Document ID: FEMA-2008-0001-0003
Agency: fema
Document Type: Rule
Title: National Flood Insurance Program (NFIP); Assistance to Private Sector Property Insurers; Write-Your-Own Arrangement
Posted Date: 2009-07-24T04:00Z

[Federal Register: July 24, 2009 (Volume 74, Number 141)]
[Rules and Regulations]               
[Page 36611-36614]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24jy09-7]                         

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DEPARTMENT OF HOMELAND SECURITY

Federal Emergency Management Agency

44 CFR Part 62

[Docket ID FEMA-2008-0001]
RIN 1660-AA58

 
National Flood Insurance Program (NFIP); Assistance to Private 
Sector Property Insurers; Write-Your-Own Arrangement

AGENCY: Federal Emergency Management Agency, DHS.

ACTION: Final rule.

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SUMMARY: This rule adopts as final, without change, an interim rule 
published on April 3, 2008. The interim rule amended portions of the 
Federal Emergency Management Agency, Federal Insurance Administration, 
Financial Assistance/Subsidy Arrangement between Write-Your-Own 
Companies and FEMA. The added language assisted WYO Companies by 
recognizing each party's duties under the Arrangement and amended the 
way FEMA communicates changes to the Unallocated Loss Adjustment 
Expenses compensation rate to WYO Companies.

DATES: This rule is effective August 24, 2009.

FOR FURTHER INFORMATION CONTACT: Edward L. Connor, Acting Federal 
Insurance Administrator, Federal Emergency Management Agency, 500 C 
Street, SW., Washington, DC 20472, (202) 646-3429 (Phone), (202) 646-
3445 (facsimile), or Edward.Connor@dhs.gov.

SUPPLEMENTARY INFORMATION:

I. Background

    Under the authority of sections 1304 and 1345 of the National Flood 
Insurance Act of 1968, Public Law 90-448, 82 Stat. 476, as amended (42 
U.S.C. 4011, 4081), the Federal Emergency Management Agency (FEMA) 
provides insurance protection against flood damage to homeowners, 
businesses, and others by means of the National Flood Insurance Program 
(NFIP). The sale of flood insurance is largely implemented by private 
insurance companies that participate in the NFIP Write-Your-Own (WYO) 
program. Through the WYO program, insurance companies enter into 
agreements with FEMA to sell and service flood insurance policies and 
adjust claims after flood losses.
    Under the WYO program, 88 private sector property insurers issue 
flood insurance policies and adjust flood insurance claims under their 
own names based on the Financial Assistance/Subsidy Arrangement 
(Arrangement). The Arrangement is published at 44 CFR part 62, Appendix 
A and defines the duties and responsibilities of insurers that sell, 
service, and market insurance under the WYO program. The Arrangement 
also identifies the responsibilities of the Government to provide 
financial and technical assistance to these insurers. The Arrangement 
is renewed yearly through written agreement between the WYO Companies 
and FEMA.
    FEMA published an interim final rule on April 3, 2008, (73 FR 
18182) in which it made three changes to the Arrangement. These changes 
either clarified existing practices or clarified how FEMA communicates 
certain information to WYO Companies.
    First, Article II, section G.3., was added to require the WYO 
Companies to notify their agents of the requirement to comply with 
State regulations regarding flood insurance agent education, notify 
them of flood insurance training opportunities needed to meet the 
minimum NFIP training requirements called for in section 207 of the 
Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004, Public 
Law 108-264, 118 Stat. 727 (42 U.S.C. 4011 note), and assist FEMA in 
periodic assessment of agent training needs. Although WYO Companies 
were already undertaking these efforts, they were added to the 
Arrangement to formalize the commitment.
    Second, FEMA revised Article VII, section A. to provide additional 
clarification that there is no requirement that WYO Companies use their 
own funds to pay NFIP claims when there are no funds available in the 
National Flood Insurance Fund (NFIF) to be drawn down through the 
company letter of credit. In such circumstances, the Federal Insurance 
Administrator would suspend the NFIP's payment of claims until funds 
are again available in the Treasury, and the WYO Companies would not be 
required to pay claims from their own funds in the event of such a 
suspension. This change was consistent with pre-existing FEMA policy.
    Finally, FEMA revised Article III, section C.1. of the Arrangement 
which deals with the Unallocated Loss Adjustment Expense (ULAE) for 
which WYO Companies receive reimbursement under the Arrangement. ULAE 
is intended to cover those claim handling expenses that are not 
associated with specific claims, such as maintaining the home office 
claims staff and establishing and running on-site claims field offices. 
Before the interim final rule, the ULAE rate was an expense 
reimbursement of 3.3 percent of the incurred loss (except that it does 
not include ``incurred but not reported''). The effect of the interim 
final rule was to remove the ULAE compensation percentage from the 
Arrangement. Instead, the percentage is now communicated by FEMA to the 
WYO Companies through a formula that is not written into the 
Arrangement. For fiscal year 2009, the formula was sent to each WYO 
Company as part of their offer to renew their Financial Assistance/
Subsidy Arrangement.
    Although the interim final rule was focused on the manner in which 
the ULAE formula is communicated to the WYO Companies, and not the 
actual ULAE rate itself, FEMA sought data to use in its efforts to 
revise the formula, and suggestions for ways to tailor the formula to 
ensure that it would accurately reimburse WYO Companies for their 
actual loss. WYO Companies were encouraged to submit actual ULAE data 
during the comment period of the interim final rule to assist FEMA in 
continuing to refine the formula.

