National Flood Insurance Program (NFIP); Assistance to Private Sector Property Insurers

FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 62

RIN 3067-AC95

National Flood Insurance Program (NFIP); Assistance to Private

Sector Property Insurers

AGENCY: Federal Emergency Management Agency (FEMA).

ACTION: Final rule.

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SUMMARY: We (the Federal Insurance Administration of FEMA) are changing

the Financial Control Plan (Appendix B of 44 CFR Part 62) that sets

standards for evaluating the performance of private insurance companies

participating in the Write Your Own program. These

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changes are to streamline and simplify the regulations of the National

Flood Insurance Program. This rule is part of an agency-wide initiative

by the Federal Emergency Management Agency to simplify regulations for

easier use by our customers. The changes are also be consistent with

the approach we adopted several years ago to streamline the arrangement

for the WYO program and to place operational details in a technical

operations manual rather than in the agreement itself between the

Government and WYO companies.

EFFECTIVE DATE: December 1, 1999.

FOR FURTHER INFORMATION CONTACT: Edward L. Connor, Federal Emergency

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

Washington, DC 20472, 202-646-3429, (facsimile) 202-646-3445, (email)

Edward.C[email protected].

SUPPLEMENTARY INFORMATION: On August 5, 1999, we proposed a rule at 64

FR 42633 that would streamline and simplify the Financial Control Plan

that private insurance companies must follow as part of their financial

assistance arrangement with FEMA under the Write Your Own component of

the National Flood Insurance Program. The proposed streamlining

involved eliminating operational details from the text of the Financial

Control Plan. This gives the Government and its industry partners the

flexibility to make operational adjustments and corrections more

efficiently and more quickly while retaining the broad framework

necessary for sound financial controls.

Comments

We received one set of comments during the comment period from a

company currently participating in the Write Your Own program. The

company generally supports the proposed changes to the Financial

Control Plan but asked for clarification on several points.

Consolidated Financial Statements Audit

The company offered ``conditional support'' for the changes on the

understanding that we would eliminate the Consolidated Financial

Statements Audit. The company concluded that ``if that audit is

continued, then the rule is overly burdensome and the system of reviews

is redundant.''

The Consolidated Financial Statements Audit and the planned

operation reviews are independent of each other and serve separate

needs. The Consolidated Financial Statements Audit is a financial audit

for the program conducted by FEMA's Inspector General (IG) and required

by the Chief Financial Officers Act of 1990, as amended by the

Government Management Reform Act of 1994. The scope of this

independent, mandatory audit includes a company's financial management

and its controls for receiving and disposing of money connected with a

Federal program. The overall goal of this audit is to prevent fraud,

waste, and abuse. The Consolidated Financial Statements Audit is not an

optional audit, and it has a specific financial management and

statutory purpose. The operation reviews that we conduct for

participating Write Your Own companies on the other hand focus on a

company's performance in specific areas of the Write Your Own program,

namely, claims, underwriting, marketing, and customer service.

In summary, the Consolidated Financial Statements Audit, the FEMA

IG's audit, and our program reviews are both appropriate, do not

duplicate each other, and serve separate needs.

Reports to the Standards Committee

The company expressed concern about confidentiality and the

protection of trade secrets when we file a report of an operation

review to the Standards Committee since the Standards Committee

consists of competitors of the Write Your Company which is the subject

of the report. The commenter recommended that ``auditors should only

file reports on those companies failing the Operation Review. In

addition, the auditors should not include in the report any information

which is of a proprietary nature or trade secret.'' We agree with this

recommendation.

We will present reports of operation reviews in summary form to the

Standards Committee. These summary reports will identify trends but not

companies by name. Instead, we will identify common or typical errors

that we discovered during operation reviews and coordinate the

appropriate remedy with the Standards Committee, such as improved

training or guidance materials. We will, however, identify for the

Standards Committee companies that fail the operation review and that

will be the subject of an audit for cause. In these cases, we will

continue to rely, as we have since the program's inception, on the

ethics and professional standards of the members of the Standards

Committee to safeguard the confidentiality of and any proprietary

information about a company that has failed an operation review.

