[Federal Register Volume 65, Number 191 (Monday, October 2, 2000)]
[Proposed Rules]
[Pages 58720-58721]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25017]



[[Page 58720]]

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FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 206


Disaster Assistance; Insurance Requirements for the Public 
Assistance Program

AGENCY: Federal Emergency Management Agency (FEMA).

ACTION: Notice of findings for the advance notice of proposed 
rulemaking.

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SUMMARY: We (FEMA) published an Advance Notice of Proposed Rulemaking 
(ANPR) on February 23, 2000 on insurance requirements, procedures and 
eligibility criteria with respect to buildings under the Public 
Assistance Program. The ANPR described a range of problems with the 
insurance element of the Public Assistance Program, listed possible 
options to address them, and finally, included several specific 
questions about how the Program could be improved. The overwhelming 
majority of comments responded to an aspect of insurance coverage for 
which our preferred option (referenced in the ANPR as Option 3) would 
condition Public Assistance grants for buildings on adequate property 
insurance being in place at the time of the disaster. Comments on other 
approaches to the insurance issues were received as well.
    The deadline for comments was April 10, 2000. We received nearly 
300 responses to the ANPR. The purpose of this notice is to provide a 
summary of these responses and an update on our process of developing a 
proposed rule on insurance requirements for the Public Assistance 
Program.

FOR FURTHER INFORMATION CONTACT: Curtis Carleton, (202) 646-4535.

SUPPLEMENTARY INFORMATION:

I. Background

    The Robert T. Stafford Disaster Relief and Emergency Assistance 
Act, 42 U.S.C. 5121 et seq. (Stafford Act), authorizes the President to 
pay at least 75 percent of the costs to repair public and certain 
eligible private non-profit infrastructure and buildings damaged by a 
presidentially declared major disaster. The Public Assistance Program 
provides grants to applicants--including State and local governments, 
Native Americans or authorized tribal organizations, Alaskan Native 
villages and organizations, as well as certain eligible private non-
profit organizations--for emergency protective measures, for debris 
removal, and for disaster-damaged infrastructure and buildings.
    We published the ANPR in the Federal Register at 65 FR 8927, 
February 23, 2000. As discussed in the ANPR, we believe that our 
current program regulations, 44 Code of Federal Regulations (CFR), Part 
206, Subpart I--Public Assistance Insurance Requirements, are 
inadequate in meeting the insurance considerations of the Stafford Act, 
in particular, with respect to buildings. The ANPR was intended to 
surface what we consider to be the important issues, and to seek 
commentary and advice for program improvements. The issues address two 
major considerations. First, there is the matter of how best to 
encourage proactive risk management: this is where we discuss property 
insurance against major natural hazards for public buildings as a pre-
disaster program eligibility requirement. And second, there is the 
failure of our current program regulation to adequately address:
     Guidance for State insurance commissioners' waivers of the 
post-disaster insurance purchase requirement;
     Whether the Public Assistance Program will fund insurance 
deductibles for buildings, and if so, how much do we fund; and
     How we define insurance (or what qualifies as insurance), 
among other issues.
    The ANPR was entirely successful in meeting its objectives, and we 
are very grateful to the many respondents who provided needed 
information and thoughtful perspectives on the issues.
    The substance and quantity of the ANPR comments were remarkable, 
and are cause for a full and deliberative analysis before continuing to 
the next stage of developing a proposed rule. Therefore, we wanted to 
give you an idea as to the nature of the ANPR responses, and advise you 
of where we stand in the analytical process.

II. ANPR Findings

    We received 291 comments representing 32 States (including Guam and 
Puerto Rico). The distribution of responses is: 63 percent from 
California; 7 percent from Washington; 4 percent from Florida; and 26 
percent representing the remaining 29 states that submitted comments.
    The respondents offered a variety of perspectives, but many of them 
prefaced their comments with a statement to the effect that they agreed 
with the Public Assistance program's objective of seeking aggressive 
risk management on the part of public and private non-profit building 
owners.
    While the comments address many issues, most are captured in the 
following topics.

Adequate Insurance

    This area deals with the reasonableness of our schedule of 
eligibility criteria with respect to insurance.
    The majority of comments focus on earthquake coverage. Many of 
these contend that the private insurance market does not have the 
capacity to provide adequate coverage, and that, because of the 
unpredictable and potentially catastrophic nature of earthquakes, 
insurance companies tend to exact high prices for their coverage. The 
result is that some entities can only get very limited coverage, and 
some find that the coverage that they can get makes little economic 
sense given the high premiums and deductibles required.
    Earthquake coverage is separate and apart from all other property 
coverage. The insurance industry has trouble offering coverage for 
perils such as earthquakes that have no known probable frequencies; 
therefore, the insurance industry has limited its exposure in this 
area. The public entities tend to have little confidence that insurance 
companies will be willing or able to provide service at an acceptable 
price and shared concerns that the market will have the capacity to 
provide coverage to the levels outlined in the ANPR.
    Over half of the comments were from California, and virtually all 
of these tell us that an eligibility requirement involving earthquake 
insurance is unreasonable. Some contend that money spent on earthquake 
premiums would reduce money available for seismic retrofits, and that 
the net effect would be counterproductive. Several writers suggest that 
our schedule of eligibility criteria in earthquake insurance coverage 
is biased against small entities, because those with less valuable 
buildings would need to have a higher percentage of them insured. (Note 
that this concern is expressed by the larger entities on behalf of the 
smaller entities; we received a very low number of responses from 
smaller entities.) Several also suggest that the $125 million cap is 
too high: it is hard to get that much coverage even in today's soft 
market for all but a few of the largest entities and pools.
    We hear that, based on past experience, few insurers will be able 
to

