[Federal Register Volume 61, Number 191 (Tuesday, October 1, 1996)]
[Rules and Regulations]
[Pages 51217-51226]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25088]


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FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 62

RIN 3067-AC40


National Flood Insurance Program; Audit Program Revision

AGENCY: Federal Insurance Administration (FEMA).

ACTION: Final rule.

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SUMMARY: The Federal Insurance Administration (FIA) has amended its 
regulations regarding the manner in which its audits are conducted 
under the National Flood Insurance Program's (NFIP) Write Your Own 
(WYO) Program. The regulations develop a comprehensive, less 
burdensome, more efficient audit program. FIA anticipates that these 
revisions will result in greater economy of resources and new savings 
to the NFIP public.

EFFECTIVE DATE: October 31, 1996.

FOR FURTHER INFORMATION CONTACT: Roland E. Holland, Federal Insurance 
Administration, Federal Emergency Management Agency, 500 C Street SW., 
Washington, DC 20472, (tel.) (202) 646-3439.

SUPPLEMENTARY INFORMATION: Recently, after reviewing the programs and 
services provided to the NFIP public, the Federal Insurance 
Administrator concluded that the services currently being provided 
could be enhanced and improved by revising the audit procedures. As a 
result, FIA will discontinue the self-audit program, as well as the 
triennial claims and underwriting operations reviews. The triennial 
audit will be revised to be conducted on a biennial basis, and expanded 
to encompass greater claims and underwriting audits that Certified 
Public Accountant (CPA) firms, selected by the WYO companies, will 
conduct at the companies' expense. These changes are being made to 
facilitate improved management control over the audit process. FIA 
believes these efforts will result in appreciable program savings to 
both the WYO companies and the FIA. FIA published in the Federal 
Register a proposed rule to implement these changes on February 1, 
1996, 61 FR 3635-3644. A 45-day public comment period expired on March 
18, 1996. However, because FIA only received one set of comments, the 
comment period was kept open to allow other interested parties 
additional time to respond. Since that time, we have not received any 
further comments. We concur with the six comments received and, 
therefore, the final rule reflects these changes, as well as other 
changes made for consistency and for continuity.
    Reference in proposed rule: Sec. 62.23(h)(1). ``To expedite 
business growth, the WYO Company will encourage its present property 
insurance policyholders to purchase flood insurance and to transfer to 
the WYO company, at the time of policy renewal, business placed by its 
producers with the NFIP Bureau and Statistical Agent.''

[[Page 51218]]

    Comment: This section contains information that appears 
inconsistent with the present intent of the WYO program and NFIP 
Servicing Agent contracts. Since there is no longer a rollover vehicle 
to transfer policies from the NFIP to a WYO Company, the references to 
this appear in error. This section also refers to ``business placed by 
its producers with the NFIP Bureau and Statistical Agent''. However, 
the NFIP Bureau and Statistical Agent does not handle policies directly 
for business producers.
    Revision in final rule: Sec. 62.23(h)(1). ``To expedite business 
growth, the WYO company will encourage its present property insurance 
policyholders to purchase flood insurance through the NFIP WYO 
program.''
    Reference in proposed rule: Sec. 62.23(h)(4). ``The WYO company is 
expected to meet the recording and reporting requirements of the WYO 
Transaction Record Reporting and Processing Plan. Transactions reported 
by the WYO company under the WYO Transaction Record Reporting and 
Processing Plan will be analyzed by the NIP Servicing Agent * * *.''
    Comment: The acronym ``NIP'' at the end of the last sentence is 
incorrect.
    Revision in final rule: Sec. 62.23(h)(4). ``The WYO company is 
expected to meet the recording and reporting requirements of the WYO 
Transaction Record Reporting and Processing Plan. Transactions reported 
by the WYO company under the WYO Transaction Record Reporting and 
Processing Plan will be analyzed by the NFIP Bureau and Statistical 
Agent * * *.''
    Reference in proposed rule: Sec. 62.23(h)(8). ``NFIP business will 
not be assumed by the WYO companies at any time other than at renewal 
time, at which time the insurance producer may submit the business to 
the WYO company as new business. However, it is permissible to cancel 
and rewrite flood policies to obtain concurrent expiration dates with 
other policies covering the property. Where the insurance agent or 
producer of record of a flood insurance policy issued by the 
Administrator has authorized the NFIP, in writing, to release policy 
information for the conversion of the NFIP coverage to a designated WYO 
company represented by the agent or producer of record, in order to 
facilitate policy issuance and reduce administrative burdens upon the 
NFIP and WYO companies and their agents and producers, countersignature 
requirements in the several States shall not apply.''
    Comment: This section contains references to a ``conversion of the 
NFIP coverage to a designated WYO Company * * *'' which appears to be 
former practice of rollover conversion.
    Revision in final rule: Sec. 62.23(h)(8). ``NFIP business will not 
be assumed by the WYO companies at any time other than at renewal time, 
at which time the insurance producer may submit the business to the WYO 
company as new business. However, it is permissible to cancel and 
rewrite flood policies to obtain concurrent expiration dates with other 
policies covering the property.''
    Reference in proposed rule: Sec. 62.23(I)(1). ``Under the terms of 
the Arrangement set forth at Appendix A of this part, WYO companies 
will adjust claims in accordance with general Company standards, guided 
by NFIP Claims manuals. The Arrangement also provides that claim 
adjustments shall be binding upon the FIA. For example, the entire 
responsibility for providing a proper adjustment for both combined wind 
and water claims and flood-alone claims is the responsibility of the 
WYO company.''
    Comment: The Appendix A referenced is Article II, Secs. C.1.0, 
C.2.0, C.3.0, and C.4.0, the requirements of the Single Adjuster 
Program. The example given in the last paragraph appears to be 
inconsistent with these changes.
    Revision in final rule: Sec. 62.23(I)(1). ``Under the terms of the 
Arrangement set forth at Appendix A of this part, WYO companies will 
adjust claims in accordance with general company standards, guided by 
the NFIP Claims manuals. The Arrangement also provides that claim 
adjustments shall be binding upon the FIA. For example, the entire 
responsibility for providing a proper adjustment of flood-alone claims 
is the responsibility of the WYO company. The responsibility for 
providing a proper adjustment for combined wind and water claims is to 
be conducted in concert with the Single Adjuster provisions listed in 
Appendix A.''
    Reference in proposed rule: p. 3639, Appendix B, Part 1, para. 
A.4.:
    ``To facilitate financial reconciliation, transaction records which 
do not pass various edits employed by the NEIP to review the quality of 
submitted data will be so identified, but will be maintained whenever 
possible until the error is corrected by the company in order to 
reconcile all financial data submitted to the NFIP.''
    Comment: The acronym ``NEIP'' in the first sentence is a 
typographical error.
    Revision in final rule: Part (1)(A)(4) ``To facilitate financial 
reconciliation, transaction records which do not pass various edits 
employed by the NFIP to review the quality of submitted data will be so 
identified, but will be maintained whenever possible until the error is 
corrected by the company in order to reconcile all financial data 
submitted to the NFIP.''
    Reference in proposed rule: page 3642, Appendix B, Part 3, para. 
B.1.e.: ``Problems with Rollover from National Flood Insurance Program 
(NFIP) to WYO (duplication of coverage, timeliness of changeover).''
    Comment: The Rollover provision no longer is available to WYO 
companies.
    Revision in final rule: We deleted this reference entirely and 
redesignated paragraphs 1.f. and 1.g. as paragraphs 1.e. and 1.f., 
respectively.
    Reference in proposed rule: Appendix B, Part 3, para. B.3.j.: 
``Repeated failure to respond fully in a timely manner to questions 
raised by the NFIP or its servicing agent concerning monthly financial 
reporting.''
    Comment: The use of the phrase ``its servicing agent'' is somewhat 
misleading since the October 1, 1993 contract changes that named a 
Bureau and Statistical Agent and an NFIP Servicing Agent as separate 
contracts.
    Revision in final rule: Appendix B, Part 3, para. B.3.j.: 
``Repeated failure to respond fully in a timely manner to questions 
raised by the NFIP Bureau and Statistical Agent concerning monthly 
financial reporting.''

