schedule is part of the

Arrangement and cannot be changed during an Arrangement year. This is

the expense allowance to cover costs of independent or WYO Company

adjusters.

(4) The normal catastrophe claims procedure currently operated by a

WYO Company should be implemented in the event of a claim catastrophe

situation. Flood claims will be handled along with other catastrophe

claims.

(5) It will be the WYO Company's responsibility to try to detect

fraud (as it does in the case of property insurance) and coordinate its

findings with FIA.

(6) Pursuant to the Arrangement, the responsibility for defending

claims will be upon the Write Your Own Company and defense costs will

be part of the unallocated or allocated claim expense allowance,

depending on whether a staff counsel or an outside attorney handles the

defense of the matter. Claims in litigation will be reported by WYO

Companies to FIA upon joinder of issue and FIA may inquire and be

advised of the disposition of such litigation.

(7) The claim reserving procedures of the individual WYO Company

can be used.

(8) Regarding the handling of subrogation, if a WYO Company prefers

to forego pursuit of subrogation recovery, it may do so by referring

the matter, with a complete copy of the claim file, to FIA. Subrogation

initiatives may be truncated at any time before suit is commenced

(after commencing an action, special arrangement must be made). FIA,

after consultation with FEMA's Office of the General Counsel (OGC),

will forward the cause of action to OGC or to the NFIP Bureau and

Statistical Agent for prosecution. Any funds received will be

deposited, less expenses, in the National Flood Insurance Fund.

(9) Special allocated loss adjustment expenses will include such

items as: nonstaff attorney fees, engineering fees and special

investigation fees over and above normal adjustment practices.

(10) The customary content of claim files will include coverage

verification, normal adjuster investigations, including statements

where necessary, police reports, building reports and investigations,

damage verification and other documentation relevant to the adjustment

of claims under the NFIP's and the WYO Company's traditional claim

adjustment practices and procedures. The WYO Company's claim examiners

and managers will supervise the adjustment of flood insurance claims by

staff and independent claims adjusters.

(11) The WYO Company will extend reasonable cooperation to FEMA's

Office of the General Counsel on matters pertaining to litigation and

subrogation, under paragraph (i)(8) of this section.

(j) To facilitate establishment of financial controls under the WYO

Program, the WYO Company will:

(1) Select a Certified Public Accountant (CPA) firm to conduct

biennial audits of the financial, claims and underwriting records of

the company. These audits shall be performed in accordance with the

Government Auditing Standards issued by the Comptroller General of the

United States (commonly known as the ``yellow book''). FIA further

requires that pre-selected policy and claims files the CPA firm is

asked to review are in addition to any files that the auditors may

select for their sample. A report of the detailed biennial audit

conducted will be filed with the FIA which, after a review of the audit

report, will convey its determination to the Standards Committee. The

CPA firm chosen to conduct the audit is expected to use qualified,

skilled persons with the requisite background in property insurance and

a knowledge of the NFIP. Persons performing claims audits are expected

to possess claims expertise which would allow them to ascertain whether

the scope of damage was proper, and if all applicable NFIP policy

provisions were properly followed. Persons performing underwriting

audits should be able to ascertain if the risk has been properly rated,

which would necessitate being aware of special NFIP rating situations,

such as elevated buildings.

(2) Meet the recording and reporting requirements of the WYO

Transaction Record Reporting and Processing Plan and the WYO Accounting

Procedures Manual. Transactions reported to the National Flood

Insurance Program's (NFIP's) Bureau and Statistical Agent by the WYO

Company under the WYO Transaction Record Reporting and Processing Plan

and the WYO Accounting Procedures Manual will be analyzed by the Bureau

and Statistical Agent and a monthly report will be submitted to the WYO

Company and the FIA. The analysis will cover the timeliness of the WYO

Company submissions, the disposition of transactions which do not pass

systems edits and the reconciliation of the totals generated from

transaction reports with those submitted on WYO Company reconciliation

reports.

(3) Cooperate with FEMA's Office of Financial Management on Letter

of Credit matters.

(4) Cooperate with FIA in the implementation of a claims

reinspection program.

(5) Cooperate with FIA in the verification of risk rating

information.

[[Page 51221]]

(6) Cooperate with FEMA's Office of the Inspector General on

matters pertaining to fraud.

(k) To facilitate the operation of the WYO Program and in order

that a WYO Company can use its own customary standards, staff and

independent contractor resources, as it would in the ordinary and

necessary conduct of its own business affairs, subject to the Act, the

Administrator, for good cause shown, may grant exceptions to and

waivers of the regulations contained in this title relative to the

administration of the NFIP.

(l)(1) WYO Companies may, on a voluntary basis, elect to

participate in the Mortgage Portfolio Protection Program (MPPP), under

which they can offer, as a last resort, flood insurance at special high

rates, sufficient to recover the full cost of this program in

recognition of the uncertainty as to the degree of risk a given

building presents due to the limited underwriting data required, to

properties in a lending institution's mortgage portfolio to achieve

compliance with the flood insurance purchase requirements of the Flood

Disaster Protection Act of 1973. Flood insurance policies under the

MPPP may only be issued for those properties that:

(i) Are determined to be located within special flood hazard areas

of communities that are participating in the NFIP, and

(ii) Are not covered by a flood insurance policy even after a

required series of notices have been given to the property owner

(mortgagor) by the lending institution of the requirement for obtaining

and maintaining such coverage, but the mortgagor has failed to respond.

