[Federal Register Volume 63, Number 219 (Friday, November 13, 1998)]
[Proposed Rules]
[Pages 63431-63432]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30409]


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FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 62

RIN 3067-AC86


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

AGENCY: Federal Emergency Management Agency (FEMA).

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: We, FEMA, are considering changes under the flood insurance 
Write-Your-Own (WYO) program to our rules on marketing incentives, 
performance measures, compensation under the WYO expense allowance, 
agent compensation, and compensation for unallocated loss expenses. 
Before publishing any rule change in these areas, we want the advice 
and comments of WYO companies, agents, consumers, and any other 
interested parties.

DATES: We invite your advice and comments on the proposal. Please send 
your comments on or before January 12, 1999.
    We intend to hold a public meeting for oral submissions in early 
1999. We will publish notice in the Federal Register with the date and 
location of the public meeting after the comment period expires for 
this advance notice of proposed rulemaking.

ADDRESSES: Please send your written comments to the Rules Docket Clerk, 
Office of the General Counsel, Federal Emergency Management Agency, 500 
C Street SW., Washington, DC 20472, (telefax) (202) 646-4536, or 
(email) [email protected].

FOR FURTHER INFORMATION CONTACT: Claudia I. Murphy, Federal Emergency 
Management Agency, Federal Insurance Administration, 500 C Street SW., 
room 429, Washington, DC 20472, (202) 646-2775, (email) 
[email protected].

SUPPLEMENTARY INFORMATION:

Background

    The WYO program is a cooperative venture between the Federal 
Government and private insurance companies. Goals of the program 
include: increase the flood insurance policy base and the geographic 
distribution of policyholders; improve service to policyholders and 
agents; increase the National Flood Insurance Program's (NFIP) ability 
to settle claims promptly when catastrophes occur; and give private 
insurers experience operating the NFIP. The duties and responsibilities 
of the Federal Government and the private insurers participating in the 
WYO program and the terms for compensation are spelled out each year in 
the Financial Assistance/Subsidy Arrangement. (44 CFR Part 62, Appendix 
A.)
    FEMA believes the WYO program is the most effective vehicle for 
delivering flood insurance to consumers and supporting the floodplain 
management goals of the NFIP. As pressure to raise flood insurance 
rates continues, particularly regarding reducing premium subsidies, 
FEMA must examine ways to contain operating costs and determine the 
most equitable and cost-effective ways to compensate companies that 
sell and service flood insurance policies.

Marketing and Promotional Expense

    We invite your comments on the reasonableness of adjusting the 
expense allowance for WYO companies to reflect the expense incurred by 
the FIA in funding marketing efforts. In recent years, FIA marketing 
and promotional expenses have been about one percent of total flood 
insurance premiums written. We did not incur similar marketing expense 
when the WYO expense allowance formula was established. FIA effectively 
incurs the type of expense that would be considered ``other acquisition 
expense'' when incurred by a private insurer. Because ``other 
acquisition expense'' is one of the expense components reflected in the 
WYO expense allowance calculation, it may be reasonable to reflect some 
or all of the marketing expense incurred by FIA as an offset to the 
marketing expense we allow in determining the overall WYO expense 
allowance.

Marketing Incentives

    We adjust a company's base expense allowance depending on how well 
the company met the marketing goals for the arrangement year contained 
in the marketing guidelines established pursuant to Article II.G. of 
the Arrangement. We seek your comments on whether a company's 
compensation should be contingent on meeting the marketing guidelines 
and if the marketing incentive is the most effective way to encourage 
the marketing of flood insurance.
    As a separate consideration, we ask for your comments on options 
regarding the marketing incentive adjustment that has been a feature of 
the expense calculation since arrangement year 1994-95. We have 
identified possible approaches to the marketing incentive allowance:
    (1) Change the current maximum addition to the basic WYO expense 
allowance from 1.3 percentage points to some other amount, such as 1.0 
or 0.5 percentage points;
    (2) Eliminate the marketing incentive program; or
    (3) Continue the current marketing incentive program.