National Environmental Policy Act

    This final rule is categorically excluded from the requirements of 
44 CFR Part 10, Environmental Consideration. No environmental impact 
assessment has been prepared.

Executive Order 12898, Environmental Justice

    The socioeconomic conditions relating to this final rule were 
reviewed and a finding was made that no disproportionately high and 
adverse effect on minority or low income populations result from this 
final rule.

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, 1983, 58 FR 51735, 
and has not been reviewed by the Office of Management and Budget (OMB). 
Nonetheless, this final rule adheres to the regulatory principles set 
forth in E.O. 12866.

Paperwork Reduction Act

    In accordance with the provisions of the Paperwork Reduction Act of 
1995, 44 U.S.C. 3501 et seq., the collections of information contained 
in this final rule

[[Page 51219]]

have been submitted to and approved by the Office of Management and 
Budget. 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, D.C. 20472. The approved collections of 
information are:
    OMB Number 3067-0169, Write Your Own (WYO) Program. 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 44 CFR, 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.
    OMB Number 3067-0229, Mortgage Portfolio Protection Program (MPPP). 
Lending institutions, mortgage servicing companies and others servicing 
mortgage loan portfolios can bring their mortgage loan portfolios into 
compliance with the flood insurance purchase requirements of the Flood 
Disaster Protection Act of 1973. The number of respondents is estimated 
at 6,526. The burden estimates per respondent are as follows: 150 hours 
for WYO companies to set up initial operations under the MPPP; 30 
minutes per lender to sign an agreement with a WYO company to 
participate in the program; 30 minutes per WYO company to notify each 
mortgagor (3 notices at 10 minutes per notice); and 30 minutes for each 
mortgagor to ask questions and respond to the notices.

Executive Order 12612

    This final rule involves no policies that have federalism 
implications under Executive Order 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 
Executive Order 12778.

List of Subjects in 44 CFR Part 62

    Flood insurance.

    Accordingly, 44 CFR part 62 is amended 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., 376.

    2. Section 62.23 is revised to read as follows:


Sec. 62.23   WYO Companies authorized.

    (a) Pursuant to section 1345 of the Act, the Administrator may 
enter into arrangements with individual private sector property 
insurance companies whereby such companies may offer flood insurance 
coverage under the Program to eligible applicants for such insurance, 
including policyholders insured by them under their own property 
business lines of insurance pursuant to their customary business 
practices including their usual arrangements with agents and producers, 
in any State in which such WYO Companies are licensed to engage in the 
business of property insurance. Arrangements entered into by WYO 
Companies under this subpart shall be in the form and substance of the 
standard arrangement, entitled ``Financial Assistance/Subsidy 
Arrangement'', a copy of which is included in appendix A of this part 
and made a part of these regulations.
    (b) Any duly licensed insurer so engaged in the Program shall be a 
WYO Company.
    (c) A WYO Company is authorized to arrange for the issuance of 
flood insurance in any amount within the maximum limits of coverage 
specified in Sec. 61.6 of this subchapter, as Insurer, to any person 
qualifying for such coverage under parts 61 and 64 of this subchapter 
who submits an application to the WYO Company; coverage shall be issued 
under the Standard Flood Insurance Policy.
    (d) A WYO Company issuing flood insurance coverage shall arrange 
for the adjustment, settlement, payment and defense of all claims 
arising from policies of flood insurance it issues under the Program, 
based upon the terms and conditions of the Standard Flood Insurance 
Policy.
    (e) In carrying out its functions under this subpart, a WYO Company 
shall use its own customary standards, staff and independent contractor 
resources, as it would in the ordinary and necessary conduct of its own 
business affairs, subject to the Act and regulations prescribed by the 
Administrator under the Act.
    (f) To facilitate the marketing of flood insurance coverage under 
the Program to policyholders of WYO Companies, the Administrator will 
enter into arrangements with such companies whereby the Federal 
Government will be a guarantor in which the primary relationship 
between the WYO Company and the Federal Government will be one of a 
fiduciary nature, i.e., to assure that any taxpayer funds are accounted 
for and appropriately expended. In furtherance of this end, the 
Administrator has established ``A Plan to Maintain Financial Control 
for Business Written Under the Write Your Own Program'', a copy of 
which is included in appendix B of this part and made a part of these 
regulations.
    (g) WYO Companies shall not be agents of the Federal Government and 
are solely responsible for their obligations to their insureds under 
any flood insurance policies issued under agreements entered into with 
the Administrator.
    (h) To facilitate the underwriting of flood insurance coverage by 
WYO Companies, the following procedures will be used by WYO Companies:
    (1) To expedite business growth, the WYO Company will encourage its 
present property insurance policyholders to purchase flood insurance 
through the NFIP WYO Program.
    (2) To conform its underwriting practices to the underwriting rules 
and rates in effect as to the NFIP, the WYO Company will establish 
procedures to carry out the NFIP rating system and provide its 
policyholders with the same coverage as is afforded under the NFIP.
    (3) The WYO Company may follow its customary billing practices to 
meet the Federal rules on the presentment of premium and net premium 
deposits to a Letter of Credit bank account authorized by the 
Administrator and reduction of coverage when an underpayment is 
discovered.
    (4) The WYO Company is expected to meet the recording and reporting 
requirements of the WYO Transaction Record Reporting and Processing 
Plan. Transactions reported by the WYO Company under the WYO 
Transaction Record Reporting and Processing Plan will be analyzed by 
the NFIP Bureau & Statistical Agent. A monthly report will be submitted 
to the WYO Company and the FIA. The analysis will cover the timeliness 
of WYO Company submissions, the disposition of transactions that have 
not passed systems edits and the reconciliation of the totals generated 
from transaction reports with those submitted on the WYO Company's 
reconciliation reports.

