98-30410. National Flood Insurance Program; Determining the Write-Your-Own Expense Allowance

[Federal Register Volume 63, Number 219 (Friday, November 13, 1998)]
[Proposed Rules]
[Pages 63432-63434]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30410]


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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) [phone], (email) 
[e-mail].

FOR FURTHER INFORMATION CONTACT: Claudia I. Murphy, Federal Emergency 
Management Agency, Federal Insurance Administration, 500 C Street SW., 
room 429, Washington, DC 20472, [phone], (email) 
[e-mail].

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.


[[Page 63434]]


    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