Assistance to Private Sector Property Insurers; Final Rule
[Federal Register: October 18, 1999 (Volume 64, Number 200)]
[Rules and Regulations]
From the Federal Register Online via GPO Access
[DOCID:fr18oc99-16]
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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.
SUMMARY: We (the Mitigation Division 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 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, Mitigation Division, 500 C Street SW., Washington, DC 20472, 202-646-3429, (facsimile) 202-646-3445, (email), Edward.Connor@fema.gov.
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.
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 Mitigation Division) 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/Mitigation Division 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 Mitigation Division , 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 Mitigation Division, 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/Mitigation Division 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.
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, Mitigation Division.
[FR Doc. 99-27009 Filed 10-15-99; 8:45 am]
BILLING CODE 6718-03-P
Last Modified: Thursday, 04-Jun-2009 12:02:37 EDT