[[Page 51220]]

    (5) If a WYO Company rejects an application from an agent or a 
producer, the agent or producer shall be notified so that the business 
can be placed through the NFIP Servicing Agent, or another WYO Company.
    (6) Flood insurance coverage will be issued by the WYO Company on a 
separate policy form and will not be added, by endorsement, to the 
Company's other property insurance forms.
    (7) Premium payment plans can be offered by the WYO Company so long 
as the net premium depository requirements specified under the NFIP/WYO 
Program accounting procedures are met. A cancellation by the WYO 
Company for non-payment of premium will not produce a pro rata return 
of the net premium deposit to the WYO Company.
    (8) NFIP business will not be assumed by the WYO Companies at any 
time other than at renewal time, at which time the insurance producer 
may submit the business to the WYO Company as new business. However, it 
is permissible to cancel and rewrite flood policies to obtain 
concurrent expiration dates with other policies covering the property.
    (i) To facilitate the adjustment of flood insurance claims by WYO 
Companies, the following procedures will be used by WYO Companies.
    (1) Under the terms of the Arrangement set forth at appendix A of 
this part, WYO Companies will adjust claims in accordance with general 
Company standards, guided by NFIP Claims manuals. The Arrangement also 
provides that claim adjustments shall be binding upon the FIA. For 
example, the entire responsibility for providing a proper adjustment 
for both combined wind and water claims and flood-alone claims is the 
responsibility of the WYO Company. The responsibility for providing a 
proper adjustment for combined wind and water claims is to be conducted 
by listing in concert with the Single Adjuster provisions listed in 
appendix A.
    (2) The WYO Company may use its staff adjusters, independent 
adjusters, or both. It is important that the Company's Claims 
Department verifies the correctness of the coverage interpretations and 
reasonableness of the payments recommended by the adjusters.
    (3) An established loss adjustment Fee Schedule is part of the 
Arrangement and cannot be changed during an Arrangement year. This is 
the expense allowance to cover costs of independent or WYO Company 
adjusters.
    (4) The normal catastrophe claims procedure currently operated by a 
WYO Company should be implemented in the event of a claim catastrophe 
situation. Flood claims will be handled along with other catastrophe 
claims.
    (5) It will be the WYO Company's responsibility to try to detect 
fraud (as it does in the case of property insurance) and coordinate its 
findings with FIA.
    (6) Pursuant to the Arrangement, the responsibility for defending 
claims will be upon the Write Your Own Company and defense costs will 
be part of the unallocated or allocated claim expense allowance, 
depending on whether a staff counsel or an outside attorney handles the 
defense of the matter. Claims in litigation will be reported by WYO 
Companies to FIA upon joinder of issue and FIA may inquire and be 
advised of the disposition of such litigation.
    (7) The claim reserving procedures of the individual WYO Company 
can be used.
    (8) Regarding the handling of subrogation, if a WYO Company prefers 
to forego pursuit of subrogation recovery, it may do so by referring 
the matter, with a complete copy of the claim file, to FIA. Subrogation 
initiatives may be truncated at any time before suit is commenced 
(after commencing an action, special arrangement must be made). FIA, 
after consultation with FEMA's Office of the General Counsel (OGC), 
will forward the cause of action to OGC or to the NFIP Bureau and 
Statistical Agent for prosecution. Any funds received will be 
deposited, less expenses, in the National Flood Insurance Fund.
    (9) Special allocated loss adjustment expenses will include such 
items as: nonstaff attorney fees, engineering fees and special 
investigation fees over and above normal adjustment practices.
    (10) The customary content of claim files will include coverage 
verification, normal adjuster investigations, including statements 
where necessary, police reports, building reports and investigations, 
damage verification and other documentation relevant to the adjustment 
of claims under the NFIP's and the WYO Company's traditional claim 
adjustment practices and procedures. The WYO Company's claim examiners 
and managers will supervise the adjustment of flood insurance claims by 
staff and independent claims adjusters.
    (11) The WYO Company will extend reasonable cooperation to FEMA's 
Office of the General Counsel on matters pertaining to litigation and 
subrogation, under paragraph (i)(8) of this section.
    (j) To facilitate establishment of financial controls under the WYO 
Program, the WYO Company will:
    (1) Select a Certified Public Accountant (CPA) firm to conduct 
biennial audits of the financial, claims and underwriting records of 
the company. These audits shall be performed in accordance with the 
Government Auditing Standards issued by the Comptroller General of the 
United States (commonly known as the ``yellow book''). FIA further 
requires that pre-selected policy and claims files the CPA firm is 
asked to review are in addition to any files that the auditors may 
select for their sample. A report of the detailed biennial audit 
conducted will be filed with the FIA which, after a review of the audit 
report, will convey its determination to the Standards Committee. The 
CPA firm chosen to conduct the audit is expected to use qualified, 
skilled persons with the requisite background in property insurance and 
a knowledge of the NFIP. Persons performing claims audits are expected 
to possess claims expertise which would allow them to ascertain whether 
the scope of damage was proper, and if all applicable NFIP policy 
provisions were properly followed. Persons performing underwriting 
audits should be able to ascertain if the risk has been properly rated, 
which would necessitate being aware of special NFIP rating situations, 
such as elevated buildings.
    (2) Meet the recording and reporting requirements of the WYO 
Transaction Record Reporting and Processing Plan and the WYO Accounting 
Procedures Manual. Transactions reported to the National Flood 
Insurance Program's (NFIP's) Bureau and Statistical Agent by the WYO 
Company under the WYO Transaction Record Reporting and Processing Plan 
and the WYO Accounting Procedures Manual will be analyzed by the Bureau 
and Statistical Agent and a monthly report will be submitted to the WYO 
Company and the FIA. The analysis will cover the timeliness of the WYO 
Company submissions, the disposition of transactions which do not pass 
systems edits and the reconciliation of the totals generated from 
transaction reports with those submitted on WYO Company reconciliation 
reports.
    (3) Cooperate with FEMA's Office of Financial Management on Letter 
of Credit matters.
    (4) Cooperate with FIA in the implementation of a claims 
reinspection program.
    (5) Cooperate with FIA in the verification of risk rating 
information.

[[Page 51221]]

