National Flood Insurance Program; Advance Notice of Determining the Write-Your-Own Expense Allowance

FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 62

RIN 3067-AC86

National Flood Insurance Program; Advance Notice of Determining

the Write-Your-Own Expense Allowance

AGENCY: Federal Emergency Management Agency (FEMA).

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: We, FEMA, are considering changes under the flood insurance

Write-Your-Own (WYO) program to our rules on marketing incentives,

performance measures, compensation under the WYO expense allowance,

agent compensation, and compensation for unallocated loss expenses.

Before publishing any rule change in these areas, we want the advice

and comments of WYO companies, agents, consumers, and any other

interested parties.

DATES: We invite your advice and comments on the proposal. Please send

your comments on or before January 12, 1999.

We intend to hold a public meeting for oral submissions in early

1999. We will publish notice in the Federal Register with the date and

location of the public meeting after the comment period expires for

this advance notice of proposed rulemaking.

ADDRESSES: Please send your written comments to the Rules Docket Clerk,

Office of the General Counsel, Federal Emergency Management Agency, 500

C Street SW., Washington, DC 20472, (telefax) (202) 646-4536, or

(email) [email protected].

FOR FURTHER INFORMATION CONTACT: Claudia I. Murphy, Federal Emergency

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

room 429, Washington, DC 20472, (202) 646-2775, (email)

[email protected].

SUPPLEMENTARY INFORMATION:

Background

The WYO program is a cooperative venture between the Federal

Government and private insurance companies. Goals of the program

include: increase the flood insurance policy base and the geographic

distribution of policyholders; improve service to policyholders and

agents; increase the National Flood Insurance Program's (NFIP) ability

to settle claims promptly when catastrophes occur; and give private

insurers experience operating the NFIP. The duties and responsibilities

of the Federal Government and the private insurers participating in the

WYO program and the terms for compensation are spelled out each year in

the Financial Assistance/Subsidy Arrangement. (44 CFR Part 62, Appendix

A.)

FEMA believes the WYO program is the most effective vehicle for

delivering flood insurance to consumers and supporting the floodplain

management goals of the NFIP. As pressure to raise flood insurance

rates continues, particularly regarding reducing premium subsidies,

FEMA must examine ways to contain operating costs and determine the

most equitable and cost-effective ways to compensate companies that

sell and service flood insurance policies.

Marketing and Promotional Expense

We invite your comments on the reasonableness of adjusting the

expense allowance for WYO companies to reflect the expense incurred by

the FIA in funding marketing efforts. In recent years, FIA marketing

and promotional expenses have been about one percent of total flood

insurance premiums written. We did not incur similar marketing expense

when the WYO expense allowance formula was established. FIA effectively

incurs the type of expense that would be considered ``other acquisition

expense'' when incurred by a private insurer. Because ``other

acquisition expense'' is one of the expense components reflected in the

WYO expense allowance calculation, it may be reasonable to reflect some

or all of the marketing expense incurred by FIA as an offset to the

marketing expense we allow in determining the overall WYO expense

allowance.

Marketing Incentives

We adjust a company's base expense allowance depending on how well

the company met the marketing goals for the arrangement year contained

in the marketing guidelines established pursuant to Article II.G. of

the Arrangement. We seek your comments on whether a company's

compensation should be contingent on meeting the marketing guidelines

and if the marketing incentive is the most effective way to encourage

the marketing of flood insurance.

As a separate consideration, we ask for your comments on options

regarding the marketing incentive adjustment that has been a feature of

the expense calculation since arrangement year 1994-95. We have

identified possible approaches to the marketing incentive allowance:

(1) Change the current maximum addition to the basic WYO expense

allowance from 1.3 percentage points to some other amount, such as 1.0

or 0.5 percentage points;

(2) Eliminate the marketing incentive program; or

(3) Continue the current marketing incentive program.

Performance Measures

We also invite your comments on how performance should be

considered in determining the expense allowance of a particular WYO

company. Incorporating performance measures into the determination of a

company's expense allowance would create incentives to maximize

efficiency in areas such as the settlement of NFIP claims, underwriting

accuracy, customer services, financial and statistical reporting, and

to maximize the cost effectiveness of the WYO program.

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Alternatives to the Current Compensation Scheme

We ask for your advice and comments on alternatives to the current

compensation scheme. One future approach might be to determine the WYO

expense allowance using actual average expense ratios of the WYO

companies as opposed to the ratios of the entire property/casualty

industry. We could use direct written premium and expense information

allocated to Federal flood insurance from Part III--Allocation to Lines

of Direct Business Written for the property/casualty industry as

reported in A.M. Best Company's Aggregates and Averages.

(1) We could total the amounts incurred for ``Commissions'',

``Taxes'', ``Other Acquisition'', and ``General Expense'' and divide

this sum by ``Premiums Written'' to derive a baseline expense ratio.

(2) Alternatively, we could compute an operating allowance

percentage by totaling the amounts incurred for ``Taxes'', ``Other

Acquisition'', and ``General Expense'' and dividing this sum by

``Premiums Written'' to derive a baseline expense ratio and add a fixed

percentage commission allowance.

We could adjust the percentage amount of either of the computed

ratios to compensate the companies for their participation in the WYO

program. One approach could be to set the expense ratio at the mid-

point, or some other point, between the expense ratio computed using

the proposed expense allowance formula and the ratio derived from

direct Federal flood program premium and expense data. We welcome your

comments on how this adjustment could be determined.

Agent Compensation

FEMA does not determine commissions paid by WYO companies to their

agents; however, we include a 15 percent agent commission expense in

calculating the WYO expense allowance. Market evidence based on the

prevalence of rebating suggests this commission level is high for

Residential Condominium Building Association Policies. We invite

comments on how to modify the expense structure in light of the

practice of rebating.

We do not intend to change the portion of the WYO expense allowance

for agents but would like to gather information on industry practices

for compensating agents who sell insurance products. We encourage and

invite you to provide a description of your commission structure and/or

other methods for compensating your agents. We are interested in

knowing about differences in compensation for flood insurance and other

types of property and casualty insurance and any differences in

commissions paid for large and small policies, new and renewal

business, and commercial and residential business.

Compensation for Unallocated Loss Expenses

Finally, we would like to gather information on the costs companies

incur handling NFIP claims, which are in addition to the Adjuster Fee

Schedule but are not eligible for reimbursement as a special allocated

loss adjustment expense. Currently, WYO companies are entitled to an

expense payment of 3.3 percent of the incurred loss, exclusive of

``incurred but not reported'' losses, as compensation for settling

losses. An expense payment based on the percent of the incurred loss

may operate as an incentive to pay questionable or disputed claims. We

encourage you to provide information on the costs incurred settling

NFIP losses, how claims handling practices affect your company's costs,

and how the frequency of disasters affect these costs.

Confidential Information

Business entities who choose to submit confidential information

protected from disclosure under the Freedom of Information Act (5 USC

552(b)(4)) should identify that information clearly as such, segregate

it from the body of the comment, and include a summary of or reference

to it in the comment.

Public Meeting

We intend to hold a public meeting for oral submissions in early

1999. We will publish notice in the Federal Register with the date and

location of the public meeting after the comment period expires for

this advance notice of proposed rulemaking. Please indicate in your

comments whether you wish to participate in this meeting, and if so,

the name and title of the speaker. If several respondents have

substantially similar comments, a preliminary hearing may be necessary

to align interests.

Dated: November 4, 1998.

Jo Ann Howard,

Federal Insurance Administrator.

[FR Doc. 98-30409 Filed 11-12-98; 8:45 am]

BILLING CODE 6718-03-P