Performance Measures

    We also invite your comments on how performance should be 
considered in determining the expense allowance of a particular WYO 
company. Incorporating performance measures into the determination of a 
company's expense allowance would create incentives to maximize 
efficiency in areas such as the settlement of NFIP claims, underwriting 
accuracy, customer services, financial and statistical reporting, and 
to maximize the cost effectiveness of the WYO program.

[[Page 63432]]

Alternatives to the Current Compensation Scheme

    We ask for your advice and comments on alternatives to the current 
compensation scheme. One future approach might be to determine the WYO 
expense allowance using actual average expense ratios of the WYO 
companies as opposed to the ratios of the entire property/casualty 
industry. We could use direct written premium and expense information 
allocated to Federal flood insurance from Part III--Allocation to Lines 
of Direct Business Written for the property/casualty industry as 
reported in A.M. Best Company's Aggregates and Averages.
    (1) We could total the amounts incurred for ``Commissions'', 
``Taxes'', ``Other Acquisition'', and ``General Expense'' and divide 
this sum by ``Premiums Written'' to derive a baseline expense ratio.
    (2) Alternatively, we could compute an operating allowance 
percentage by totaling the amounts incurred for ``Taxes'', ``Other 
Acquisition'', and ``General Expense'' and dividing this sum by 
``Premiums Written'' to derive a baseline expense ratio and add a fixed 
percentage commission allowance.
    We could adjust the percentage amount of either of the computed 
ratios to compensate the companies for their participation in the WYO 
program. One approach could be to set the expense ratio at the mid-
point, or some other point, between the expense ratio computed using 
the proposed expense allowance formula and the ratio derived from 
direct Federal flood program premium and expense data. We welcome your 
comments on how this adjustment could be determined.

Agent Compensation

    FEMA does not determine commissions paid by WYO companies to their 
agents; however, we include a 15 percent agent commission expense in 
calculating the WYO expense allowance. Market evidence based on the 
prevalence of rebating suggests this commission level is high for 
Residential Condominium Building Association Policies. We invite 
comments on how to modify the expense structure in light of the 
practice of rebating.
    We do not intend to change the portion of the WYO expense allowance 
for agents but would like to gather information on industry practices 
for compensating agents who sell insurance products. We encourage and 
invite you to provide a description of your commission structure and/or 
other methods for compensating your agents. We are interested in 
knowing about differences in compensation for flood insurance and other 
types of property and casualty insurance and any differences in 
commissions paid for large and small policies, new and renewal 
business, and commercial and residential business.

Compensation for Unallocated Loss Expenses

    Finally, we would like to gather information on the costs companies 
incur handling NFIP claims, which are in addition to the Adjuster Fee 
Schedule but are not eligible for reimbursement as a special allocated 
loss adjustment expense. Currently, WYO companies are entitled to an 
expense payment of 3.3 percent of the incurred loss, exclusive of 
``incurred but not reported'' losses, as compensation for settling 
losses. An expense payment based on the percent of the incurred loss 
may operate as an incentive to pay questionable or disputed claims. We 
encourage you to provide information on the costs incurred settling 
NFIP losses, how claims handling practices affect your company's costs, 
and how the frequency of disasters affect these costs.

Confidential Information

    Business entities who choose to submit confidential information 
protected from disclosure under the Freedom of Information Act (5 USC 
552(b)(4)) should identify that information clearly as such, segregate 
it from the body of the comment, and include a summary of or reference 
to it in the comment.

Public Meeting

    We intend to hold a public meeting for oral submissions in early 
1999. We will publish notice in the Federal Register with the date and 
location of the public meeting after the comment period expires for 
this advance notice of proposed rulemaking. Please indicate in your 
comments whether you wish to participate in this meeting, and if so, 
the name and title of the speaker. If several respondents have 
substantially similar comments, a preliminary hearing may be necessary 
to align interests.

    Dated: November 4, 1998.
Jo Ann Howard,
Federal Insurance Administrator.
[FR Doc. 98-30409 Filed 11-12-98; 8:45 am]
BILLING CODE 6718-03-P