    (6) Cooperate with FEMA's Office of the Inspector General on 
matters pertaining to fraud.
    (k) To facilitate the operation of the WYO Program and in order 
that a WYO Company can use its own customary standards, staff and 
independent contractor resources, as it would in the ordinary and 
necessary conduct of its own business affairs, subject to the Act, the 
Administrator, for good cause shown, may grant exceptions to and 
waivers of the regulations contained in this title relative to the 
administration of the NFIP.
    (l)(1) WYO Companies may, on a voluntary basis, elect to 
participate in the Mortgage Portfolio Protection Program (MPPP), under 
which they can offer, as a last resort, flood insurance at special high 
rates, sufficient to recover the full cost of this program in 
recognition of the uncertainty as to the degree of risk a given 
building presents due to the limited underwriting data required, to 
properties in a lending institution's mortgage portfolio to achieve 
compliance with the flood insurance purchase requirements of the Flood 
Disaster Protection Act of 1973. Flood insurance policies under the 
MPPP may only be issued for those properties that:
    (i) Are determined to be located within special flood hazard areas 
of communities that are participating in the NFIP, and
    (ii) Are not covered by a flood insurance policy even after a 
required series of notices have been given to the property owner 
(mortgagor) by the lending institution of the requirement for obtaining 
and maintaining such coverage, but the mortgagor has failed to respond.
    (2) WYO Companies participating in the MPPP must provide a detailed 
implementation package to any lending institution that, on a voluntary 
basis, chooses to participate in the MPPP to ensure the lending 
institution has full knowledge of the criteria in that program and must 
obtain a signed receipt for that package from the lending institution. 
Participating WYO Companies must also maintain evidence of compliance 
with paragraph (l)(3) of this section for review during the audits and 
reviews required by the WYO Financial Control Plan contained in 
appendix B of this part.
    (3) The mortgagor must be protected against the lending 
institution's arbitrary placing of flood insurance for which the 
mortgagor will be billed by being sent three notification letters as 
described in paragraphs (l)(4) through (6) of this section.
    (4) The initial notification letter must:
    (i) State the requirements of the Flood Disaster Protection Act of 
1973, as amended;
    (ii) Announce the determination that the mortgagor's property is in 
an identified special flood hazard area as delineated on the 
appropriate FEMA map, necessitating flood insurance coverage for the 
duration of the loan;
    (iii) Describe the procedure to follow should the mortgagor wish to 
challenge the determination;
    (iv) Request evidence of a valid flood insurance policy or, if 
there is none, encourage the mortgagor to obtain a Standard Flood 
Insurance Policy (SFIP) promptly from a local insurance agent (or WYO 
Company);
    (v) Advise that the premium for a MPPP policy is significantly 
higher than a conventional SFIP policy and advise as to the option for 
obtaining less costly flood insurance; and
    (vi) Advise that a MPPP policy will be purchased by the lender if 
evidence of flood insurance coverage is not received by a date certain.
    (5) The second notification letter must remind the mortgagor of the 
previous notice and provide essentially the same information.
    (6) The final notification letter must:
    (i) Enclose a copy of the flood insurance policy purchased under 
the MPPP on the mortgagor's (insured's) behalf, together with the 
Declarations Page,
    (ii) Advise that the policy was purchased because of the failure to 
respond to the previous notices, and
    (iii) Remind the insured that similar coverage may be available at 
significantly lower cost and advise that the policy can be cancelled at 
any time during the policy year and a pro rata refund provided for the 
unearned portion of the premium in the event the insured purchases 
another policy that is acceptable to satisfy the requirements of the 
1973 Act. ``(Approved by the Office of Management and Budget under OMB 
control number 3067-0229.)''
    3. Appendix B to Part 62--National Flood Insurance Program, is 
revised 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

    Under the Write Your Own (WYO) Program, the Federal Insurance 
Administrator (Administrator) may enter into arrangements with 
individual private sector insurance companies that are licensed to 
engage in the business of property insurance, whereby these 
companies may offer flood insurance coverage to eligible property 
owners using their customary business practices. To facilitate the 
marketing of flood insurance coverage, the Federal Government will 
be a guarantor of flood insurance coverage for WYO Company policies 
issued under the WYO Arrangement. To ensure that any taxpayer funds 
are accounted for and appropriately expended, the Federal Insurance 
Administration (FIA) and WYO Companies will implement this Financial 
Control Plan. Any departures from the requirements of this Plan must 
be approved by the Administrator. The authority for the WYO Program 
is contained in section 1345 of the National Flood Insurance Act of 
1968, 42 U.S.C. 4081, and 44 CFR parts 61 and 62, Secs. 61.13 and 
62.23. The WYO Financial Assistance/Subsidy Arrangement 
(Arrangement) which is included in appendix A of this part is hereby 
made a part of this Financial Control Plan.
    WYO Companies are subject to audit, examination, and regulatory 
controls of the various states. Additionally, insurance company 
operating departments are customarily subject to examinations and 
audits performed by Company internal audit or quality control 
departments, or both, and independent CPA firms. It is intended that 
this Plan use to the extent possible, the findings of these 
examinations and audits as they pertain to business written under 
the WYO Program (Parts 3 and 4).
    The WYO Financial Control 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 
Company files by the FIA staff or their 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.
    The WYO Financial Control Plan requires the WYO Company to meet 
the minimum requirements established by the Standards Committee. The 
Standards Committee consists of four (4) members from FIA, one (1) 
member from the Federal Emergency Management Agency's (FEMA's) 
Office of Financial Management, one (1) member designated by the 
Administrator who is not directly involved in the WYO Program, and 
one (1) member from each of six (6) designated WYO Companies, pools 
or other entities.
    The WYO Financial Control Plan must require the WYO Company to:
    1. Have a biennial audit of the flood insurance financial 
statements and claims and underwriting activity conducted by an 
independent accounting firm at the Company's expense to ensure that 
the financial data reported to FIA accurately represents the flood 
insurance activities of the Company. Require that the CPA firm's 
audit be performed in accordance with GAO yellow book requirements. 
Require that the auditors conduct their own review sample, even if 
pre-selected policy and claims files are given to them for review.
    2. Meet the recording and reporting requirements of the WYO 
Transaction Record Reporting and Processing Plan. Transactions

[[Page 51222]]

reported to the National Flood Insurance Program's (NFIP's) Bureau 
and Statistical Agent by the WYO Company under the WYO Transaction 
Record Reporting and Processing Plan will be analyzed by the Bureau 
and Statistical Agent and a monthly report will be submitted to the 
WYO Company and the FIA. The analysis will cover the timeliness of 
the WYO Company's submissions, the disposition of transactions that 
do not pass systems edits, and the reconciliation of the total 
generated from transaction reports with those submitted on the WYO 
Company's reports (part 1).
    3. Cooperate with FEMA's Office of Financial Management on 
Letter of Credit matters.
    4. Cooperate with FIA in the implementation of a claims 
reinspection program (part 2).
    5. Cooperate with FIA in the verification of risk rating 
information.
    6. Cooperate with FEMA's Office of the Inspector General on 
matters pertaining to fraud.
    The Standards Committee will review and make a recommendation to 
the Administrator concerning any adverse action arising from the 
implementation of the Financial Control Plan. Adverse actions 
include, but are not limited to, the FIA Operations Division's 
recommendation not to renew a particular Company's WYO arrangement.
    This Plan includes the following guidelines:
    Part 1--Transaction Record Reporting and Processing Plan 
Reconciliation Procedures
    Part 2--Claims Reinspection Program
    Part 3--Financial Audits, Underwriting Audits, Claims Audits, 
Audits for Cause, and State Insurance Department Audits
    Part 4--Reports Certifications
    Part 5--WYO Financial Assistance/Subsidy Arrangement 
(Incorporated by Reference)
    Part 6--Transaction Record Reporting and Processing Plan 
(Incorporated by Reference)
    Part 7--Write Your Own (WYO) Accounting Procedures Manual 
(Incorporated by Reference)

Part 1--Transaction Record Reporting and Processing Plan 
Reconciliation Procedures, Transaction Record Reporting and 
Processing Plan Reconciliation Objectives

    The objectives are: To reconcile transaction detail with monthly 
financial statements submitted by the WYO Companies; to assess the 
quality and timeliness of submitted data; and to provide for the 
identification and resolution of discrepancies in the data. The 
reliance on computer processing to perform the review of transaction 
and financial data will help minimize the necessity for on-site 
audits of WYO Companies. Reconciliation of the statistical reports 
submitted will be performed by the WYO Companies and independently 
by the NFIP Bureau and Statistical Agent.
    The review of monthly financial statements and transaction level 
detail will involve six areas:
    A. Financial control;
    B. Quality control (audit trails);
    C. Quality review of submitted data;
    D. Policy rating;
    E. Timeliness of reporting; and
    F. Monthly reports.