II. Discussion of Public Comments

    FEMA received no comments from the public regarding the interim 
final rule. All previously published rulemaking documents, including 
the interim final rule which contains an in-depth explanation for the 
changes made, and supporting data are available in the public docket 
for this rulemaking. The public docket for this rulemaking is available 
online by conducting a search for Docket ID FEMA-2008-0001, at the 
Federal e-Rulemaking Portal at http://www.regulations.gov.

III. Regulatory Requirements

Congressional Review of Agency Rulemaking

    FEMA has sent this final rule to the Congress and to the Government 
Accountability Office under the Congressional Review of Agency 
Rulemaking Act, 5 U.S.C. 801-808. As discussed in depth below in the 
Executive Order 12866 analysis, this rule is not a ``major rule'' 
within the meaning of that Act and will not result in an annual effect 
on the economy of $100,000,000 or more. Moreover, it will not result in 
a major increase in costs or

[[Page 36612]]

prices for consumers, individual industries, Federal, State, or local 
government agencies, or geographic regions. Nor does FEMA expect that 
it will have ``significant adverse effects'' on competition, 
employment, investment, productivity, innovation, or on the ability of 
United States-based enterprises to compete with foreign-based 
enterprises.
    This rule revised the Arrangement between the WYO Companies and 
FEMA to encourage agents writing flood insurance under the NFIP to 
avail themselves of the training opportunities needed to meet the 
minimum NFIP training requirements, to clarify that there is no 
requirement that WYO Companies use their own funds to pay NFIP claims 
when there are no funds available in the NFIF to be drawn down through 
the company letter of credit, and to change the method in which FEMA 
communicates the ULAE rate to the WYO Companies. These changes were 
made to improve the Arrangement and to allow FEMA to run the NFIP in a 
more efficient and reasonable manner.

