National Flood Insurance Program (NFIP); Standard Flood Insurance Policy

FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 61

RIN 3067-AC73

National Flood Insurance Program (NFIP); Standard Flood Insurance

Policy

AGENCY: Federal Emergency Management Agency (FEMA).

ACTION: Final rule.

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SUMMARY: This rule increases the amount of the deductible under the

Standard Flood Insurance Policy--from $750 to $1,000--for structures

with subsidized coverage.

EFFECTIVE DATE: May 1, 1998.

FOR FURTHER INFORMATION CONTACT: Charles M. Plaxico, Jr., Federal

Emergency Management Agency, Federal Insurance Administration, 202-646-

3422, (facsimile) 202-646-4327.

SUPPLEMENTARY INFORMATION: On October 7, 1997, FEMA published in the

Federal Register, 62 FR 52304, a proposed rule to amend the regulations

of the National Flood Insurance Program (NFIP) to increase the

deductible from $750 to $1,000 for structures with subsidized coverage.

The proposal also described a buy-back feature that would permit

insureds to `buy back,' in consideration of additional premium, a

reduced deductible under the Standard Flood Insurance Policy (SFIP).

During the comment period, comments were received from: The Flood

Insurance Producers National Committee (FIPNC), a staff underwriter

from one of the insurance companies participating in the NFIP's Write

Your Own (WYO) program, and the Association of State Flood Plain

Managers (ASFPM).

FIPNC agreed with the proposed change in its entirety and

recommended that the amount of the reduced deductible that a

policyholder could buy back be set at $500. While the policy language

itself will remain silent on the amount of the reduced buy-back, the

$500 figure is the amount contemplated by the Federal Insurance

Administration in implementing this rule.

[[Page 66027]]

The underwriter from one of the WYO companies expressed concern

that changing the deductible would introduce complexities that would

undermine the NFIP's growth and policy sales goals. Assuming that the

commenter is referring to the underwriting steps to reduce the

deductible to $500 for an additional charge, any additional complexity

is more than offset by the ability of the insured to purchase the

desired coverage. Since optional increased deductibles have already

been available for many years, it would appear that the flexibility to

reduce the deductible does not add any large degree of complexity in

writing the policy.

The underwriter also expressed concern that increasing the

deductible and offering a buy-back would require ``enormous changes''

to the computer systems of a participating company. It is unclear why

this would be necessary. The FIA consulted with the NFIP Bureau and

Statistical Agent and several WYO companies before initiating

rulemaking. There was no indication at all that establishing a

surcharge for an optional deductible would pose any difficulty. From

past experience, the proposed lead-time for implementing this change

should be adequate.

The underwriter also raised the question of whether increasing the

deductible would ``provide enough benefit to warrant such a drastic

change.'' It is FEMA's position that the change is far from ``drastic''

and actually is only a modest one for agents and companies

participating under the WYO Program. The reason for implementing this

change is to benefit the general body of taxpayers by distributing

costs more equitably between the public taxpayers who have subsidized

the coverage and the policyholders who benefit from less than actuarial

rates.

The last issue raised by the insurance underwriter focused on

whether the deductible will be accepted by mortgage companies and

recommended that FEMA coordinate the rule change with lending

institutions prior to implementation. It is a standard procedure for

FEMA to coordinate with the Federal agencies that regulate lending

activities any change connected with the National Flood Insurance

Program. This change will be no exception. Before the effective date of

May 1, 1998, in addition to the close coordination FEMA will make with

these agencies, FEMA will incorporate this change in its lenders

workshops scheduled for this fiscal year.

ASFPM, the third commenter, believed that the ``Federal Insurance

Administration (FIA) has unnecessarily narrowed its options for

building reserves for catastrophic loss years.'' ASFPM recommended that

before FIA inaugurates an increase in the deductible for subsidized

policies other measures should be taken. ASFPM said that, ``Limiting

the options to those whose costs are borne by the policy holder ignores

a number of programmatic, process, and operational measures that should

be examined. FIA has a responsibility to demonstrate to Congress, and

the rate payers, that its performance as a business is efficient.''

FEMA disagrees that it has restricted its options. To increase the

deductible for subsidized policies through rulemaking, which is the

necessary and appropriate vehicle for changes to the Standard Flood

Insurance Policy, does not prevent FEMA from continuing to pursue other

program improvements that do not require rulemaking, such as the ones

recommended by the Association. FEMA does not believe that it serves

business efficiency by delaying modest actions that can reasonably be

taken now to reduce outlays from the National Flood Insurance Fund

while other initiatives, including some of those proposed by the

Association, are already underway independent of rulemaking.