(2) WYO Companies participating in the MPPP must provide a detailed

implementation package to any lending institution that, on a voluntary

basis, chooses to participate in the MPPP to ensure the lending

institution has full knowledge of the criteria in that program and must

obtain a signed receipt for that package from the lending institution.

Participating WYO Companies must also maintain evidence of compliance

with paragraph (l)(3) of this section for review during the audits and

reviews required by the WYO Financial Control Plan contained in

appendix B of this part.

(3) The mortgagor must be protected against the lending

institution's arbitrary placing of flood insurance for which the

mortgagor will be billed by being sent three notification letters as

described in paragraphs (l)(4) through (6) of this section.

(4) The initial notification letter must:

(i) State the requirements of the Flood Disaster Protection Act of

1973, as amended;

(ii) Announce the determination that the mortgagor's property is in

an identified special flood hazard area as delineated on the

appropriate FEMA map, necessitating flood insurance coverage for the

duration of the loan;

(iii) Describe the procedure to follow should the mortgagor wish to

challenge the determination;

(iv) Request evidence of a valid flood insurance policy or, if

there is none, encourage the mortgagor to obtain a Standard Flood

Insurance Policy (SFIP) promptly from a local insurance agent (or WYO

Company);

(v) Advise that the premium for a MPPP policy is significantly

higher than a conventional SFIP policy and advise as to the option for

obtaining less costly flood insurance; and

(vi) Advise that a MPPP policy will be purchased by the lender if

evidence of flood insurance coverage is not received by a date certain.

(5) The second notification letter must remind the mortgagor of the

previous notice and provide essentially the same information.

(6) The final notification letter must:

(i) Enclose a copy of the flood insurance policy purchased under

the MPPP on the mortgagor's (insured's) behalf, together with the

Declarations Page,

(ii) Advise that the policy was purchased because of the failure to

respond to the previous notices, and

(iii) Remind the insured that similar coverage may be available at

significantly lower cost and advise that the policy can be cancelled at

any time during the policy year and a pro rata refund provided for the

unearned portion of the premium in the event the insured purchases

another policy that is acceptable to satisfy the requirements of the

1973 Act. ``(Approved by the Office of Management and Budget under OMB

control number 3067-0229.)''

3. Appendix B to Part 62--National Flood Insurance Program, is

revised to read as follows:

Appendix B to Part 62--National Flood Insurance Program

A Plan to Maintain Financial Control for Business Written Under the

Write Your Own Program

Under the Write Your Own (WYO) Program, the Federal Insurance

Administrator (Administrator) may enter into arrangements with

individual private sector insurance companies that are licensed to

engage in the business of property insurance, whereby these

companies may offer flood insurance coverage to eligible property

owners using their customary business practices. To facilitate the

marketing of flood insurance coverage, the Federal Government will

be a guarantor of flood insurance coverage for WYO Company policies

issued under the WYO Arrangement. To ensure that any taxpayer funds

are accounted for and appropriately expended, the Federal Insurance

Administration (FIA) and WYO Companies will implement this Financial

Control Plan. Any departures from the requirements of this Plan must

be approved by the Administrator. The authority for the WYO Program

is contained in section 1345 of the National Flood Insurance Act of

1968, 42 U.S.C. 4081, and 44 CFR parts 61 and 62, Secs. 61.13 and

62.23. The WYO Financial Assistance/Subsidy Arrangement

(Arrangement) which is included in appendix A of this part is hereby

made a part of this Financial Control Plan.

WYO Companies are subject to audit, examination, and regulatory

controls of the various states. Additionally, insurance company

operating departments are customarily subject to examinations and

audits performed by Company internal audit or quality control

departments, or both, and independent CPA firms. It is intended that

this Plan use to the extent possible, the findings of these

examinations and audits as they pertain to business written under

the WYO Program (Parts 3 and 4).

The WYO Financial Control Plan contains several checks and

balances that can, if properly implemented by the WYO Company,

significantly reduce the need for extensive on-site reviews of

Company files by the FIA staff or their designee. Furthermore, we

believe that this process is consistent with customary reinsurance

practices and avoids duplication of examinations performed under the

auspices of individual State Insurance Departments, NAIC Zone

examinations, and independent CPA firms.

The WYO Financial Control Plan requires the WYO Company to meet

the minimum requirements established by the Standards Committee. The

Standards Committee consists of four (4) members from FIA, one (1)

member from the Federal Emergency Management Agency's (FEMA's)

Office of Financial Management, one (1) member designated by the

Administrator who is not directly involved in the WYO Program, and

one (1) member from each of six (6) designated WYO Companies, pools

or other entities.

