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

FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 62

RIN 3067-AC92

National Flood Insurance Program; Determining the Write-Your-Own

Expense Allowance

AGENCY: Federal Emergency Management Agency (FEMA).

ACTION: Proposed rule.

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SUMMARY: We, FEMA, propose to change our method for establishing the

Write-Your-Own (WYO) expense allowance percentage for arrangement years

beginning on or after October 1, 1999. We would use a new formula to

derive the expense ratios used in determining the operating portion of

the expense allowance. This formula would use direct, as opposed to

net, premium and expense information for the property/casualty industry

and would have the effect of lowering the expense allowance.

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 a notice in the Federal Register with the date

and location of the meeting after the comment period expires for this

proposed rule.

ADDRESSES: Please send your 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, (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. The goals of the program

are: to increase the flood insurance policy base and the geographic

distribution of policyholders; to improve service to policyholders and

agents; to increase the NFIP's ability to settle claims promptly in

catastrophe situations, and to give private insurers experience

operating the NFIP. The duties and responsibilities of the Federal

Government and the private

[[Page 63433]]

insurers participating in the WYO program and the compensation, or

expense allowance, are spelled out each year in the Financial

Assistance/Subsidy Arrangement. (44 CFR Part 62, Appendix A.)

WYO Expense Allowance

The WYO expense allowance is composed of an operating allowance

percentage and a fixed 15 percent commission allowance. Before the

1994-95 arrangement year, the operating allowance percentage of the

expense allowance was based on the average expense ratios for ``Other

Acq.'', ``General Exp.'', and ``Taxes'' as published, for the latest

available year, in A.M. Best Company's Aggregates and Averages--

Property Casualty Insurance Underwriting--by Lines for Fire, Allied

Lines, Farmowners Multiple Peril, Homeowners Multiple Peril, and

Commercial Multiple Peril combined. Specifically, we combined the

ratios of net expenses, by category, to net premiums written, for each

of the aforementioned five property insurance coverages according to

weighting based on net premiums earned for each coverage. To that

percentage we then added a fixed 15 percent commission allowance to

arrive at the annual WYO expense allowance percentage.

Since the 1994-95 arrangement year, we have included only the non-

liability portion of Commercial Multiple Peril lines in the

computations. We have also determined the final amount retained by the

company by an adjustment to a base percentage 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.

New Formula To Derive Expense Ratios

We want to continue the same basic approach we have used for more

than 15 years and intend to use published property/casualty industry

expense information to derive flood insurance expense allowances. We

would update the specifics of the formula to take advantage of data

elements not available in published form at the time we originally

established the current formula. Fifteen years ago Aggregates and

Averages did not contain an Insurance Expense Exhibit for the property/

casualty industry and the Insurance Expense Exhibit completed by

insurers did not provide direct premium and expense information

comparable to what is provided today.

New Formula Under Consideration

We ask your advice and comments on a new formula we propose to use

to derive the three expense ratios that determine the operating portion

of the expense allowance. This formula would use the direct, as opposed

to net, premium and expense information reflected in Part III of the

Insurance Expense Exhibit for the property/casualty industry as

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

aggregate premiums and expense amounts for each of the same five

property coverages, and we would derive the weighted-average expense

ratios therefrom. We would eliminate the use of an earned premium

weighting of by-line expense ratios because we would rely no longer on

by-line ratios to derive the combined expense ratios for the five lines

involved.

Information on direct premiums written provides a better indicator

of the premiums written in a year to be used in computing the expense

ratio. Direct premiums written represent the aggregate amount of

recorded originated premiums, other than reinsurance, written during a

year after deducting all return premiums. Net premiums written include

direct premiums written and reinsurance assumed, less reinsurance

ceded. Reinsurance is not a part of a WYO company's flood business

because the Federal government assumes liability for all losses and

hence, should not be included in the calculation of the expense ratio.

Confidential Information

Business entities who chose to submit confidential information

protected from disclosure under the Freedom of Information Act (5

U.S.C. 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 a notice in the Federal Register with the date

and location of the meeting after the comment period expires for this

proposed rule. 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.