ASFPM also expressed concern that the NFIP's `` `administrative

grandfathering' measure allows a policyholder to `lock in' a rate

regardless of future changes in risk or in the mapped Special Flood

Hazard Area.'' Unlike the ``lock in'' feature of many home purchase

agreements where a homebuyer may ``lock in'' a set interest rate for

his or her mortgage loan for the term of the loan and can thereby be

assured of the same monthly payment for the entire term of the loan,

there are no such guarantees for policy-holders under the NFIP. While

the policyholder with a pre-FIRM structure may be entitled under the

NFIP's ``administrative grandfathering'' provision to the same risk

classification, it does not guarantee that the policyholder will not

experience an increase in the premium paid each year for flood

insurance coverage. The entire issue of ``administrative

grandfathering,'' however, is under review by the Federal Insurance

Administration. In the meantime, FEMA will implement this modest change

of increasing the deductible for subsidized policies.

FEMA agrees wholeheartedly with the ASFPM's recommendation that

underused, low-cost mitigation measures should be encouraged, such as

relocating furnaces and hot water heaters. FEMA encourages such

measures in its Interagency Hazard Mitigation Team Reports, through its

publications to homeowners and insureds, by assigning mitigation

specialists to assist flood victims and communities during the recovery

process, and by conducting on-site mitigation workshops after flood

disasters. States, localities, and FEMA have been working in

partnership for years on this issue and will continue to work to

implement the type of low cost mitigation measures cited by the

Association. To suggest that increasing the deductible should be

delayed until after more success is achieved in this area is not

reasonable.

ASFPM also recommended that FEMA improve ``quality control when

policies are written and by evaluating the policies currently on the

books.'' The Association argued that corrections in ratings ``will

increase premium income in a manner that will benefit all policy

holders.'' FIA has conducted studies to determine the possible extent

of misrating. These studies show that only a relatively small

percentage of NFIP policies are misrated. FEMA has underway efforts to

improve the quality of underwriting in the NFIP.

First, during fiscal year 1997, the NFIP conducted 396 workshops

for insurance agents to master the underwriting requirements of the

NFIP so that policies will be rated properly when submitted to the NFIP

or to the Write Your Own company participating in the NFIP. So far, 150

workshops for agents have been scheduled for fiscal year 1998.

Second, there are other initiatives underway designed to improve

the quality control of NFIP's underwriting. In May 1998, FIA will use a

Geographic Information System (GIS) to ensure that structures insured

by Preferred Risk Policies (PRP) are in fact located in zones entitling

them to PRP rates. If this proves to be an effective tool for

monitoring structures insured under PRP policies, FIA may expand the

use of the GIS system as a quality control tool for other policies as

well. Also, a condominium re-inspection program has been an effective

tool to ensure proper rating of condominiums.

ASPFM cited the difficult experience of State and local floodplain

managers in administering the NFIP's `substantial damage' provision

after significant flood damage. The Association recommended that ``FEMA

should examine current methods for determining `substantial damage' and

seek to simplify the process.'' FEMA has long recognized the problems

with regard to State and community implementation of the NFIP

substantial damage requirement. The

[[Page 66028]]

NFIP substantial damage requirement, although a necessary step to

reduce flood damages, has often created financial hardship for

individual property owners who must comply with a floodplain management

ordinance which requires that buildings be elevated or floodproofed to

an elevation above the base flood elevation (a flood having a one

percent chance of being equaled or exceeded in any given year). FEMA

believes that the new Increased Cost of Compliance (ICC) coverage under

the Standard Flood Insurance Policy, a coverage mandated by Sec. 555 of

Pub. L. 103-325 and implemented by FEMA through publication of a final

rule on February 25, 1997, in the Federal Register 62 FR 8391, will

help policyholders to pay for the additional costs to comply with State

or community floodplain management laws or ordinances for substantially

damaged as well as repetitively damaged buildings. In addition, FEMA

has developed the ``Residential Substantial Damage Estimator,'' which

is a computer program to assist State and local officials in estimating

building value and damage costs for both single family and manufactured

homes. Furthermore, FIA has worked closely with the Mitigation

Directorate to develop a procedure for alerting both the local

community and the FEMA Regional Mitigation staff of potential cases of

substantial damage after a flood event. Once sufficient claims have

been paid on the new coverage, FEMA intends to evaluate how well the

ICC coverage is working. FEMA will also continue to examine how well

communities are implementing the substantial damage requirement and

evaluate methods for determining substantial damage.

The Association also stated that ``the claims adjustment process

should be critically evaluated to determine that claims amounts are

appropriate. The Association is aware of anecdotal evidence that some

policyholders may be receiving claim payments that are in excess of

damage. Occasionally, it is perceived that a claims adjuster may be lax

because the dollars used to pay claims are not the responsibility of

his or her insurance company.''