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fully indemnify earthquake policyholders after a major quake.
    There was a suggestion that a requirement for an eligibility 
criterion on earthquake insurance would be viable only if FEMA were to 
promote a nationwide pool for earthquake coverage for public entities. 
This suggestion rests on the presumption that the commercial insurance 
market does not have the capacity to deal with the scope of the 
coverage needed. Along these lines, other writers suggest that we 
establish a National Earthquake Program, similar to the National Flood 
Insurance Program.
    Other than the comments on earthquake insurance, there were 
questions about the meaning of ``highest-valued single location.'' 
There was also the suggestion that we provide for a cap on all risk 
insurance, just as we do for wind and earthquake in our insurance 
schedule.

Premium Thresholds

    There was broad agreement with the need for a safety net provision 
in the form of a premium threshold. While some find it to be 
reasonable, most writers tell us that the $.30 per $100 is far too 
high, based on what they currently pay. For example, some entities are 
telling us that they pay just a few pennies per $100 for their hazard 
insurance. Many writers also point out that by using an absolute dollar 
threshold, insurance companies will quickly price their products to 
meet that threshold.
    Quite a few writers suggest that a threshold based on a percentage 
of an entity's operating budget would be a better way of offering a 
safety net. No writer suggested an actual percentage to be used in this 
regard.

Self-Insurance

    There is a lot of interest in this area. All comments support the 
idea that self-insurance be an option for all entities. Several writers 
suggest that there should be specific, stringent requirements for self-
insurance--for example, the retention of a dedicated fund--but, most 
simply state that the self-insurance should be an option to commercial 
insurance. In many cases, writers felt that self-insurance is a more 
sensible risk management technique than commercial insurance.
    In this context, quite a few writers speak to the ``all or 
nothing'' provision of Option 3. They refer to the notion that a 
failure to have adequate insurance in force would result in zero aid 
for a damaged building--the ``all or nothing'' provision. They suggest 
that this would be unreasonable, particularly for a very low 
probability hazard. The remedy put forth is to treat an uninsured 
building as self-insured, which would disqualify it for Public 
Assistance below our schedule of eligibility criteria coverage, but 
would allow it to remain qualified for Public Assistance above that 
amount.

Deductibles

    This is one area where we received opposing viewpoints.
    Some writers tell us that deductibles are, by their very nature, 
the responsibility of the insured, and should not be funded by FEMA. 
They point out that the size of the deductible is a major factor for 
the premium amount, and is a calculated business decision on the part 
of the building owner. It is their expression of risk tolerance or risk 
aversion, and should be their issue, not FEMA's. Other, more numerous 
writers are not only comfortable with the concept of deductibles being 
funded under the program, but offered suggestions for increasing the 
amounts. One person suggests increasing the deductible for blanket 
flood coverage from $25,000 to $100,000 if the loss limits exceed 150 
percent of the NFIP maximum coverage. The suggestion is that this would 
encourage building owners to carry higher limit flood policies, and 
that it would better correspond to the actual deductibles associated 
with most blanket flood policies. Another person suggests that we 
eliminate the deductible cap of $100,000 for wind coverage, but reduce 
the amount that we would fund from 5 percent to 2 percent, which, the 
commenter tells us, is the industry standard.
    The writers express concerns that if they had a higher deductible 
than the amount we would fund they would not be eligible for FEMA 
assistance. This misconception caused concerns similar to the concerns 
related to the ``all or nothing'' provision.

Incentives

    There is strong support for some form of incentive regarding a 
provision to condition future Public Assistance on insurance being in 
place at the time of the disaster. Fifty-two respondents favor 
incentives for purchasing insurance. However, the vast majority limit 
their comments to broad statements in support of the concept, rather 
than spell out specific ways of implementing an incentive arrangement.

Administrative Burdens

    Many respondents are concerned that an eligibility criterion for 
pre-disaster insurance will result in added delays and problems in 
obtaining Public Assistance grants. The thought is that FEMA would have 
to determine whether adequate property insurance is in effect on an 
applicant's buildings at the time of the disaster. This would require 
insurance experts, and would slow and complicate the process of 
awarding grants. Further, some respondents suggested that smaller 
Public Assistance applicants may not presently have property insurance 
on their buildings. A pre-disaster insurance eligibility criterion 
would necessitate them buying property insurance for the first time, 
and that, in so doing, they would encounter significant administrative 
burdens.

III. Next Steps

    While we have received many valuable comments on this subject, we 
are still seeking information on the feasibility of encouraging new or 
expanded property insurance coverage as a means to improving risk 
management analysis and decisions about public and certain private non-
profit buildings. For this reason, and in order to assist us in the 
evaluation of options, as well as to establish a benchmark for whatever 
criteria are eventually implemented, we plan to perform a study of 
public entity building insurance coverage.

    Dated: September 20, 2000.
James L. Witt,
Director.
[FR Doc. 00-25017 Filed 9-29-00; 8:45 am]
BILLING CODE 6718-02-P