A. Financial Control

    1. WYO Companies are required to submit a reconciliation report 
(Exhibit ``A'') with the submission of transaction level detail. 
This report will reconcile the transaction records data to the 
financial report, explaining any discrepancies.
    2. WYO Companies are required to submit, on a form approved by 
the Administrator, a tape transmittal document with the submission 
of the statistical tape containing transaction detail. This will be 
used to validate record counts and dollar amounts.
    3. The NFIP will review, at a minimum, the categories on the 
attached format and produce a similar report reconciling the 
transaction data to the monthly financial statement submitted by 
each WYO Company.
    4. To facilitate financial reconciliation, transaction records 
which do not pass various edits employed by the NFIP to review the 
quality of submitted data will be so identified, but will be 
maintained whenever possible until the error is corrected by the 
company in order to reconcile all financial data submitted to the 
NFIP.

B. Quality Control

    Transaction level detail will be maintained in policy and claim 
history files for record-keeping and audit purposes.

C. Quality Review of Submitted Data

    1. Transaction records will be edited for correct format and 
values.
    2. Relational edits will be performed on individual transactions 
as well as between policy and claim transactions submitted against 
those policies.
    3. Record validation will be performed to check that the 
transaction type is allowable for the type of policy or claim 
indicated.
    4. Errors will be categorized as critical or non-critical. The 
rate of critical errors in the submission of statistical data will 
be the basis by which company performance is reported to the 
Standards Committee. Critical errors include those made in required 
data elements. Required data elements:
    a. Identify the policyholder, the policy, the loss, and the 
property location;
    b. Provide information necessary to rate the policy;
    c. Provide information used in financial control; and
    d. Provide information used for actuarial review of NFIP 
experience.
    5. Non-critical errors are those made in data elements reported 
by the WYO Companies at their option.

D. Policy Rating

    1. The rating will be validated by the NFIP for all policies for 
which the following transactions have been submitted:
    a. New Business;
    b. Renewals;
    c. Endorsements involving type A transaction records; and
    d. Corrections of type A transaction records previously 
submitted for premium transactions.
    2. Incorrect rating will be considered a critical error.

E. Timeliness of Reporting

    1. WYO Companies will be expected to submit monthly statistical 
and financial reports within thirty days of the end of the month of 
record.
    2. The NFIP will produce reports based on review of submitted 
data within thirty days after the due date or the first processing 
cycle subsequent to the receipt of WYO Company submissions, 
whichever is later.

F. Monthly Reports

    1. Reports for each WYO Company's data submission will be sent 
to the respective WYO Company and the FIA explaining any 
discrepancies found by the NFIP review.
    2. Report to WYO Companies. Transaction records that fail to 
pass the quality review or policy rating edits will be reported to 
the appropriate Company in transaction detail with error codes, 
classification of errors as either critical or non-critical and any 
codes used by the Company to identify the source of the transaction 
data.
    3. Reports to WYO Companies and the FIA:
    a. Summary statistics will be generated for each monthly 
submission of transaction data. These will include:
    i. Absolute numbers of transactions read and transactions 
rejected by transaction type; and
    ii. Dollar amounts associated with transactions read and 
transactions rejected.
    b. Summary statistics for all policy and claim records submitted 
to date (which may each be the result of multiple transactions) will 
be generated, separately for critical and non-critical errors. These 
will include:
    i. Absolute number of policy and claim records on file and those 
containing errors; and
    ii. Relative values for the number of records containing 
critical errors.
    c. Control totals will be generated for tapes submitted to and 
processed by the NFIP. This front-end balancing procedure will 
include:
    i. Numbers of records submitted according to the NFIP compared 
with numbers of records submitted according to the WYO Company 
transmittal document; and
    ii. Dollar amounts submitted according to the NFIP compared with 
dollar amounts submitted according to the WYO Company transmittal 
document.
    d. If there is any discrepancy between the NFIP reading of 
dollar amounts from the tape and the WYO Company tape transmittal 
document, then the monthly statistical tape submission will be 
rejected and returned to the Company. The rejected tape must be 
corrected and resubmitted by the next monthly submission due date.
    e. In cases where the NFIP reconciliation of transaction level 
detail with the financial statements does not agree with the 
reconciliation report submitted by the WYO Company, a separate 
report will be generated and transmitted to the Company for 
resolution and to the FIA.

Reporting of Company Rating to the Standards Committee and the 
Administrator

A. Satisfactory Rating

    An annual end of the year report will be submitted to convey the 
satisfactory rating of WYO Companies' submission of transaction

[[Page 51223]]

data and the reconciliation of these data with financial reports.

B. Unsatisfactory Rating

    The report of an unsatisfactory rating will be submitted as soon 
as errors and problems reach critical threshold levels. This rating 
will be based on: Continuing problems in reconciling transaction 
data with financial reports; statistics on the percentage of 
transactions submitted with critical errors; the percentage of 
policy and claim records on file that contain critical errors; and 
late submission of statistical and financial reports.

Exhibit ``A''.--WYO Statistical Tape--Transmittal Document

Date Sent:-------------------------------------------------------------

WYO Prefix Code:-------------------------------------------------------

Address:---------------------------------------------------------------

----------------------------------------------------------------------

Reel Number(s) of Enclosed
Tapes:-----------------------------------------------------------------

Density----------------------------------------------------------------

LRECL------------------------------------------------------------------

Blocksize--------------------------------------------------------------

File Name (DSN)--------------------------------------------------------

Contact Person---------------------------------------------------------

Contact Number---------------------------------------------------------

IBU No. (WYO Use Only)-------------------------------------------------

Monthly Reconciliation--Net Written Premiums

Company name-----------------------------------------------------------

Co. NAIC No.-----------------------------------------------------------

Month/year ending------------------------------------------------------

Date submitted---------------------------------------------------------

Preparer's name--------------------------------------------------------

Telephone No-----------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                                         Monthly statistical transactions report                
       Monthly financial report        -------------------------------------------------------------------------
                                                    Trans. code                Record count      Premium amount 
----------------------------------------------------------------------------------------------------------------
Net Written premiums..................  $                                                                       
    (Income statement = Line 100......  11                                  .................      $            
                                        15                                  .................  .................
                                        17                                  .................  .................
Unprocessed statistical:                                                                                        
    (+) Prior month's.................  20                                  .................  .................
    (-) Current month's...............  23                                  .................  .................
Other--Explain:                                                                                                 
    (+) Current month's...............  26                                  .................        (-)        
    (-) Prior month's.................  29                                  .................        (-)        
                                        14 and 81                           .................        (+)        
                                       -------------------------------------------------------------------------
        Total.........................  Total:                              .................  .................
                                                                                                                
(2)(Add 11 Through 23 less 26 and 29)                                                                           
                                       -------------------------------------------------------------------------
Comments:                                                                                                       
----------------------------------------------------------------------------------------------------------------