On the broader issues of claims payments and fiscal responsibility,

FEMA has adopted a number of safeguards to ensure a claim program of

the highest quality and service possible. A company participating in

the NFIP's Write Your Own program bears responsibility for overpayments

that result from error--and not simply a matter of judgement--and must

reimburse the National Flood Insurance Fund for overpayments due to

such errors. FEMA has a regular system of re-inspections and audits to

maintain quality control over the claim process. The NFIP has on its

staff experienced general property adjusters who conduct random re-

inspections of claims handled by each of the companies participating in

the NFIP's Write Your Own program. In addition to the claims re-

inspection program, claims are audited by an accounting firm selected

by FEMA's Office of Inspector General. These audits include a

representative number of claim files for each year that are reviewed

for compliance with NFIP regulations. Under the NFIP's claim audit

procedures, Write Your Own companies themselves must hire independent

auditors to do audits every two years. In addition, FIA is about to

conduct a study that will review the whole process of claims

adjustments and audits. The experience from past audits and re-

inspections is that claims overpayments have not been a significant

problem. Nonetheless, FEMA invites concrete evidence on any

policyholders who may have received ``claim payments that are in excess

of damage'' or where the claims adjuster ``may be lax.'' That

information may be submitted directly to: Federal Emergency Management

Agency, Federal Insurance Administration, 500 C Street SW., Washington,

DC 20472, Attention: Director of Claims.

The Association also recommended that the expense allowance--the

amount of premium retained by companies participating in the NFIP's

Write Your Own program, especially the amount of commission paid to

agents for policy renewals--be examined ``carefully because the NFIP is

fundamentally a program designed to reduce federal disaster

expenditures and to help floodplain occupants.'' FEMA is in the process

of evaluating what percentage of the expense allowance is appropriate

for companies to retain and how that should relate to meeting specified

growth goals.

Finally, the Association cited repetitive losses as a ``significant

drain on the National Flood Insurance Fund'' and urged ``closer

examination of the repetitive loss problem in order to determine

whether certain types of risks can be discriminated, and perhaps

targeted with mitigation information.'' The problem of repetitive

losses has presented a significant challenge to the program. In the

past, FIA proposed several remedies, including premium surcharges, to

address the problem of repetitive flood losses. These proposals,

however, encountered political opposition and have not been

implemented.

Currently, FEMA is addressing this problem through its Community

Rating System (CRS), implementation of ICC coverage, and mitigation

grant and assistance programs authorized by Congress. The NFIP's CRS,

through community-wide premium discounts, gives incentives to

communities to mitigate repetitive flood losses. In addition, Congress

authorized ICC coverage not only for substantially flood-damaged

buildings but also for repetitively flood-damaged buildings in States

and communities that require compliance with laws and ordinances

affecting these buildings. With passage of the National Flood Insurance

Reform Act, Pub. L. 103-325, Congress also authorized establishment of

a Federal grant program--Flood Mitigation Assistance (FMA)--to provide

financial assistance to States and communities for flood mitigation

planning and activities. A major statutory goal of FEMA is to fund

cost-effective mitigation measures that reduce the number of

repetitively damaged buildings. FEMA's Hazard Mitigation Grant Program

authorized under Sec. 404 of the Robert T. Stafford Disaster Relief and

Emergency Assistance Act also provides financial assistance to States

and communities to fund mitigation measures for repetitively damaged

buildings following a major disaster declaration. FEMA will continue to

explore other measures to address the issue of repetitive losses.

Increasing the deductible is one relatively modest step that is

expected to reduce outlays from the National Flood Insurance Fund by

$6.3 million in the first full year of implementation. This action is a

measured change compatible with Congressional intent for the program.

The subsidy study that the ASFPM wished to see completed before the

increase in deductible takes effect is intended to examine the affects

of subsidy changes of much greater impact and wider scope. FEMA intends

to pursue a balanced approach through its program initiatives for the

NFIP with modest reductions in subsidy that are consistent with the

larger NFIP subsidy issue. These efforts complement the recommendations

made by the Association. FEMA does not agree that increasing the

deductible should be delayed until larger scale solutions are

identified and implemented.

National Environmental Policy Act

Pursuant to section 102(2)(C) of the National Environmental Policy

Act of 1969, 42 U.S.C. 4371 et seq., and the implementing regulations

of the Council

[[Page 66029]]

on Environmental Quality, 40 CFR parts 1500-1508, FEMA has conducted an

environmental assessment of this final rule. The assessment concludes

that there will be no significant impact on the human environment as a

result of the issuance of this final rule, and no Environmental Impact

Statement will be prepared. Copies of the environmental assessment are

on file for inspection through the Rules Docket Clerk, Federal

Emergency Management Agency, room 840, 500 C Street SW., Washington, DC

20472.