The WYO Financial Control Plan must require the WYO Company to:

1. Have a biennial audit of the flood insurance financial

statements and claims and underwriting activity conducted by an

independent accounting firm at the Company's expense to ensure that

the financial data reported to FIA accurately represents the flood

insurance activities of the Company. Require that the CPA firm's

audit be performed in accordance with GAO yellow book requirements.

Require that the auditors conduct their own review sample, even if

pre-selected policy and claims files are given to them for review.

2. Meet the recording and reporting requirements of the WYO

Transaction Record Reporting and Processing Plan. Transactions

[[Page 51222]]

reported to the National Flood Insurance Program's (NFIP's) Bureau

and Statistical Agent by the WYO Company under the WYO Transaction

Record Reporting and Processing Plan will be analyzed by the Bureau

and Statistical Agent and a monthly report will be submitted to the

WYO Company and the FIA. The analysis will cover the timeliness of

the WYO Company's submissions, the disposition of transactions that

do not pass systems edits, and the reconciliation of the total

generated from transaction reports with those submitted on the WYO

Company's reports (part 1).

3. Cooperate with FEMA's Office of Financial Management on

Letter of Credit matters.

4. Cooperate with FIA in the implementation of a claims

reinspection program (part 2).

5. Cooperate with FIA in the verification of risk rating

information.

6. Cooperate with FEMA's Office of the Inspector General on

matters pertaining to fraud.

The Standards Committee will review and make a recommendation to

the Administrator concerning any adverse action arising from the

implementation of the Financial Control Plan. Adverse actions

include, but are not limited to, the FIA Operations Division's

recommendation not to renew a particular Company's WYO arrangement.

This Plan includes the following guidelines:

Part 1--Transaction Record Reporting and Processing Plan

Reconciliation Procedures

Part 2--Claims Reinspection Program

Part 3--Financial Audits, Underwriting Audits, Claims Audits,

Audits for Cause, and State Insurance Department Audits

Part 4--Reports Certifications

Part 5--WYO Financial Assistance/Subsidy Arrangement

(Incorporated by Reference)

Part 6--Transaction Record Reporting and Processing Plan

(Incorporated by Reference)

Part 7--Write Your Own (WYO) Accounting Procedures Manual

(Incorporated by Reference)

Part 1--Transaction Record Reporting and Processing Plan

Reconciliation Procedures, Transaction Record Reporting and

Processing Plan Reconciliation Objectives

The objectives are: To reconcile transaction detail with monthly

financial statements submitted by the WYO Companies; to assess the

quality and timeliness of submitted data; and to provide for the

identification and resolution of discrepancies in the data. The

reliance on computer processing to perform the review of transaction

and financial data will help minimize the necessity for on-site

audits of WYO Companies. Reconciliation of the statistical reports

submitted will be performed by the WYO Companies and independently

by the NFIP Bureau and Statistical Agent.

The review of monthly financial statements and transaction level

detail will involve six areas:

A. Financial control;

B. Quality control (audit trails);

C. Quality review of submitted data;

D. Policy rating;

E. Timeliness of reporting; and

F. Monthly reports.

A. Financial Control

1. WYO Companies are required to submit a reconciliation report

(Exhibit ``A'') with the submission of transaction level detail.

This report will reconcile the transaction records data to the

financial report, explaining any discrepancies.

2. WYO Companies are required to submit, on a form approved by

the Administrator, a tape transmittal document with the submission

of the statistical tape containing transaction detail. This will be

used to validate record counts and dollar amounts.

3. The NFIP will review, at a minimum, the categories on the

attached format and produce a similar report reconciling the

transaction data to the monthly financial statement submitted by

each WYO Company.

4. To facilitate financial reconciliation, transaction records

which do not pass various edits employed by the NFIP to review the

quality of submitted data will be so identified, but will be

maintained whenever possible until the error is corrected by the

company in order to reconcile all financial data submitted to the

NFIP.

B. Quality Control

Transaction level detail will be maintained in policy and claim

history files for record-keeping and audit purposes.

C. Quality Review of Submitted Data

1. Transaction records will be edited for correct format and

values.

2. Relational edits will be performed on individual transactions

as well as between policy and claim transactions submitted against

those policies.

3. Record validation will be performed to check that the

transaction type is allowable for the type of policy or claim

indicated.

4. Errors will be categorized as critical or non-critical. The

rate of critical errors in the submission of statistical data will

be the basis by which company performance is reported to the

Standards Committee. Critical errors include those made in required

data elements. Required data elements:

a. Identify the policyholder, the policy, the loss, and the

property location;

b. Provide information necessary to rate the policy;

c. Provide information used in financial control; and

d. Provide information used for actuarial review of NFIP

experience.

5. Non-critical errors are those made in data elements reported

by the WYO Companies at their option.

D. Policy Rating

1. The rating will be validated by the NFIP for all policies for

which the following transactions have been submitted:

a. New Business;

b. Renewals;

c. Endorsements involving type A transaction records; and

d. Corrections of type A transaction records previously

submitted for premium transactions.

