[Federal Register Volume 64, Number 200 (Monday, October 18, 1999)]
[Rules and Regulations]
[Pages 56174-56177]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27009]


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FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 62

RIN 3067-AC95


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

AGENCY: Federal Emergency Management Agency (FEMA).

ACTION: Final rule.

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SUMMARY: We (the Federal Insurance Administration of FEMA) are changing 
the Financial Control Plan (Appendix B of 44 CFR Part 62) that sets 
standards for evaluating the performance of private insurance companies 
participating in the Write Your Own program. These

[[Page 56175]]

changes are to streamline and simplify the regulations of the National 
Flood Insurance Program. This rule is part of an agency-wide initiative 
by the Federal Emergency Management Agency to simplify regulations for 
easier use by our customers. The changes are also be consistent with 
the approach we adopted several years ago to streamline the arrangement 
for the WYO program and to place operational details in a technical 
operations manual rather than in the agreement itself between the 
Government and WYO companies.

EFFECTIVE DATE: December 1, 1999.

FOR FURTHER INFORMATION CONTACT: Edward L. Connor, Federal Emergency 
Management Agency, Federal Insurance Administration, 500 C Street SW., 
Washington, DC 20472, 202-646-3429, (facsimile) 202-646-3445, (email) 
Edward.C[email protected].

SUPPLEMENTARY INFORMATION: On August 5, 1999, we proposed a rule at 64 
FR 42633 that would streamline and simplify the Financial Control Plan 
that private insurance companies must follow as part of their financial 
assistance arrangement with FEMA under the Write Your Own component of 
the National Flood Insurance Program. The proposed streamlining 
involved eliminating operational details from the text of the Financial 
Control Plan. This gives the Government and its industry partners the 
flexibility to make operational adjustments and corrections more 
efficiently and more quickly while retaining the broad framework 
necessary for sound financial controls.

Comments

    We received one set of comments during the comment period from a 
company currently participating in the Write Your Own program. The 
company generally supports the proposed changes to the Financial 
Control Plan but asked for clarification on several points.

Consolidated Financial Statements Audit

    The company offered ``conditional support'' for the changes on the 
understanding that we would eliminate the Consolidated Financial 
Statements Audit. The company concluded that ``if that audit is 
continued, then the rule is overly burdensome and the system of reviews 
is redundant.''
    The Consolidated Financial Statements Audit and the planned 
operation reviews are independent of each other and serve separate 
needs. The Consolidated Financial Statements Audit is a financial audit 
for the program conducted by FEMA's Inspector General (IG) and required 
by the Chief Financial Officers Act of 1990, as amended by the 
Government Management Reform Act of 1994. The scope of this 
independent, mandatory audit includes a company's financial management 
and its controls for receiving and disposing of money connected with a 
Federal program. The overall goal of this audit is to prevent fraud, 
waste, and abuse. The Consolidated Financial Statements Audit is not an 
optional audit, and it has a specific financial management and 
statutory purpose. The operation reviews that we conduct for 
participating Write Your Own companies on the other hand focus on a 
company's performance in specific areas of the Write Your Own program, 
namely, claims, underwriting, marketing, and customer service.
    In summary, the Consolidated Financial Statements Audit, the FEMA 
IG's audit, and our program reviews are both appropriate, do not 
duplicate each other, and serve separate needs.

Reports to the Standards Committee

    The company expressed concern about confidentiality and the 
protection of trade secrets when we file a report of an operation 
review to the Standards Committee since the Standards Committee 
consists of competitors of the Write Your Company which is the subject 
of the report. The commenter recommended that ``auditors should only 
file reports on those companies failing the Operation Review. In 
addition, the auditors should not include in the report any information 
which is of a proprietary nature or trade secret.'' We agree with this 
recommendation.
    We will present reports of operation reviews in summary form to the 
Standards Committee. These summary reports will identify trends but not 
companies by name. Instead, we will identify common or typical errors 
that we discovered during operation reviews and coordinate the 
appropriate remedy with the Standards Committee, such as improved 
training or guidance materials. We will, however, identify for the 
Standards Committee companies that fail the operation review and that 
will be the subject of an audit for cause. In these cases, we will 
continue to rely, as we have since the program's inception, on the 
ethics and professional standards of the members of the Standards 
Committee to safeguard the confidentiality of and any proprietary 
information about a company that has failed an operation review.

Penalties for Poor Performance

    The commenter also expressed concern that the ``penalties are 
undefined'' for companies that fail the operation review. The purpose 
of operation reviews is for us to provide technical assistance to 
individual companies so that they may improve their underwriting, 
claims, marketing, and customer service operations. We will present to 
the Standards Committee summaries of common errors and trends that 
surface during the operation reviews so that we may select the most 
appropriate program-wide remedy, for example, training, guidance, etc. 
If we find that a company's performance warrants it, however, we will 
recommend an audit for cause and the deficient company would be subject 
to any penalties that are appropriate from that separate and 
independent mechanism.