National Environmental Policy Act

This proposed rule would be categorically excluded from the

requirements of 44 CFR Part 10, Environmental Consideration. We have

not prepared an environmental impact assessment.

Executive Order 12866, Regulatory Planning and Review

This proposed rule would not be a significant regulatory action

within the meaning of Sec. 2(f) of E.O. 12866 of September 30, 1993, 58

FR 51735. To the extent possible, this proposed rule adheres to the

regulatory principles set forth in E.O. 12866 and the Office of

Management and Budget has not reviewed it under the provisions of E.O.

12866.

Paperwork Reduction Act

This proposed rule would not contain a collection of information

requirement as described in section 3504(h) of the Paperwork Reduction

Act.

Executive Order 12612, Federalism

This proposed rule would not involve any policies that have

federalism implications under E.O. 12612, Federalism, dated October 26,

1987.

Executive Order 12778, Civil Justice Reform

This proposed rule would meet the applicable standards of

Sec. 2(b)(2) of E.O. 12778.

Regulatory Flexibility Act

I certify that this proposed rule is exempt from the requirements

of the Regulatory Flexibility Act because it would make minor and

technical amendments to the National Flood Insurance Program. This

proposed rule would not contain any significant substantive changes

from FEMA's present Write-Your-Own expense allowance regulations and

would not substantially change how FEMA determines the Write-Your-Own

expense allowance. The Regulatory Flexibility Act does not apply to

this proposed rule and no regulatory analysis has been prepared.

List of Subjects in 44 CFR 62

Flood insurance, Reporting and recordkeeping requirements.

Accordingly, we propose to amend 44 CFR 62, Appendix A, as follows:

PART 62--SALE OF INSURANCE AND ADJUSTMENT OF CLAIMS

1. The authority citation to Part 62 continues to read:

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.

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2. We revise Article III.B of Appendix A to Part 62, to read as

follows:

Appendix A to Part 62--Federal Emergency Management Agency, Federal

Insurance Administration, Financial Assistance/Subsidy Arrangement

* * * * *

Article III--Loss Costs, Expenses, Expense Reimbursement, and Premium

Refunds

* * * * *

B. The Company will be entitled to withhold as operating and

administrative expenses, other than agents' or brokers' commissions,

an amount from the Company's written premium on the policies covered

by this Arrangement in reimbursement of all of the Company's

marketing, operating and administrative expenses, except for

allocated and unallocated loss adjustment expenses described in C.

of this article. This amount will equal the sum of the average of

industry expense ratios for ``Other Acq.'' ``Gen. Exp.'' and

``Taxes'' calculated by aggregating premiums and expense amounts for

each of five property coverages using direct, as opposed to net,

premium and expense information to derive weighted average expense

ratios. The five property coverages we will include are Fire, Allied

Lines, Farmowners Multiple Peril, Homeowners Multiple Peril, and

Commercial Multiple Peril (non-liability portion). We will use data

for the property/casualty industry published, as of March 15 of the

prior Arrangement year, in Part III of the Insurance Expense Exhibit

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

The Company will be entitled to 15 percent of the Company's

written premium on the policies covered by this Arrangement as the

commission allowance to meet commissions and/or salaries of their

insurance agents, brokers, or other entities producing qualified

flood insurance applications and other related expenses.

The amount of expense allowance retained by the company may be

increased a maximum of 1.3 percent, depending on the extent to which

the company meets the marketing goals for the Arrangement year

contained in marketing guidelines established pursuant to Article

II.G. The amount of any increase will be paid to the company after

the end of the Arrangement year.

The Company, with the consent of the Administrator as to terms

and costs, will be entitled to use the services of a national rating

organization, licensed under state law, to help the FIA undertake

and carry out such studies and investigations on a community or

individual risk basis, and to determine equitable and accurate

estimates of flood insurance risk premium rates as authorized under

the National Flood Insurance Act of 1968, as amended. The Company

will be reimbursed for the charges or fees for such services under

the provisions of the WYO Accounting Procedures Manual.

* * * * *

Dated: November 4, 1998.

Jo Ann Howard,

Federal Insurance Administrator.

[FR Doc. 98-30410 Filed 11-12-98; 8:45 am]

BILLING CODE 6718-03-U