2. Incorrect rating will be considered a critical error.

E. Timeliness of Reporting

1. WYO Companies will be expected to submit monthly statistical

and financial reports within thirty days of the end of the month of

record.

2. The NFIP will produce reports based on review of submitted

data within thirty days after the due date or the first processing

cycle subsequent to the receipt of WYO Company submissions,

whichever is later.

F. Monthly Reports

1. Reports for each WYO Company's data submission will be sent

to the respective WYO Company and the FIA explaining any

discrepancies found by the NFIP review.

2. Report to WYO Companies. Transaction records that fail to

pass the quality review or policy rating edits will be reported to

the appropriate Company in transaction detail with error codes,

classification of errors as either critical or non-critical and any

codes used by the Company to identify the source of the transaction

data.

3. Reports to WYO Companies and the FIA:

a. Summary statistics will be generated for each monthly

submission of transaction data. These will include:

i. Absolute numbers of transactions read and transactions

rejected by transaction type; and

ii. Dollar amounts associated with transactions read and

transactions rejected.

b. Summary statistics for all policy and claim records submitted

to date (which may each be the result of multiple transactions) will

be generated, separately for critical and non-critical errors. These

will include:

i. Absolute number of policy and claim records on file and those

containing errors; and

ii. Relative values for the number of records containing

critical errors.

c. Control totals will be generated for tapes submitted to and

processed by the NFIP. This front-end balancing procedure will

include:

i. Numbers of records submitted according to the NFIP compared

with numbers of records submitted according to the WYO Company

transmittal document; and

ii. Dollar amounts submitted according to the NFIP compared with

dollar amounts submitted according to the WYO Company transmittal

document.

d. If there is any discrepancy between the NFIP reading of

dollar amounts from the tape and the WYO Company tape transmittal

document, then the monthly statistical tape submission will be

rejected and returned to the Company. The rejected tape must be

corrected and resubmitted by the next monthly submission due date.

e. In cases where the NFIP reconciliation of transaction level

detail with the financial statements does not agree with the

reconciliation report submitted by the WYO Company, a separate

report will be generated and transmitted to the Company for

resolution and to the FIA.

Reporting of Company Rating to the Standards Committee and the

Administrator

A. Satisfactory Rating

An annual end of the year report will be submitted to convey the

satisfactory rating of WYO Companies' submission of transaction

[[Page 51223]]

data and the reconciliation of these data with financial reports.

B. Unsatisfactory Rating

The report of an unsatisfactory rating will be submitted as soon

as errors and problems reach critical threshold levels. This rating

will be based on: Continuing problems in reconciling transaction

data with financial reports; statistics on the percentage of

transactions submitted with critical errors; the percentage of

policy and claim records on file that contain critical errors; and

late submission of statistical and financial reports.

Exhibit ``A''.--WYO Statistical Tape--Transmittal Document

Date Sent:-------------------------------------------------------------

WYO Prefix Code:-------------------------------------------------------

Address:---------------------------------------------------------------

----------------------------------------------------------------------

Reel Number(s) of Enclosed

Tapes:-----------------------------------------------------------------

Density----------------------------------------------------------------

LRECL------------------------------------------------------------------

Blocksize--------------------------------------------------------------

File Name (DSN)--------------------------------------------------------

Contact Person---------------------------------------------------------

Contact Number---------------------------------------------------------

IBU No. (WYO Use Only)-------------------------------------------------

Monthly Reconciliation--Net Written Premiums

Company name-----------------------------------------------------------

Co. NAIC No.-----------------------------------------------------------

Month/year ending------------------------------------------------------

Date submitted---------------------------------------------------------

Preparer's name--------------------------------------------------------

Telephone No-----------------------------------------------------------

----------------------------------------------------------------------------------------------------------------

Monthly statistical transactions report

Monthly financial report -------------------------------------------------------------------------

Trans. code Record count Premium amount

----------------------------------------------------------------------------------------------------------------

Net Written premiums.................. $

(Income statement = Line 100...... 11 ................. $

15 ................. .................

17 ................. .................

Unprocessed statistical:

(+) Prior month's................. 20 ................. .................

(-) Current month's............... 23 ................. .................

Other--Explain:

(+) Current month's............... 26 ................. (-)

(-) Prior month's................. 29 ................. (-)

14 and 81 ................. (+)

-------------------------------------------------------------------------

Total......................... Total: ................. .................

(2)(Add 11 Through 23 less 26 and 29)

-------------------------------------------------------------------------

Comments:

----------------------------------------------------------------------------------------------------------------

Monthly Reconciliation--Losses

Company name-----------------------------------------------------------

Co. NAIC No.-----------------------------------------------------------

Month/year-------------------------------------------------------------

Date submitted---------------------------------------------------------

----------------------------------------------------------------------------------------------------------------

Loss/paid

Trans. code Record count recoveries

----------------------------------------------------------------------------------------------------------------

100 Net paid losses................... $ ................. .................

(Income statement line 115) ..................................

Unprocessed statistical: .................................. ................. .................