Executive Order 12866, Regulatory Planning and Review

    FEMA has prepared and reviewed this rule under the provisions of 
Executive Order 12866, Regulatory Planning and Review. Under Executive 
Order 12866, a significant regulatory action is subject to Office of 
Management and Budget (OMB) review and the requirements of the 
Executive Order. The Executive Order defines ``significant regulatory 
action'' as one that is likely to result in a rule that may:
    (1) Have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or Tribal governments or 
communities;
    (2) Create a serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) Materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.
    This final rule is not a ``significant regulatory action'', 
therefore OMB has not reviewed it under that Order. This rule adopts as 
final, without change, an interim rule published on April 3, 2008. The 
interim rule made three changes to the Arrangement. The first change 
simply clarifies existing practices. Article II, section G.3., was 
added to address the WYO Companies' cooperation in helping ensure that 
agents writing flood insurance under the NFIP meet the minimum NFIP 
training requirements.\1\ This new section of the Arrangement will not 
affect the training and education requirements, which are already 
established by the States. Although WYO Companies are already 
undertaking these efforts, they were added to the Arrangement to 
formalize the commitment. This change will have no economic impact.
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    \1\ An NFIP insurance agent may satisfy the minimum training and 
education requirements by completing an online course, which may be 
approved for 3 hours of continuing education credit per year by 
State.
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    WYO Companies have sought clarification as to what would occur 
following a large scale flooding event if there are no funds available 
in the NFIP to be drawn down through the company letter of credit. 
Therefore, the second change clarifies that there is no requirement 
that WYO Companies use their own funds to pay NFIP claims when there 
are no funds available in the NFIP to be drawn down through the company 
letter of credit. The Federal Insurance Administrator will suspend the 
NFIP's payment of claims until funds are again available in the 
Treasury. This change is consistent with pre-existing FEMA policy, will 
not affect the amount of FEMA's funding, and will have no economic 
impact.
    Finally, FEMA revised Article III, section C.1. of the Arrangement 
which deals with the ULAE for which WYO Companies receive reimbursement 
under the Arrangement. The rule removed the fixed 3.3 percent of ULAE 
compensation from the Arrangement to allow FEMA added flexibility in 
adjusting the rate as needed to best align with the actual expenses 
incurred by the WYO Companies. At present, the ULAE is reimbursed 
according to a revised formula of 1 percent of net written premium and 
1.5 percent of incurred loss. FEMA will adjust the rate as needed to 
reflect the actual expenses incurred by the WYO Companies on an annual 
basis.
    Table 1 below shows the historic ULAE compensation that the program 
paid to WYO Companies over the 21 years from 1987 to 2007. These 
figures have been compiled using historic accounting statements 
submitted by the WYO Companies. The ULAE is intended to cover those 
claim handling expenses that are not associated with specific claims, 
such as maintaining the home office claims staff and establishing and 
running on-site claims field offices. The 3.3 percent rate functioned 
equitably during most years of the NFIP, under-compensating companies 
moderately in light loss years, while providing slightly more 
compensation in heavier loss years. However, after catastrophic 
disasters such as Hurricane Katrina, FEMA found that the 3.3 percent 
fixed rate dramatically over compensated WYO Companies.
    The average annual impact of this rule is estimated to be $13.93 
million per year (in 2007 $), which represents a decrease in the ULAE 
compensation to WYO Companies. However, in an ``average'' loss year 
excluding the years 2005 and 2006 for Hurricane Katrina, the NFIP has 
paid out approximately $22.02 million per year in ULAE (=$418,468,366/
19). With the new formula, the annual impact would result in an 
increase in ULAE compensation to WYO Companies of $605,210 per year (in 
2007 $). The annual impact will vary as the rate will be adjusted 
annually to reflect the actual expenses incurred by the WYO Companies; 
however, it is not likely to have a significant economic impact of $100 
million or more per year. The data from 1987 to 2007 used to generate 
these figures is available in the public docket for this rulemaking.

                                                       Table 1--The Impact of the New Fee Schedule
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                                                                                                       Fixed ULAE       New ULAE fee      New ULAE fee
                                                                   Net written      Incurred loss       (3.3% of      schedule  (1% of    schedule less
                              FY                                premium (WP) (in  (IL) (in 2007 $)   incurred loss)   WP + 1.5% of IL)   fixed ULAE (in
                                                                   2007 $) \2\                         (in 2007 $)       (in 2007 $)         2007 $)
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1987..........................................................      $581,620,328       $74,573,109        $2,460,913        $6,934,800        $4,473,887
1988..........................................................       645,173,008        65,777,062         2,170,643         7,438,386         5,267,743
1989..........................................................       715,237,333       369,480,867        12,192,869        12,694,586           501,718