Monthly Reconciliation--Losses

Company name-----------------------------------------------------------

Co. NAIC No.-----------------------------------------------------------

Month/year-------------------------------------------------------------

Date submitted---------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
                                                                                                   Loss/paid    
                                                    Trans. code                Record count        recoveries   
----------------------------------------------------------------------------------------------------------------
100 Net paid losses...................  $                                   .................  .................
(Income statement line 115)             ..................................                                      
Unprocessed statistical:                ..................................  .................  .................
                                        31                                  .................     $             
    140 (+) Prior month's.............  34                                  .................  .................
                                        37                                  .................  .................
    150 (-) Current month.............  40                                  .................  .................
                                        43                                  .................  .................
    160 Salvage not to be reported by   ..................................  .................  .................
     transaction (explain).                                                                                     
    170 Other--Explain................  46 and 61                           .................  .................
                                        49                                  .................  .................
                                        64                                  .................  .................
                                        84 and 87                           .................  .................
                                        52 Recovery                         .................  .................
                                        Salvage                             .................  .................
                                        Subrogation                         .................  .................
                                        67 Recovery                         .................  .................
                                        Salvage                             .................  .................
                                        Subrogation                         .................  .................
                                       -------------------------------------------------------------------------
        Total:........................  Total:                              .................  .................
                                       -------------------------------------------------------------------------
        (Sum of Lines 100, 140, 160,                                                                            
         and 170 less 150).                                                                                     
(2) (Add 31, 34, 40 through 64 less 52                                                                          
 and 67)                                                                                                        
                                       -------------------------------------------------------------------------
Comments:                                                                                                       
----------------------------------------------------------------------------------------------------------------

Monthly Reconciliation--Special Allocated LAE

Company name-----------------------------------------------------------

Co. NAIC No.-----------------------------------------------------------


[[Page 51224]]

-----------------------------------------------------------------------
Month/year ending------------------------------------------------------

Date submitted---------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
                                                         Monthly statistical transaction report                 
       Monthly financial report        -------------------------------------------------------------------------
                                                    Trans. code                Record count         Amounts     
----------------------------------------------------------------------------------------------------------------
Special allocated loss adjustment       ..................................  .................  .................
 expenses.                                                                                                      
(Other loss and LAE Calc.--Line 655)                                                                            
                                        71                                  .................     $             
                                        74                                  .................  .................
Unprocessed statistical:                                                                                        
    (+) Prior Month...................  ..................................  .................  .................
    (-) Current Month.................  ..................................  .................  .................
Other--Explain:                                                                                                 
    (1)...............................  ..................................  .................  .................
    (2)...............................  ..................................  .................  .................
                                       -------------------------------------------------------------------------
                Total:................  Total:                              .................  .................
                                       -------------------------------------------------------------------------
Comments:                                                                                                       
----------------------------------------------------------------------------------------------------------------

Monthly Reconciliation--Net Policy Service Fees

Company Name-----------------------------------------------------------

Co. NAIC No.-----------------------------------------------------------

Month/Year Ending------------------------------------------------------

Date Submitted---------------------------------------------------------

Monthly Financial Report

Net Policy Service Fees (Income Statement Line 170):

$----------------------------------------------------------------------
Unprocessed statistical:

(+) Prior Month's------------------------------------------------------

(-) Current Month's----------------------------------------------------
Other--Explain:

(1)--------------------------------------------------------------------

(2)--------------------------------------------------------------------

Total------------------------------------------------------------------
Comments:

Monthly Statistical Transaction Report

Record Count:----------------------------------------------------------

Fee Amount:------------------------------------------------------------

Total:-----------------------------------------------------------------

(Approved by the Office of Management and Budget under OMB control 
number 3067-0169.)

Part 2--Claims Reinspection Program

WYO-NFIP Claims Reinspection Program

    To keep WYO-NFIP Claims Management informed, to assist in the 
overall claims operation, and to provide necessary assurances and 
documentation for dealing with GAO, Congressional Oversight 
Committees, and the public, the FIA and WYO Companies have 
established a Claims Reinspection Program. The Program is comprised 
of the following major elements:
    A. All files are subject to reinspection.
    B. Files for reinspection may be randomly selected by flood 
event, or size of loss, or class of business, as determined by WYO-
NFIP Claims Management.
    C. WYO-NFIP Claims Management will utilize a binomial table to 
define sample size for reinspections prior to payment. A larger 
sample may be used depending upon error ratio.
    D. An agreed upon sample of closed files, by event, will be 
subjected to reinspection as well.
    E. A WYO representative will conduct the reinspection, 
accompanied by an NFIP General Adjuster.
    F. A joint, single report will be issued by the WYO Company 
representative and the NFIP General Adjuster.
    G. Copies of reinspection reports will be forwarded to the 
Claims Management of both the WYO Company and the NFIP.

Part 3---Biennial Financial Audits, Underwriting Audits, Claims 
Audits, Audits for Cause, and State Insurance Department Audits

A. Biennial Financial, Underwriting and Claims Audits

    1. Objectives of WYO Biennial Financial Underwriting and Claims 
Audit. The biennial, financial, underwriting and claims audit is 
intended to provide the Federal Emergency Management Agency with 
independent assessment of the quality of financial controls over 
activities relating to the Company's participation in the National 
Flood Insurance Program as well as the integrity of the underwriting 
and claims data reported to FEMA.
    a. Participating WYO companies are responsible for selecting and 
funding independent Certified Public Accounting firms to conduct the 
biennial audits. Such costs are considered part of the normal 
administrative cost of operating the WYO program and as such are 
included in the WYO expense allowance.
    b. The WYO Company's representative will be notified in writing 
to arrange for a biennial audit. This notice should provide the WYO 
Company at least 120 days to prepare for the biennial audit.
    c. It is also intended that the biennial audit will reduce if 
not eliminate the need for FEMA auditors or their designees to 
conduct on-site visits to WYO companies in their review of financial 
activity. However, the requirement may still exist for such visits 
to occur as determined by the auditors. The CPA firm's audit shall 
be performed in accordance with GAO yellow book requirements. 
Further, the CPA firm is required to select its own sample, even 
though FIA may provide them with pre-selected policy and claim files 
for review. In addition, nothing in this section should be construed 
as limiting the ability of the General Accounting Office or FEMA's 
Office of Inspector General to review the activities of the WYO 
Program.
    d. The purpose of the biennial audit is to provide opinion on 
the fairness of the financial statements, the adequacy of internal 
controls, and the extent of compliance with laws and regulations.
    e. Any WYO Company which has been subject to a comprehensive 
audit by the CPA firm under contract with the FEMA OIG is exempted 
by its selected Certified Public Accountant firm. Only the remaining 
unaudited fiscal year of the two years normally to be reviewed under 
the biennial audit will be examined. Policy and claim related 
financial data as reported to the NFIP are proper and adequately 
supported by underlying documentation.

B. Audits for Cause

    In accordance with the terms of the Arrangement, the 
Administrator, on his/her own initiative or upon recommendation of 
the WYO Standards Committee or the FEMA Inspector General, may 
conduct for-cause audits of participating companies. The following 
criteria, in combination or independently, may constitute the basis 
for initiation of such an audit.

1. Underwriting

    a. Excessively high frequency of errors in underwriting.
    i. Issuing policies for ineligible risks.
    ii. Issuing policies in ineligible communities.
    iii. Consistent premium rating errors.
    iv. Missing or insufficient documentation for submit for rate 
policies.
    v. Other patterns of consistent errors.
    b. Abnormally high rate of policy cancellations or non-renewals.
    c. Policies not processed in a timely fashion.
    d. Duplication of policy coverage noted.