31 ................. $

140 (+) Prior month's............. 34 ................. .................

37 ................. .................

150 (-) Current month............. 40 ................. .................

43 ................. .................

160 Salvage not to be reported by .................................. ................. .................

transaction (explain).

170 Other--Explain................ 46 and 61 ................. .................

49 ................. .................

64 ................. .................

84 and 87 ................. .................

52 Recovery ................. .................

Salvage ................. .................

Subrogation ................. .................

67 Recovery ................. .................

Salvage ................. .................

Subrogation ................. .................

-------------------------------------------------------------------------

Total:........................ Total: ................. .................

-------------------------------------------------------------------------

(Sum of Lines 100, 140, 160,

and 170 less 150).

(2) (Add 31, 34, 40 through 64 less 52

and 67)

-------------------------------------------------------------------------

Comments:

----------------------------------------------------------------------------------------------------------------

Monthly Reconciliation--Special Allocated LAE

Company name-----------------------------------------------------------

Co. NAIC No.-----------------------------------------------------------

[[Page 51224]]

-----------------------------------------------------------------------

Month/year ending------------------------------------------------------

Date submitted---------------------------------------------------------

----------------------------------------------------------------------------------------------------------------

Monthly statistical transaction report

Monthly financial report -------------------------------------------------------------------------

Trans. code Record count Amounts

----------------------------------------------------------------------------------------------------------------

Special allocated loss adjustment .................................. ................. .................

expenses.

(Other loss and LAE Calc.--Line 655)

71 ................. $

74 ................. .................

Unprocessed statistical:

(+) Prior Month................... .................................. ................. .................

(-) Current Month................. .................................. ................. .................

Other--Explain:

(1)............................... .................................. ................. .................

(2)............................... .................................. ................. .................

-------------------------------------------------------------------------

Total:................ Total: ................. .................

-------------------------------------------------------------------------

Comments:

----------------------------------------------------------------------------------------------------------------

Monthly Reconciliation--Net Policy Service Fees

Company Name-----------------------------------------------------------

Co. NAIC No.-----------------------------------------------------------

Month/Year Ending------------------------------------------------------

Date Submitted---------------------------------------------------------

Monthly Financial Report

Net Policy Service Fees (Income Statement Line 170):

$----------------------------------------------------------------------

Unprocessed statistical:

(+) Prior Month's------------------------------------------------------

(-) Current Month's----------------------------------------------------

Other--Explain:

(1)--------------------------------------------------------------------

(2)--------------------------------------------------------------------

Total------------------------------------------------------------------

Comments:

Monthly Statistical Transaction Report

Record Count:----------------------------------------------------------

Fee Amount:------------------------------------------------------------

Total:-----------------------------------------------------------------

(Approved by the Office of Management and Budget under OMB control

number 3067-0169.)

Part 2--Claims Reinspection Program

WYO-NFIP Claims Reinspection Program

To keep WYO-NFIP Claims Management informed, to assist in the

overall claims operation, and to provide necessary assurances and

documentation for dealing with GAO, Congressional Oversight

Committees, and the public, the FIA and WYO Companies have

established a Claims Reinspection Program. The Program is comprised

of the following major elements:

A. All files are subject to reinspection.

B. Files for reinspection may be randomly selected by flood

event, or size of loss, or class of business, as determined by WYO-

NFIP Claims Management.

C. WYO-NFIP Claims Management will utilize a binomial table to

define sample size for reinspections prior to payment. A larger

sample may be used depending upon error ratio.

D. An agreed upon sample of closed files, by event, will be

subjected to reinspection as well.

E. A WYO representative will conduct the reinspection,

accompanied by an NFIP General Adjuster.

F. A joint, single report will be issued by the WYO Company

representative and the NFIP General Adjuster.

G. Copies of reinspection reports will be forwarded to the

Claims Management of both the WYO Company and the NFIP.

Part 3---Biennial Financial Audits, Underwriting Audits, Claims

Audits, Audits for Cause, and State Insurance Department Audits

A. Biennial Financial, Underwriting and Claims Audits

1. Objectives of WYO Biennial Financial Underwriting and Claims

Audit. The biennial, financial, underwriting and claims audit is

intended to provide the Federal Emergency Management Agency with

independent assessment of the quality of financial controls over

activities relating to the Company's participation in the National

Flood Insurance Program as well as the integrity of the underwriting

and claims data reported to FEMA.

a. Participating WYO companies are responsible for selecting and

funding independent Certified Public Accounting firms to conduct the

biennial audits. Such costs are considered part of the normal

administrative cost of operating the WYO program and as such are

included in the WYO expense allowance.

b. The WYO Company's representative will be notified in writing

to arrange for a biennial audit. This notice should provide the WYO

Company at least 120 days to prepare for the biennial audit.

c. It is also intended that the biennial audit will reduce if

not eliminate the need for FEMA auditors or their designees to

conduct on-site visits to WYO companies in their review of financial

activity. However, the requirement may still exist for such visits

to occur as determined by the auditors. The CPA firm's audit shall

be performed in accordance with GAO yellow book requirements.