[[Page 36613]]

1990..........................................................       769,271,356       685,763,329        22,630,190        17,979,164        -4,651,026
1991..........................................................       780,514,853       206,603,224         6,817,906        10,904,197         4,086,290
1992..........................................................       796,262,026       473,136,630        15,613,509        15,059,670          -553,839
1993..........................................................       866,436,821     1,097,485,315        36,217,015        25,126,648       -11,090,367
1994..........................................................       932,647,295       270,791,261         8,936,112        13,388,342         4,452,230
1995..........................................................     1,041,750,604     1,314,742,022        43,386,487        30,138,636       -13,247,850
1996..........................................................     1,157,008,118     1,152,337,444        38,027,136        28,855,143        -9,171,993
1997..........................................................     1,294,209,933       885,147,617        29,209,871        26,219,314        -2,990,558
1998..........................................................     1,500,206,671       522,197,486        17,232,517        22,835,029         5,602,512
1999..........................................................     1,528,655,735       909,405,646        30,010,386        28,927,642        -1,082,744
2000..........................................................     1,557,194,095       514,278,754        16,971,199        23,286,122         6,314,923
2001..........................................................     1,678,554,108     1,495,645,122        49,356,289        39,220,218       -10,136,071
2002..........................................................     1,796,558,215       276,916,036         9,138,229        22,119,323        12,981,093
2003..........................................................     1,853,315,163       559,297,309        18,456,811        26,922,611         8,465,800
2004..........................................................     1,945,458,730     1,014,727,339        33,486,002        34,675,497         1,189,495
2005..........................................................     2,060,079,530     7,612,410,664       251,209,552       134,786,955      -116,422,597
2006..........................................................     2,353,434,684    11,730,924,332       387,120,503       199,498,212      -187,622,291
2007..........................................................     2,535,371,429       792,553,990        26,154,282        37,242,024        11,087,742
                                                               -----------------------------------------------------------------------------------------
     Total....................................................    28,388,960,039    32,024,194,560     1,056,798,420       764,252,519      -292,545,902
                                                               =========================================================================================
 Per Year.....................................................     1,351,855,240     1,524,961,646        50,323,734        36,392,977       -13,930,757
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    \2\ Numbers were adjusted for inflation based on Consumer Price 
Index (CPI) published by the Bureau of Labor Statistics, http://
inflationdata.com/inflation/Inflation_Rate/
HistoricalInflation.aspx.
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National Environmental Policy Act

    FEMA's regulations implementing the National Environmental Policy 
Act of 1969 (42 U.S.C. 4321 et seq.) at paragraph (ii) of 44 CFR 
10.8(d)(2) categorically exclude the preparation, revision, and 
adoption of regulations, directives, manuals, and other guidance 
documents related to actions that qualify for categorical exclusions. 
The changes made in this regulation constitute actions to enforce 
Federal, State or local codes, standards or regulations. This 
rulemaking will not have a significant effect on the human environment 
and, therefore, neither an environmental assessment nor an 
environmental impact statement are required.

Executive Order 13132, Federalism

    Executive Order 13132, entitled ``Federalism,'' (64 FR 43255, Aug. 
10, 1999), sets forth principles and criteria that agencies must adhere 
to in formulating and implementing policies that have federalism 
implications; that is, regulations that have substantial direct effects 
on the States, or on the distribution of power and responsibilities 
among the various levels of government. Federal agencies must closely 
examine the statutory authority supporting any action that would limit 
the policymaking discretion of the States, and to the extent 
practicable, must consult with State and local officials before 
implementing any such action. The changes in this rule affect the 
contractual relationship between FEMA and WYO Companies. Participation 
as a WYO Company is voluntary and does not affect State policymaking 
discretion. In accordance with section 6 of Executive Order 13132, FEMA 
determines that this rule will not have federalism implications 
sufficient to warrant the preparation of a federalism impact statement.