Penalties for Poor Performance

The commenter also expressed concern that the ``penalties are

undefined'' for companies that fail the operation review. The purpose

of operation reviews is for us to provide technical assistance to

individual companies so that they may improve their underwriting,

claims, marketing, and customer service operations. We will present to

the Standards Committee summaries of common errors and trends that

surface during the operation reviews so that we may select the most

appropriate program-wide remedy, for example, training, guidance, etc.

If we find that a company's performance warrants it, however, we will

recommend an audit for cause and the deficient company would be subject

to any penalties that are appropriate from that separate and

independent mechanism.

Opportunity for Further Review and Comment

The commenter stated that it was important for participating

companies to know ``how the Operation Review will be conducted and the

benchmarks for passage or failure of the review.'' We agree that

companies need to have more specific information about the operation

reviews, which are included in a companion document titled ``The Write

Your Own Program Financial Control Plan Requirements and Procedures.''

We will distribute during the first quarter of the 1999-2000

Arrangement year a draft version of this document for review and

comment to all companies participating in the Write Your Own program.

We have postponed the effective date of this rule until December 1,

1999 to allow us to consider all comments on the companion document for

this rule before either one becomes final. Until that date, we will

operate under the existing Financial Control Plan found at 44 CFR Part

62, Appendix B.

National Environmental Policy Act

This rule is categorically excluded from the requirements of 44 CFR

Part 10, Environmental Consideration. We have not prepared an

environmental assessment.

Executive Order 12866, Regulatory Planning and Review

This 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, and the

Office of Management and Budget has not reviewed it. Nevertheless, this

rule adheres to the regulatory principles set forth in E.O. 12866.

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Paperwork Reduction Act

In accordance with the provisions of the Paperwork Reduction Act of

1995, 44 U.S.C. 3501 et seq., we have submitted to the Office of

Management and Budget (OMB) the collections of information in this

final rule, and OMB has approved them. 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, DC

20472. The approved collections of information are:

OMB Number 3067-0169, Write Your Own (WYO) Program (expires March

31, 2002). 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 44CFR, 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.

Executive Order 12612, Federalism

This rule involves no policies that have federalism implications

under Executive Order 12612, Federalism, dated October 26, 1987.

Executive Order 12778, Civil Justice Reform

This rule meets the applicable standards of section 2(b)(2) of

Executive Order 12778.

List of Subjects in 44 CFR Part 62

Claims, Flood insurance.

Accordingly, we amend 44 CFR part 62 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., p.376.

2. We amend Sec. 62.23 by redesignating paragraphs (j)(2) through

(j)(6) as paragraphs (j)(3) through (j)(7), and by revising paragraph

(j)(1) and adding new paragraph (j)(2) to read as follows:

Sec. 62.23 WYO Companies authorized.

* * * * *

(j) * * *

(1) Have a biennial audit of the flood insurance financial

statements conducted by an independent Certified Public Accountant

(CPA) firm at the Company's expense to ensure that the financial data

reported to us accurately represents the flood insurance activities of

the Company. The CPA firm must conduct its audits in accordance with

the generally accepted auditing standards (GAAS) and Government

Auditing Standards issued by the Comptroller General of the United

States (commonly known as ``yellow book'' requirements). The Company

must file with us (the Federal Insurance Administration) a report of

the CPA firm's detailed biennial audit, and, after our review of the

audit report, we will convey our determination to the Standards

Committee.

(2) Participate in a WYO Company/FIA Operation review. We will

conduct a review of the WYO Company's flood insurance claims,

underwriting, customer service, marketing, and litigation activities at

least once every three (3) years. As part of these reviews, we will

reconcile specific files with a listing of transactions submitted by

the Company under the Transaction Record Reporting and Processing

(TRPP) Plan (Part 5). We will file a report of the Operation Review

with the Standards Committee.

* * * * *

3. We revise Appendix B to Part 62--National Flood Insurance

Program 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.

(a) In general. Under the Write Your Own (WYO) Program, we (the

Federal Insurance Administration (FIA), Federal Emergency Management

Agency (FEMA)) may enter into an arrangement with individual private

sector insurance companies licensed to engage in the business of

property insurance. The arrangement allows these companies--using

their customary business practices--to offer flood insurance

coverage to eligible property owners. To assist companies in

marketing flood insurance coverage, the Federal Government will be a

guarantor of flood insurance coverage for WYO policies issued under

the WYO Arrangement. To account for and ensure appropriate spending

of any taxpayer funds, the WYO companies and we will implement this

Financial Control Plan (Plan). Only the Administrator may approve

any departures from the requirements of this Plan.