Opportunity for Further Review and Comment

    The commenter stated that it was important for participating 
companies to know ``how the Operation Review will be conducted and the 
benchmarks for passage or failure of the review.'' We agree that 
companies need to have more specific information about the operation 
reviews, which are included in a companion document titled ``The Write 
Your Own Program Financial Control Plan Requirements and Procedures.'' 
We will distribute during the first quarter of the 1999-2000 
Arrangement year a draft version of this document for review and 
comment to all companies participating in the Write Your Own program. 
We have postponed the effective date of this rule until December 1, 
1999 to allow us to consider all comments on the companion document for 
this rule before either one becomes final. Until that date, we will 
operate under the existing Financial Control Plan found at 44 CFR Part 
62, Appendix B.

National Environmental Policy Act

    This rule is categorically excluded from the requirements of 44 CFR 
Part 10, Environmental Consideration. We have not prepared an 
environmental assessment.

Executive Order 12866, Regulatory Planning and Review

    This rule is not a significant regulatory action within the meaning 
of Sec. 2(f) of E.O. 12866 of September 30, 1993, 58 FR 51735, and the 
Office of Management and Budget has not reviewed it. Nevertheless, this 
rule adheres to the regulatory principles set forth in E.O. 12866.

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Paperwork Reduction Act

    In accordance with the provisions of the Paperwork Reduction Act of 
1995, 44 U.S.C. 3501 et seq., we have submitted to the Office of 
Management and Budget (OMB) the collections of information in this 
final rule, and OMB has approved them. To request additional 
information or copies of the OMB submissions, contact the FEMA 
Information Collections Officer, Muriel B. Anderson, by calling (202) 
646-2625, or by writing to FEMA, 500 C Street SW., Washington, DC 
20472. The approved collections of information are:
    OMB Number 3067-0169, Write Your Own (WYO) Program (expires March 
31, 2002). To maintain adequate financial control over Federal funds, 
the National Flood Insurance Program requires each WYO company to meet 
the requirements of the WYO Transaction record Reporting and Processing 
Plan and to submit monthly financial and statistical reports as 
required in FEMA regulation 44CFR, part 62, Appendix B. The number of 
respondents is estimated at 105. The burden estimates per respondent 
are as follows: Reconciliation Report, 30 minutes: Biennial Audit 
Administrative Review Checklist, 1 hour; Monthly Financial and 
Statistical Reconciliation Reports Certification Statement, 3 minutes; 
and Monthly Statistical Transaction Reports Certification Statement, 3 
minutes.

Executive Order 12612, Federalism

    This rule involves no policies that have federalism implications 
under Executive Order 12612, Federalism, dated October 26, 1987.

Executive Order 12778, Civil Justice Reform

    This rule meets the applicable standards of section 2(b)(2) of 
Executive Order 12778.

List of Subjects in 44 CFR Part 62

    Claims, Flood insurance.
    Accordingly, we amend 44 CFR part 62 as follows:

PART 62--SALE OF INSURANCE AND ADJUSTMENT OF CLAIMS

    1. The authority citation for part 62 continues to read as follows:

    Authority: 42 U.S.C. 4001 et seq.; Reorganization Plan No. 3 of 
1978, 43 FR 41943, 3 CFR, 1978 Comp., p. 329; E.O. 12127 of Mar. 31, 
1979, 44 FR 19367, 3 CFR, 1979 Comp., p.376.

    2. We amend Sec. 62.23 by redesignating paragraphs (j)(2) through 
(j)(6) as paragraphs (j)(3) through (j)(7), and by revising paragraph 
(j)(1) and adding new paragraph (j)(2) to read as follows:


Sec. 62.23  WYO Companies authorized.

* * * * *
    (j) * * *
    (1) Have a biennial audit of the flood insurance financial 
statements conducted by an independent Certified Public Accountant 
(CPA) firm at the Company's expense to ensure that the financial data 
reported to us accurately represents the flood insurance activities of 
the Company. The CPA firm must conduct its audits in accordance with 
the generally accepted auditing standards (GAAS) and Government 
Auditing Standards issued by the Comptroller General of the United 
States (commonly known as ``yellow book'' requirements). The Company 
must file with us (the Federal Insurance Administration) a report of 
the CPA firm's detailed biennial audit, and, after our review of the 
audit report, we will convey our determination to the Standards 
Committee.
    (2) Participate in a WYO Company/FIA Operation review. We will 
conduct a review of the WYO Company's flood insurance claims, 
underwriting, customer service, marketing, and litigation activities at 
least once every three (3) years. As part of these reviews, we will 
reconcile specific files with a listing of transactions submitted by 
the Company under the Transaction Record Reporting and Processing 
(TRPP) Plan (Part 5). We will file a report of the Operation Review 
with the Standards Committee.
* * * * *
    3. We revise Appendix B to Part 62--National Flood Insurance 
Program to read as follows:

Appendix B to Part 62--National Flood Insurance Program

    A Plan to Maintain Financial Control for Business Written Under 
the Write Your Own Program.
    (a) In general. Under the Write Your Own (WYO) Program, we (the 
Federal Insurance Administration (FIA), Federal Emergency Management 
Agency (FEMA)) may enter into an arrangement with individual private 
sector insurance companies licensed to engage in the business of 
property insurance. The arrangement allows these companies--using 
their customary business practices--to offer flood insurance 
coverage to eligible property owners. To assist companies in 
marketing flood insurance coverage, the Federal Government will be a 
guarantor of flood insurance coverage for WYO policies issued under 
the WYO Arrangement. To account for and ensure appropriate spending 
of any taxpayer funds, the WYO companies and we will implement this 
Financial Control Plan (Plan). Only the Administrator may approve 
any departures from the requirements of this Plan.
    (b) Financial Control Plan. (1) The WYO Companies are subject to 
audit, examination, and regulatory controls of the various States. 
Additionally, the operating department of an insurance company is 
customarily subject to examinations and audits performed by the 
company's internal audit or quality control departments, or both, 
and independent Certified Public Accountant (CPA) firms. This Plan 
will use to the extent possible the findings of these examinations 
and audits as they pertain to business written under the WYO 
Program.
    (2) This Plan contains several checks and balances that can, if 
properly implemented by the WYO Company, significantly reduce the 
need for extensive on-site reviews of the Company's files by us or 
our designee. Furthermore, we believe that this process is 
consistent with customary reinsurance practices and avoids 
duplication of examinations performed under the auspices of 
individual State Insurance Departments, NAIC Zone examinations, and 
independent CPA firms.
    (c) Standards Committee established. (1) We establish in this 
Plan a Standards Committee for the WYO Program to oversee the 
performance of WYO companies under this Plan and to recommend 
appropriate remedial actions to the Administrator. The Standards 
Committee will review and recommend to the Administrator remedies 
for any adverse action arising from the implementation of the 
Financial Control Plan. Adverse actions include, but are not limited 
to, not renewing a particular company's WYO Arrangement.
    (2) The Administrator appoints the members of the Standards 
Committee, which consists of five (5) members from FIA, one (1) 
member from FEMA's Office of Financial Management, and one (1) 
member from each of the six (6) designated WYO Companies, pools, or 
other entities.
    (3) A WYO company must--
    (A) Have a biennial audit of the flood insurance financial 
statements conducted by a CPA firm at the Company's expense to 
ensure that the financial data reported to us accurately represents 
the flood insurance activities of the Company. The CPA firm must 
conduct its audits in accordance with generally accepted auditing 
standards (GAAS) and the Government Auditing Standards issued by the 
Comptroller General of the United States (commonly known as ``yellow 
book'' requirements). The Company must file with us a report of the 
CPA firm's detailed biennial audit, and, after our review of the 
audit report, we will convey our determination to the Standards 
Committee.
    (B) Participate in a WYO Company/FIA Operation review. We will 
conduct a review of the WYO Company's flood insurance claims, 
underwriting, customer service, marketing, and litigation activities 
at least once every three (3) years. As part of these reviews, we 
will reconcile specific files with a listing of transactions 
submitted by the Company under the Transaction Record Reporting and 
Processing Plan (Part 5). We will file a report of the Operation 
Review with the Standards Committee (Part 7).
    (C) Meet the recording and reporting requirements of the WYO 
Transaction Record Reporting and Processing (TRRP) Plan and the WYO 
Accounting Procedures Manual.

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The National Flood Insurance Program's (NFIP) Bureau and Statistical 
Agent will analyze the transactions reported under the TRRP Plan and 
submit a monthly report to the WYO company and to us. The analysis 
will cover the timeliness of the WYO submissions, the disposition of 
transactions that do not pass systems edits, and the reconciliation 
of the totals generated from transaction reports with those 
submitted on the WYO Company's reports. (Parts 2 and 6).
    (D) Cooperate with FEMA's Office of Financial Management on 
Letter of Credit matters.
    (E) Cooperate with us in the implementation of a claims 
reinspection program (Part 3).
    (F) Cooperate with us in the verification of risk rating 
information.
    (G) Cooperate with FEMA's Office of Inspector General on matters 
pertaining to fraud.
    (d) This Plan incorporates by reference a separate document, 
``The Write Your Own Program Financial Control Plan Requirements and 
Procedures,'' that contains the following parts, each of which is 
incorporated by reference into and is applicable to the Financial 
Control Plan:
    (1) Part 1--Financial Audits, Audits for Cause, and State 
Insurance Department Audits;
    (2) Part 2--Transaction Record Reporting and Processing Plan 
Reconciliation Procedures;
    (3) Part 3--Claims Reinspection Program;
    (4) Part 4--Report Certifications and Signature Authorization;
    (5) Part 5--Transaction Record Reporting and Processing Plan;
    (6) Part 6--Write Your Own (WYO) Accounting Procedures Manual; 
and
    (7) Part 7--Operation Review Procedures.
    (e) Interested members of the public may obtain a copy of ``The 
Write Your Own Program Financial Control Plan Requirements and 
Procedures'' by contacting the FEMA Distribution Center, P.O. Box 
2012, Jessup, MD 20794.''

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

    Dated: October 12, 1999.
Edward T. Pasterick,
Acting Administrator, Federal Insurance Administration.
[FR Doc. 99-27009 Filed 10-15-99; 8:45 am]
BILLING CODE 6718-03-P