Paperwork Reduction Act of 1995

    As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 
et seq.), an agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless the 
collection of information displays a valid OMB control number. This 
rule does not impose any new reporting or recordkeeping requirements, 
nor does it revise information collection requirements currently 
approved under the Paperwork Reduction Act of 1995.

Executive Order 12988, Civil Justice Reform

    FEMA has reviewed this rule under Executive Order 12988, ``Civil 
Justice Reform'' (61 FR 4729, Feb. 7, 1996). This rule meets applicable 
standards to minimize litigation, eliminate ambiguity, and reduce 
burden.

Unfunded Mandates Reform Act

    The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) 
requires Federal agencies, to the extent permitted by law, to prepare a 
written assessment of the effects of any Federal mandate in a proposed 
or final agency rule that may result in the expenditure by State, 
local, and Tribal governments, in the aggregate, or by the private 
sector, of $100 million or more in any one year. Though this rule will 
not result in such an expenditure, FEMA does discuss the effects of 
this rule elsewhere in this preamble.
    Moreover, because this rule addresses a pre-existing Arrangement 
between FEMA, Federal Insurance Administration, and WYO Companies it 
does not impose any additional enforceable duty beyond that already 
established. Participation as a WYO Company is voluntary and does not 
affect State policymaking discretion. Accordingly, this rule does not 
contain any unfunded mandate or significantly or uniquely affect small 
governments, as described in the Unfunded Mandates Reform Act of 1995.

Executive Order 12898, Environmental Justice

    Under Executive Order 12898, ``Federal Actions to Address 
Environmental Justice in Minority Populations and Low-Income

[[Page 36614]]

Populations'' (59 FR 7629, Feb. 16, 1994), FEMA incorporates 
environmental justice into its policies and programs. The Executive 
Order requires each Federal agency to conduct its programs, policies, 
and activities that substantially affect human health or the 
environment in a manner that ensures that those programs, policies, and 
activities do not have the effect of excluding persons from 
participation in programs, denying persons the benefits of programs, or 
subjecting persons to discrimination because of race, color, or 
national origin. FEMA believes that no action under this rule will have 
a disproportionately high or adverse effect on human health or the 
environment, and that the rule meets the requirements of the Executive 
Order.

Executive Order 13045, Protection of Children

    FEMA has analyzed this rule under Executive Order 13045, Protection 
of Children from Environmental Health Risks and Safety Risks. This rule 
is not an economically significant rule and would not create an 
environmental risk to health or safety that might disproportionately 
affect children.

Executive Order 13175, Consultation and Coordination With Indian Tribal 
Governments

    FEMA has reviewed this rule under Executive Order 13175, 
``Consultation and Coordination with Indian Tribal Governments'' (65 FR 
67249, Nov. 9, 2000). This rule will not have a substantial direct 
effect on one or more Indian Tribes, on the relationship between the 
Federal Government and Indian Tribes, or on the distribution of power 
and responsibilities between the Federal Government and Indian Tribes.

Executive Order 12630, Governmental Actions and Interference With 
Constitutionally Protected Property Rights

    FEMA has reviewed this rule under Executive Order 12630, 
``Governmental Actions and Interference with Constitutionally Protected 
Property Rights'' (53 FR 8859, Mar. 18, 1988) as supplemented by 
Executive Order 13406, ``Protecting the Property Rights of the American 
People'' (71 FR 36973, June 28, 2006). This rule will not effect a 
taking of private property or otherwise have taking implications under 
Executive Order 12630.

List of Subjects in 44 CFR Part 62

    Claims, Flood insurance, Reporting and recordkeeping requirements.

0
Accordingly, the interim rule amending 44 CFR part 62 which was 
published at 73 FR 18182, Apr. 3, 2008, is adopted as final without 
change.

    Dated: July 16, 2009.
W. Craig Fugate,
Administrator, Federal Emergency Management Agency.
[FR Doc. E9-17744 Filed 7-23-09; 8:45 am]

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