Further, the CPA firm is required to select its own sample, even

though FIA may provide them with pre-selected policy and claim files

for review. In addition, nothing in this section should be construed

as limiting the ability of the General Accounting Office or FEMA's

Office of Inspector General to review the activities of the WYO

Program.

d. The purpose of the biennial audit is to provide opinion on

the fairness of the financial statements, the adequacy of internal

controls, and the extent of compliance with laws and regulations.

e. Any WYO Company which has been subject to a comprehensive

audit by the CPA firm under contract with the FEMA OIG is exempted

by its selected Certified Public Accountant firm. Only the remaining

unaudited fiscal year of the two years normally to be reviewed under

the biennial audit will be examined. Policy and claim related

financial data as reported to the NFIP are proper and adequately

supported by underlying documentation.

B. Audits for Cause

In accordance with the terms of the Arrangement, the

Administrator, on his/her own initiative or upon recommendation of

the WYO Standards Committee or the FEMA Inspector General, may

conduct for-cause audits of participating companies. The following

criteria, in combination or independently, may constitute the basis

for initiation of such an audit.

1. Underwriting

a. Excessively high frequency of errors in underwriting.

i. Issuing policies for ineligible risks.

ii. Issuing policies in ineligible communities.

iii. Consistent premium rating errors.

iv. Missing or insufficient documentation for submit for rate

policies.

v. Other patterns of consistent errors.

b. Abnormally high rate of policy cancellations or non-renewals.

c. Policies not processed in a timely fashion.

d. Duplication of policy coverage noted.

[[Page 51225]]

e. Relational type edits indicate an usually high or low premium

amount per policy for the geographical area.

f. Biennial audit results indicate usual volume of errors in

underwriting.

2. Claims

a. Reinspection indicates consistent patterns of:

i. Losses being paid when not covered.

ii. Statistical information being reported on original loss

adjustment found to be incorrect on reinspection.

iii. Salvage/subrogation not being adequately addressed.

iv. Consistent overpayment of claims.

b. Unusually high count of erroneous assignments and/or claims

closed without payment (CWP).

c. Unusually low count of CWP. (May indicate inadequate follow-

up of claims submitted).

d. Average claim payments that significantly exceed the average

for the Program as a whole.

e. Lack of (adequate) documentation for paid claims.

f. Claims not processed in a timely fashion.

g. Consistent failure of WYO Company to receive authorization

for special allocated loss adjustment expenses prior to incurring

them.

h. High submission of Special Allocated Loss Adjustment Expenses

(SALAE).

i. Consistently high policyholder complaint level.

j. Low/high count of salvage/subrogation.

k. Biennial audit indicates significant problems.

3. Financial Reporting/Accounting

a. Consistently high reconciliation variations and/or errors in

statistical information.

b. Financial and/or statistical information not received in a

timely fashion.

c. Letter of Credit violations are found.

d. WYO Company is not depositing funds to the Restricted Account

in a timely manner, or funds are not being transferred through the

automated clearinghouse on a timely basis.

e. Premium suspense is consistently significant, older than 60

days, and/or cannot be detailed sufficiently, or both.

f. Large/unusual balance in Cash-Other (Receivables and/or

Payable).

g. Large, unexplained differences in cash reconciliation.

h. Large/unusual balances or variations between months noted for

key reported financial data.

i. Financial statement to statistical data reconciliation sheets

improperly completed indicating proper review of information is not

being performed prior to signing certification statement.

j. Repeated failure to respond fully in a timely manner to

questions raised by FIA or the NFIP Bureau and Statistical Agent

concerning monthly financial reporting.

k. Biennial audit indicates significant problems.

C. Underwriting Audit

1. Samples of new business policies, renewals, endorsements and

cancellations will be provided by the FIA with the biennial audit

instructions, including samples of the Mortgage Portfolio Protection

business, where applicable. The audit is to be conducted in

accordance with GAO yellow book requirements. The CPA firm may

supplement with its own sample of risks which were in force during

all or part of the Arrangement Year under audit for detail testing.

2. Underwriting Audit Outline

a. Review of the Underwriting Department's responsibilities,

authorities and composition.

b. Personal interviews with management and key clerical

personnel to determine current processing activities, planned

changes and problems.

c. Administrative review to verify compliance with company

procedures.

d. Thorough examination of a random sample of underwriting files

to measure the quality of work. The CPA firm is expected to provide

a representative sample of its review to substantiate its opinion

and findings. At a minimum, the files should be reviewed to verify

the following:

i. Policies are issued for eligible risks;

ii. Rates are correct and consistent with the amount of

insurance requested on the application;

iii. Waiting period for new business is consistent with

government regulations;

iv. Elevation certification or difference is correctly shown on

application;

v. The coverage does not include more than one building and/or

its contents per policy;

vi. No binder is effective unless issued with the authorization

of FIA;

vii. The FIRM zone shown on the application to the community in

which the property is located;

viii. Community shown on application is eligible to purchase

insurance under the NFIP;

ix. Information on type of building, etc., is fully complete;

x. Applicable deductibles are recorded;

xi. A new, fully completed application or a photocopy of the

most recent application, or similar documentation, with the

appropriate updates to reflect current information is on file for

each risk, including those formerly written by the NFIP Servicing

Facility;

xii. If any files to be audited are unavailable, determine the

reason for the absence.

e. Endorsement Processing.