(b) Financial Control Plan. (1) The WYO Companies are subject to

audit, examination, and regulatory controls of the various States.

Additionally, the operating department of an insurance company is

customarily subject to examinations and audits performed by the

company's internal audit or quality control departments, or both,

and independent Certified Public Accountant (CPA) firms. This Plan

will use to the extent possible the findings of these examinations

and audits as they pertain to business written under the WYO

Program.

(2) This 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 the Company's files by us or

our 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.

(c) Standards Committee established. (1) We establish in this

Plan a Standards Committee for the WYO Program to oversee the

performance of WYO companies under this Plan and to recommend

appropriate remedial actions to the Administrator. The Standards

Committee will review and recommend to the Administrator remedies

for any adverse action arising from the implementation of the

Financial Control Plan. Adverse actions include, but are not limited

to, not renewing a particular company's WYO Arrangement.

(2) The Administrator appoints the members of the Standards

Committee, which consists of five (5) members from FIA, one (1)

member from FEMA's Office of Financial Management, and one (1)

member from each of the six (6) designated WYO Companies, pools, or

other entities.

(3) A WYO company must--

(A) Have a biennial audit of the flood insurance financial

statements conducted by a CPA firm at the Company's expense to

ensure that the financial data reported to us accurately represents

the flood insurance activities of the Company. The CPA firm must

conduct its audits in accordance with generally accepted auditing

standards (GAAS) and the Government Auditing Standards issued by the

Comptroller General of the United States (commonly known as ``yellow

book'' requirements). The Company must file with us a report of the

CPA firm's detailed biennial audit, and, after our review of the

audit report, we will convey our determination to the Standards

Committee.

(B) Participate in a WYO Company/FIA Operation review. We will

conduct a review of the WYO Company's flood insurance claims,

underwriting, customer service, marketing, and litigation activities

at least once every three (3) years. As part of these reviews, we

will reconcile specific files with a listing of transactions

submitted by the Company under the Transaction Record Reporting and

Processing Plan (Part 5). We will file a report of the Operation

Review with the Standards Committee (Part 7).

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

Transaction Record Reporting and Processing (TRRP) Plan and the WYO

Accounting Procedures Manual.

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The National Flood Insurance Program's (NFIP) Bureau and Statistical

Agent will analyze the transactions reported under the TRRP Plan and

submit a monthly report to the WYO company and to us. The analysis

will cover the timeliness of the WYO submissions, the disposition of

transactions that do not pass systems edits, and the reconciliation

of the totals generated from transaction reports with those

submitted on the WYO Company's reports. (Parts 2 and 6).

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

Letter of Credit matters.

(E) Cooperate with us in the implementation of a claims

reinspection program (Part 3).

(F) Cooperate with us in the verification of risk rating

information.

(G) Cooperate with FEMA's Office of Inspector General on matters

pertaining to fraud.

(d) This Plan incorporates by reference a separate document,

``The Write Your Own Program Financial Control Plan Requirements and

Procedures,'' that contains the following parts, each of which is

incorporated by reference into and is applicable to the Financial

Control Plan:

(1) Part 1--Financial Audits, Audits for Cause, and State

Insurance Department Audits;

(2) Part 2--Transaction Record Reporting and Processing Plan

Reconciliation Procedures;

(3) Part 3--Claims Reinspection Program;

(4) Part 4--Report Certifications and Signature Authorization;

(5) Part 5--Transaction Record Reporting and Processing Plan;

(6) Part 6--Write Your Own (WYO) Accounting Procedures Manual;

and

(7) Part 7--Operation Review Procedures.

(e) Interested members of the public may obtain a copy of ``The

Write Your Own Program Financial Control Plan Requirements and

Procedures'' by contacting the FEMA Distribution Center, P.O. Box

2012, Jessup, MD 20794.''

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

Insurance'')

Dated: October 12, 1999.

Edward T. Pasterick,

Acting Administrator, Federal Insurance Administration.

[FR Doc. 99-27009 Filed 10-15-99; 8:45 am]

BILLING CODE 6718-03-P