[[Page 51225]]

    e. Relational type edits indicate an usually high or low premium 
amount per policy for the geographical area.
    f. Biennial audit results indicate usual volume of errors in 
underwriting.
    2. Claims
    a. Reinspection indicates consistent patterns of:
    i. Losses being paid when not covered.
    ii. Statistical information being reported on original loss 
adjustment found to be incorrect on reinspection.
    iii. Salvage/subrogation not being adequately addressed.
    iv. Consistent overpayment of claims.
    b. Unusually high count of erroneous assignments and/or claims 
closed without payment (CWP).
    c. Unusually low count of CWP. (May indicate inadequate follow-
up of claims submitted).
    d. Average claim payments that significantly exceed the average 
for the Program as a whole.
    e. Lack of (adequate) documentation for paid claims.
    f. Claims not processed in a timely fashion.
    g. Consistent failure of WYO Company to receive authorization 
for special allocated loss adjustment expenses prior to incurring 
them.
    h. High submission of Special Allocated Loss Adjustment Expenses 
(SALAE).
    i. Consistently high policyholder complaint level.
    j. Low/high count of salvage/subrogation.
    k. Biennial audit indicates significant problems.
    3. Financial Reporting/Accounting
    a. Consistently high reconciliation variations and/or errors in 
statistical information.
    b. Financial and/or statistical information not received in a 
timely fashion.
    c. Letter of Credit violations are found.
    d. WYO Company is not depositing funds to the Restricted Account 
in a timely manner, or funds are not being transferred through the 
automated clearinghouse on a timely basis.
    e. Premium suspense is consistently significant, older than 60 
days, and/or cannot be detailed sufficiently, or both.
    f. Large/unusual balance in Cash-Other (Receivables and/or 
Payable).
    g. Large, unexplained differences in cash reconciliation.
    h. Large/unusual balances or variations between months noted for 
key reported financial data.
    i. Financial statement to statistical data reconciliation sheets 
improperly completed indicating proper review of information is not 
being performed prior to signing certification statement.
    j. Repeated failure to respond fully in a timely manner to 
questions raised by FIA or the NFIP Bureau and Statistical Agent 
concerning monthly financial reporting.
    k. Biennial audit indicates significant problems.

C. Underwriting Audit

    1. Samples of new business policies, renewals, endorsements and 
cancellations will be provided by the FIA with the biennial audit 
instructions, including samples of the Mortgage Portfolio Protection 
business, where applicable. The audit is to be conducted in 
accordance with GAO yellow book requirements. The CPA firm may 
supplement with its own sample of risks which were in force during 
all or part of the Arrangement Year under audit for detail testing.

2. Underwriting Audit Outline

    a. Review of the Underwriting Department's responsibilities, 
authorities and composition.
    b. Personal interviews with management and key clerical 
personnel to determine current processing activities, planned 
changes and problems.
    c. Administrative review to verify compliance with company 
procedures.
    d. Thorough examination of a random sample of underwriting files 
to measure the quality of work. The CPA firm is expected to provide 
a representative sample of its review to substantiate its opinion 
and findings. At a minimum, the files should be reviewed to verify 
the following:
    i. Policies are issued for eligible risks;
    ii. Rates are correct and consistent with the amount of 
insurance requested on the application;
    iii. Waiting period for new business is consistent with 
government regulations;
    iv. Elevation certification or difference is correctly shown on 
application;
    v. The coverage does not include more than one building and/or 
its contents per policy;
    vi. No binder is effective unless issued with the authorization 
of FIA;
    vii. The FIRM zone shown on the application to the community in 
which the property is located;
    viii. Community shown on application is eligible to purchase 
insurance under the NFIP;
    ix. Information on type of building, etc., is fully complete;
    x. Applicable deductibles are recorded;
    xi. A new, fully completed application or a photocopy of the 
most recent application, or similar documentation, with the 
appropriate updates to reflect current information is on file for 
each risk, including those formerly written by the NFIP Servicing 
Facility;
    xii. If any files to be audited are unavailable, determine the 
reason for the absence.
    e. Endorsement Processing.
    1. Complete tasks as applicable.
    2. Review requests for additional coverage to ensure that they 
are subject to the waiting period rule.
    3. Review controls established to ensure that no risk is insured 
under endorsement provisions that are not acceptable as a new 
business risk (i.e., a property located in a suspended community).
    f. Cancellation Processing. Verify controls to ensure that one 
of the necessary reasons for cancellation exists and that the 
transaction is accompanied by proper documentation.
    g. Renewal Processing. Determine controls to ensure that all 
necessary information needed to complete the transaction is 
provided.
    h. Expired Policies. Determine controls to ensure that each step 
is carried out at the proper time.
    i. Observance of Waiting Period. Establish procedures to 
document, as a matter of WYO Company business record and in each 
transaction involving a new application, renewal, and endorsement, 
that any applicable effective date and premium receipt rules have 
been observed (44 CFR 61.11). Documentation reasonably suitable for 
the purpose includes retention of postmarked envelopes (for three 
(3) years) from date, date stamping and retention (via hard copy or 
microfilm process) of application, renewal and endorsement documents 
and checks received in payment of premium; computer input of 
document and premium receipt transactions and retention of such 
records in the computer system; and other reasonable insurer methods 
of verifying transactions involving requests for coverage and 
receipts of premium.

D. Claims Audit Outline

    1. Review of the Claims Department's responsibilities, 
authorities, and composition.
    2. Personal interviews with management and key clerical 
personnel to determine current processing activities, planned 
changes and problems.
    3. Administrative review to verify compliance with company 
procedures.
    4. Thorough examination of a random sample of claims files which 
may be provided by FIA to measure the quality of work. At a minimum, 
the files should be reviewed to verify the following:
    a. Verify controls to ensure that a file is set up for each 
Notice of Loss Received.
    b. Review adjuster reports to determine whether they contain 
adequate evidence to substantiate the payment or denial of claims, 
including amount of losses claimed, any salvage proceeds, 
depreciation and potential subrogation.
    c. Ascertain that building and contents allocations are correct.
    d. Determine whether the file contains evidence identifying 
subrogation possibilities.
    e. Verify that partial payments were properly considered in 
processing the final draft or check.
    f. Verify that the loss payees are listed correctly (consider 
insured and mortgagee).
    g. Verify that the total amount of the drafts or checks is 
within the policy limits.
    h. Ascertain the relevance and validity of the criteria used by 
the carrier to judge effectiveness of its claims servicing 
operation.
    i. Confirm that when information is received from an independent 
adjuster, the examiner either acts promptly to give proper feedback 
with instructions or takes action to pay or deny the loss.
    j. Determine whether the Claims Department is using an 
``impression of risk'' program in reporting misrated policies, etc.
    k. Where attempts at fraud occur, verify that these instances 
are being reported to FIA for referral to the FEMA Inspector 
General's office.

[[Page 51226]]

    i. If any files to be audited are unavailable, determine the 
reason for their absence. In undertaking this portion of the 
biennial audit, the Administrative Review Checklist (Exhibit B) 
below should be utilized.