1. Complete tasks as applicable.

2. Review requests for additional coverage to ensure that they

are subject to the waiting period rule.

3. Review controls established to ensure that no risk is insured

under endorsement provisions that are not acceptable as a new

business risk (i.e., a property located in a suspended community).

f. Cancellation Processing. Verify controls to ensure that one

of the necessary reasons for cancellation exists and that the

transaction is accompanied by proper documentation.

g. Renewal Processing. Determine controls to ensure that all

necessary information needed to complete the transaction is

provided.

h. Expired Policies. Determine controls to ensure that each step

is carried out at the proper time.

i. Observance of Waiting Period. Establish procedures to

document, as a matter of WYO Company business record and in each

transaction involving a new application, renewal, and endorsement,

that any applicable effective date and premium receipt rules have

been observed (44 CFR 61.11). Documentation reasonably suitable for

the purpose includes retention of postmarked envelopes (for three

(3) years) from date, date stamping and retention (via hard copy or

microfilm process) of application, renewal and endorsement documents

and checks received in payment of premium; computer input of

document and premium receipt transactions and retention of such

records in the computer system; and other reasonable insurer methods

of verifying transactions involving requests for coverage and

receipts of premium.

D. Claims Audit Outline

1. Review of the Claims Department's responsibilities,

authorities, and composition.

2. Personal interviews with management and key clerical

personnel to determine current processing activities, planned

changes and problems.

3. Administrative review to verify compliance with company

procedures.

4. Thorough examination of a random sample of claims files which

may be provided by FIA to measure the quality of work. At a minimum,

the files should be reviewed to verify the following:

a. Verify controls to ensure that a file is set up for each

Notice of Loss Received.

b. Review adjuster reports to determine whether they contain

adequate evidence to substantiate the payment or denial of claims,

including amount of losses claimed, any salvage proceeds,

depreciation and potential subrogation.

c. Ascertain that building and contents allocations are correct.

d. Determine whether the file contains evidence identifying

subrogation possibilities.

e. Verify that partial payments were properly considered in

processing the final draft or check.

f. Verify that the loss payees are listed correctly (consider

insured and mortgagee).

g. Verify that the total amount of the drafts or checks is

within the policy limits.

h. Ascertain the relevance and validity of the criteria used by

the carrier to judge effectiveness of its claims servicing

operation.

i. Confirm that when information is received from an independent

adjuster, the examiner either acts promptly to give proper feedback

with instructions or takes action to pay or deny the loss.

j. Determine whether the Claims Department is using an

``impression of risk'' program in reporting misrated policies, etc.

k. Where attempts at fraud occur, verify that these instances

are being reported to FIA for referral to the FEMA Inspector

General's office.

[[Page 51226]]

i. If any files to be audited are unavailable, determine the

reason for their absence. In undertaking this portion of the

biennial audit, the Administrative Review Checklist (Exhibit B)

below should be utilized.

Exhibit ``B''--Administrative Review Checklist

Policy #:

Insured's Name:

State:

Date of loss:

Date paid:

Date reported:

Amt. of loss: $

Bldg: $

Contents: $

Adjusting firm:

Examiner's name:

Comments:

1. Investigation and Adjustments

Yes No N/A

A. Application of Coverage.

(1) Insurable Interest?...................... [ ] [ ] [ ]

(2) Is loss from the flood peril?............ [ ] [ ] [ ]

(3) Did loss occur within the policy term:... [ ] [ ] [ ]

(4) Does location and description of risk

coincide with policy information?........... [ ] [ ] [ ]

(5) Were proper deductibles applied?......... [ ] [ ] [ ]

(6) Other insurance considered?.............. [ ] [ ] [ ]

(7) Other losses?............................ [ ] [ ] [ ]

B. Application of Sound Adjusting Practices:

(1) Was adjuster's report accurate/complete?. [ ] [ ] [ ]

(2) Was an attorney used in the settlement?.. [ ] [ ] [ ]

(3) Was a technical expert used in the

settlement?................................. [ ] [ ] [ ]

C. Documentation:

(1) Are damages clearly identified?.......... [ ] [ ] [ ]

(2) Are damages flood related?............... [ ] [ ] [ ]

(3) Are damages clearly and completely

itemized and documented by the adjuster?.... [ ] [ ] [ ]

(4) Was depreciation considered?............. [ ] [ ] [ ]

(5) Has subrogation been considered.......... [ ] [ ] [ ]

(6) Has salvage been properly handled?....... [ ] [ ] [ ]

(7) Was salvage timely?...................... [ ] [ ] [ ]

2. Supervision:

a. Assignments:

(1) Are assignments made promptly?........... [ ] [ ] [ ]