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, 1993, 58 FR 51735,

but attempts to adhere to the regulatory principles set forth in E.O.

12866. The final rule has not been reviewed by the Office of Management

and Budget under E.O. 12866.

Paperwork Reduction Act

This final rule does not contain a collection of information and

therefore is not subject to the provisions of the Paperwork Reduction

Act of 1995.

Executive Order 12612, Federalism

This final rule involves no policies that have federalism

implications under E.O. 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

E.O. 12778.

Congressional Review of Agency Rulemaking

This final rule has been submitted to the Congress and to the

General Accounting Office under the Congressional Review of Agency

Rulemaking Act, Pub. L. 104-121. The rule is not a ``major rule''

within the meaning of that Act. It does not result in nor is it likely

to result in an annual effect on the economy of $100,000,000 or more;

it will not result in a major increase in costs or prices for

consumers, individual industries, Federal, State, or local government

agencies, or geographic regions; and it will not have ``significant

adverse effects'' on competition, employment, investment, productivity,

innovation, or on the ability of United States-based enterprises to

compete with foreign-based enterprises.

This final rule is exempt (1) from the requirements of the

Regulatory Flexibility Act, and (2) from the Paperwork Reduction Act.

The rule is not an unfunded Federal mandate within the meaning of the

Unfunded Mandates Reform Act of 1995, Pub. L. 104-4. It does not meet

the $100,000,000 threshold of that Act, and any enforceable duties are

imposed as a condition of Federal assistance or a duty arising from

participation in a voluntary Federal program.

List of Subjects in 44 CFR Part 61

Flood insurance.

Accordingly, 44 CFR Part 61 is amended as follows:

PART 61--INSURANCE COVERAGE AND RATES

1. The authority citation for Part 61 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., p. 376.

2. Paragraph C. of Article 7 of Appendix A(1) is revised to read as

follows:

Appendix A(1)--Federal Emergency Management Agency, Federal Insurance

Administration Standard Flood Insurance Policy

* * * * *

C. For any flood insurance policy issued or renewed for a property

located in an Emergency Program community or for any property located

in a Regular Program community in Zones A, AO, AH, A1-A30, AE, AR, AR/

AE, AR/AH, AR/AO, AR/A1-A30, AR/A, VO, V1-V30, VE, or V where the rates

available for buildings built before the effective date of the initial

Flood Insurance Rate Map or December 31, 1974, whichever is later, are

used to compute the premium, the amount of the deductible for each loss

occurrence is determined as follows: We shall be liable only when such

loss exceeds $1,000, or the amount of any other deductible that you

selected when you applied for this policy or subsequently by

endorsement.

* * * * *

3. Paragraph C. of Article 7 of Appendix A(2) is revised to read as

follows:

Appendix A(2)--Federal Emergency Management Agency, Federal Insurance

Administration Standard Flood Insurance Policy

C. For any flood insurance policy issued or renewed for a property

located in an Emergency Program community or for any property located

in a Regular Program community in Zones A, AO, AH, A1-A30, AE, AR, AR/

AE, AR/AH, AR/AO, AR/A1-A30, AR/A, VO, V1-V30, VE, or V where the rates

available for buildings built before the effective date of the initial

Flood Insurance Rate Map or December 31, 1974, whichever is later, are

used to compute the premium, the amount of the deductible for each loss

occurrence is determined as follows: The Insurer shall be liable only

when such loss exceeds $1,000, or the amount of any other deductible

that the Insured selected when it applied for this policy or

subsequently by endorsement.

* * * * *

4. Paragraph C. of Article 7 of Appendix A(3) is revised to read as

follows:

Appendix A(3)--Federal Emergency Management Agency, Federal Insurance

Administration Standard Flood Insurance Policy

C. For any flood insurance policy issued or renewed for any

property located in Zones A, AO, AH, A1-A30, AE, AR, AR/AE, AR/AH, AR/

AO, AR/A1-A30, AR/A, VO, V1-V30, VE, or V where the rates available for

buildings built before the effective date of the initial Flood

Insurance Rate Map or December 31, 1974, whichever is later, are used

to compute the premium, the amount of the deductible for each loss

occurrence is determined as follows: The Insurer shall be liable only

when such loss exceeds $1,000, or the amount of any other deductible

that the Insured selected when it applied for this policy or

subsequently by endorsement.

* * * * *

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

Insurance''; No. 83.516, ``Disaster Assistance'')

Dated: December 12, 1997.

Edward T. Pasterick,

Acting Executive Administrator, Federal Insurance Administration.

[FR Doc. 97-32945 Filed 12-16-97; 8:45 am]

BILLING CODE 6718-03-M