Exhibit ``B''--Administrative Review Checklist

Policy #:
Insured's Name:
State:
Date of loss:
Date paid:
Date reported:
Amt. of loss: $
Bldg: $
Contents: $
Adjusting firm:
Examiner's name:
Comments:

1. Investigation and Adjustments

                                                                        
                                                 Yes       No      N/A  
                                                                        
A. Application of Coverage.                                             
(1) Insurable Interest?......................    [  ]     [  ]     [  ] 
(2) Is loss from the flood peril?............    [  ]     [  ]     [  ] 
(3) Did loss occur within the policy term:...    [  ]     [  ]     [  ] 
(4) Does location and description of risk                               
 coincide with policy information?...........    [  ]     [  ]     [  ] 
(5) Were proper deductibles applied?.........    [  ]     [  ]     [  ] 
(6) Other insurance considered?..............    [  ]     [  ]     [  ] 
(7) Other losses?............................    [  ]     [  ]     [  ] 
B. Application of Sound Adjusting Practices:                            
(1) Was adjuster's report accurate/complete?.    [  ]     [  ]     [  ] 
(2) Was an attorney used in the settlement?..    [  ]     [  ]     [  ] 
(3) Was a technical expert used in the                                  
 settlement?.................................    [  ]     [  ]     [  ] 
C. Documentation:                                                       
(1) Are damages clearly identified?..........    [  ]     [  ]     [  ] 
(2) Are damages flood related?...............    [  ]     [  ]     [  ] 
(3) Are damages clearly and completely                                  
 itemized and documented by the adjuster?....    [  ]     [  ]     [  ] 
(4) Was depreciation considered?.............    [  ]     [  ]     [  ] 
(5) Has subrogation been considered..........    [  ]     [  ]     [  ] 
(6) Has salvage been properly handled?.......    [  ]     [  ]     [  ] 
(7) Was salvage timely?......................    [  ]     [  ]     [  ] 
2. Supervision:                                                         
a. Assignments:                                                         
(1) Are assignments made promptly?...........    [  ]     [  ]     [  ] 
(2) Is insured contacted promptly?...........    [  ]     [  ]     [  ] 
b. Reserves:                                                            
(1) Are initial reserves indicated on the                               
 first report?...............................    [  ]     [  ]     [  ] 
(2) Are they adequate?.......................    [  ]     [  ]     [  ] 
(3) Does final settlement compare favorably                             
 with last reserve established?..............    [  ]     [  ]     [  ] 
c. Diary Control:                                                       
(1) Automatic?...............................    [  ]     [  ]     [  ] 
(2) Timely?..................................    [  ]     [  ]     [  ] 
(3) Is file reviewed at diary date with                                 
 examiner's comments?........................    [  ]     [  ]     [  ] 
d. Examiner Evaluation and Settlement                                   
 Performances:                                                          
(1) Is examiner directing adjuster when                                 
 needed?.....................................    [  ]     [  ]     [  ] 
(2) Are files documented?....................    [  ]     [  ]     [  ] 
(3) Is adequate control maintained over in-                             
 house adjuster?.............................    [  ]     [  ]     [  ] 
(4) Is adequate control maintained over                                 
 outside adjuster?...........................    [  ]     [  ]     [  ] 
e. Salvage and subrogation:                                             
(1) Is salvage evaluated by salvors?.........    [  ]     [  ]     [  ] 
(2) Is salvage disposed of promptly?.........    [  ]     [  ]     [  ] 
(3) Are salvage returns adequate?............    [  ]     [  ]     [  ] 
(4) Is potential subrogation being promptly                             
 and properly investigated?..................    [  ]     [  ]     [  ] 
(5) Are proper subrogation forms used?.......    [  ]     [  ]     [  ] 
(6) Are subrogation and salvage files                                   
 properly opened, diaried, and referred (if                             
 appropriate)?...............................    [  ]     [  ]     [  ] 
(7) Are recovery funds for subrogation and                              
 salvage being properly handled?.............    [  ]     [  ]     [  ] 
f. Suits:                                                               
(1) Are suits properly identified?...........    [  ]     [  ]     [  ] 
(2) Are suits being properly evaluated?......    [  ]     [  ]     [  ] 
(3) Are suits being referred to attorneys                               
 promptly?...................................    [  ]     [  ]     [  ] 
(4) Are attorneys being advised as to                                   
 handling settlement or compromise?..........    [  ]     [  ]     [  ] 
(5) Are suits being properly controlled?.....    [  ]     [  ]     [  ] 
(6) Are suits files properly diaried?........    [  ]     [  ]     [  ] 
(7)-(8) [Reserved]...........................                           
g. Other:                                                               
(1) Was there other coverage by the WYO                                 
 Company?....................................    [  ]     [  ]     [  ] 
(2) Were damages correctly apportioned?......    [  ]     [  ]     [  ] 
(3) Was a solo adjuster used?................    [  ]     [  ]     [  ] 
(4) Were there prior flood claims?...........    [  ]     [  ]     [  ] 
(5) Were prior damages repaired?.............    [  ]     [  ]     [  ] 
(6) Were prior claim files reviewed?.........    [  ]     [  ]     [  ] 
(7) Was a Congressional complaint letter in                             
 file?.......................................    [  ]     [  ]     [  ] 
(8) Was it responded to promptly?............    [  ]     [  ]     [  ] 
(9) Is the statistical reporting correction                             
 file being properly managed?................    [  ]     [  ]     [  ] 
                                                                        

E. State Insurance Department Examination

    1. It is expected that audits of WYO companies by independent 
accountants and/or state insurance departments, aside from those 
conducted by the FIA or its designee, will include flood insurance 
activity. When such audits occur, a financial officer for the WYO 
Company will notify the FIA, identifying the auditing entity and 
providing a brief statement of the overall conclusions that relate 
to flood insurance and the insurer's financial condition, when 
available. In the case of an audit in progress, a brief statement on 
the scope of the audit should be provided to the FIA. A checklist 
will be utilized for this reporting and will be provided to WYO 
Companies by the FIA.
    2. The WYO Companies will maintain on file the reports resulting 
from audits, subject to on-site inspection by the FIA or its 
designee. At the FIA's request, the WYO Company will submit a copy 
of the auditor's opinion, should one be available, summarizing the 
audit conclusion. ``(Approved by the Office of Management and Budget 
under OMB control number 3067-0169)''
    a. Certification Statement for Monthly Financial and Statistical 
Reconciliation Reports.
    I have reviewed the accompanying financial and statistical 
reconciliation reports of XYZ Company as of ____________. All 
information included in these statements is the representation of 
the XYZ Company.
    Based on my review (with the exception of the matter(s) 
described in the following paragraphs, if applicable), I certify 
that I am not aware of any material modifications that should be 
made to the accompanying reports.

Signed-----------------------------------------------------------------
    (Responsible Financial Officer)

Date-------------------------------------------------------------------

B. Certification Statement for Monthly Statistical Transaction Report

    I have reviewed the accompanying statistical transaction report 
control totals in conjunction with appropriate statistical 
reconciliation reports. All information included in these reports is 
the representation of the XYZ Company. ``(Approved by the Office of 
Management and Budget under OMB control number 3067-0169).''

Signed-----------------------------------------------------------------
(Responsible Reporting Officer)

Date-------------------------------------------------------------------
(Catalog of Federal Domestic Assistance No. 83.100, ``Flood 
Insurance'')

    Dated: September 20, 1996.
Spence W. Perry,
Executive Administrator, Federal Insurance Administration.
[FR Doc. 96-25088 Filed 9-30-96; 8:45 am]
BILLING CODE 6718-03-P