(2) Is insured contacted promptly?........... [ ] [ ] [ ]

b. Reserves:

(1) Are initial reserves indicated on the

first report?............................... [ ] [ ] [ ]

(2) Are they adequate?....................... [ ] [ ] [ ]

(3) Does final settlement compare favorably

with last reserve established?.............. [ ] [ ] [ ]

c. Diary Control:

(1) Automatic?............................... [ ] [ ] [ ]

(2) Timely?.................................. [ ] [ ] [ ]

(3) Is file reviewed at diary date with

examiner's comments?........................ [ ] [ ] [ ]

d. Examiner Evaluation and Settlement

Performances:

(1) Is examiner directing adjuster when

needed?..................................... [ ] [ ] [ ]

(2) Are files documented?.................... [ ] [ ] [ ]

(3) Is adequate control maintained over in-

house adjuster?............................. [ ] [ ] [ ]

(4) Is adequate control maintained over

outside adjuster?........................... [ ] [ ] [ ]

e. Salvage and subrogation:

(1) Is salvage evaluated by salvors?......... [ ] [ ] [ ]

(2) Is salvage disposed of promptly?......... [ ] [ ] [ ]

(3) Are salvage returns adequate?............ [ ] [ ] [ ]

(4) Is potential subrogation being promptly

and properly investigated?.................. [ ] [ ] [ ]

(5) Are proper subrogation forms used?....... [ ] [ ] [ ]

(6) Are subrogation and salvage files

properly opened, diaried, and referred (if

appropriate)?............................... [ ] [ ] [ ]

(7) Are recovery funds for subrogation and

salvage being properly handled?............. [ ] [ ] [ ]

f. Suits:

(1) Are suits properly identified?........... [ ] [ ] [ ]

(2) Are suits being properly evaluated?...... [ ] [ ] [ ]

(3) Are suits being referred to attorneys

promptly?................................... [ ] [ ] [ ]

(4) Are attorneys being advised as to

handling settlement or compromise?.......... [ ] [ ] [ ]

(5) Are suits being properly controlled?..... [ ] [ ] [ ]

(6) Are suits files properly diaried?........ [ ] [ ] [ ]

(7)-(8) [Reserved]...........................

g. Other:

(1) Was there other coverage by the WYO

Company?.................................... [ ] [ ] [ ]

(2) Were damages correctly apportioned?...... [ ] [ ] [ ]

(3) Was a solo adjuster used?................ [ ] [ ] [ ]

(4) Were there prior flood claims?........... [ ] [ ] [ ]

(5) Were prior damages repaired?............. [ ] [ ] [ ]

(6) Were prior claim files reviewed?......... [ ] [ ] [ ]

(7) Was a Congressional complaint letter in

file?....................................... [ ] [ ] [ ]

(8) Was it responded to promptly?............ [ ] [ ] [ ]

(9) Is the statistical reporting correction

file being properly managed?................ [ ] [ ] [ ]

E. State Insurance Department Examination

1. It is expected that audits of WYO companies by independent

accountants and/or state insurance departments, aside from those

conducted by the FIA or its designee, will include flood insurance

activity. When such audits occur, a financial officer for the WYO

Company will notify the FIA, identifying the auditing entity and

providing a brief statement of the overall conclusions that relate

to flood insurance and the insurer's financial condition, when

available. In the case of an audit in progress, a brief statement on

the scope of the audit should be provided to the FIA. A checklist

will be utilized for this reporting and will be provided to WYO

Companies by the FIA.

2. The WYO Companies will maintain on file the reports resulting

from audits, subject to on-site inspection by the FIA or its

designee. At the FIA's request, the WYO Company will submit a copy

of the auditor's opinion, should one be available, summarizing the

audit conclusion. ``(Approved by the Office of Management and Budget

under OMB control number 3067-0169)''

a. Certification Statement for Monthly Financial and Statistical

Reconciliation Reports.

I have reviewed the accompanying financial and statistical

reconciliation reports of XYZ Company as of ____________. All

information included in these statements is the representation of

the XYZ Company.

Based on my review (with the exception of the matter(s)

described in the following paragraphs, if applicable), I certify

that I am not aware of any material modifications that should be

made to the accompanying reports.

Signed-----------------------------------------------------------------

(Responsible Financial Officer)

Date-------------------------------------------------------------------

B. Certification Statement for Monthly Statistical Transaction Report

I have reviewed the accompanying statistical transaction report

control totals in conjunction with appropriate statistical

reconciliation reports. All information included in these reports is

the representation of the XYZ Company. ``(Approved by the Office of

Management and Budget under OMB control number 3067-0169).''

Signed-----------------------------------------------------------------

(Responsible Reporting Officer)

Date-------------------------------------------------------------------

(Catalog of Federal Domestic Assistance No. 83.100, ``Flood

Insurance'')

Dated: September 20, 1996.

Spence W. Perry,

Executive Administrator, Federal Insurance Administration.

[FR Doc. 96-25088 Filed 9-30-96; 8:45 am]

BILLING CODE 6718-03-P