National Flood Insurance Program (NFIP): Financial Assistance/Subsidy Arrangement

SUMMARY: The Federal Emergency Management Agency (FEMA) is issuing this final rule to remove the copy of the Financial Assistance/Subsidy Arrangement (Arrangement) and the summary of the Financial Control Plan from the appendices of the National Flood Insurance Program (NFIP) regulations. It is no longer necessary or appropriate to retain a contract, agreement, or any other arrangement between FEMA and private insurance companies in the Code of Federal Regulations.

DATES: This final rule is effective December 23, 2016.

FOR FURTHER INFORMATION CONTACT: Claudia Murphy, Director, Policyholder Services Division, Federal Insurance and Mitigation Administration, Federal Emergency Management Agency, 400 C Street SW., Washington, DC 20472, (202) 646-2775.

SUPPLEMENTARY INFORMATION: The National Flood Insurance Act of 1968 (NFIA), as amended (42 U.S.C. 4001 et seq.), authorizes the Administrator of the Federal Emergency Management Agency (FEMA) to establish and carry out a National Flood Insurance Program (NFIP) to enable interested persons to purchase insurance against loss resulting from physical damage to or loss of real or personal property arising from flood in the United States. See 42 U.S.C. 4011(a). Under the NFIA, FEMA has the authority to undertake arrangements to carry out the NFIP through the facilities of the Federal government, utilizing, for the purposes of providing flood insurance coverage, insurance companies and other insurers, insurance agents and brokers, and insurance adjustment organizations, as fiscal agents of the United States. See 42 U.S.C. 4071. To this end, FEMA is authorized to "enter into any contracts, agreements, or other arrangements" with private insurance companies to utilize their facilities and services in administering the NFIP, and on such terms and conditions as may be agreed upon. See 42 U.S.C. 4081(a).

Pursuant to this authority, FEMA enters into a standard Financial Assistance/Subsidy Arrangement (Arrangement) with private sector property insurers, also known as Write Your Own (WYO) companies, to sell NFIP flood insurance policies under their own names and adjust and pay claims arising under the Standard Flood Insurance Policy (SFIP). Each Arrangement entered into by a WYO company must be in the form and substance of the standard Arrangement, a copy of which is in Title 44 of the Code of Federal Regulations (CFR) Part 62, Appendix A. See 44 CFR 62.23(a). Since the primary relationship between the Federal government and WYO companies is one of a fiduciary nature (that is, to ensure that any taxpayer funds are appropriately expended), FEMA established "A Plan to Maintain Financial Control for Business Written Under the Write Your Own Program," also known as the "Financial Control Plan." See 42 U.S.C. 4071; 44 CFR 62.23(f), Part 62, App. B. To ensure financial and statistical control over the NFIP, as part of the Arrangement, WYO companies agree to adhere to the standards and requirements in the Financial Control Plan.

On May 23, 2016, FEMA published a proposed rule (81 FR 32261) proposing to remove the copy of the Arrangement in 44 CFR part 62, Appendix A, and the summary of the Financial Control Plan in 44 CFR part 62, Appendix B. In addition, FEMA proposed to make conforming amendments to remove citations to these appendices in 44 CFR 62.23.

FEMA proposed to remove the Arrangement from the NFIP regulations because it is no longer necessary to include a copy of the Arrangement in the CFR. FEMA originally included the Arrangement in the CFR to inform the public of the procedural details of the WYO Program. See 50 FR 16236 (April 25, 1985). There are now more efficient ways to inform the public of the procedural details of the WYO Program, and after more than 30 years of operation, the public is more familiar with the procedural details of the WYO Program and the flood insurance provided through WYO companies. Further, the NFIA does not require FEMA to include a copy of the Arrangement in the CFR. See 42 U.S.C. 4081. Finally, it is inappropriate to codify in regulation a contract, agreement, or other arrangement between FEMA and private insurance companies.

With the removal of the copy of the Arrangement from the NFIP regulations, FEMA and its industry partners can have flexibility to make operational adjustments and corrections to the Arrangement more quickly and efficiently. Although the rulemaking process plays an important role in agency policymaking, when this process is not required or necessary, the requirement to undergo rulemaking can unnecessarily slow down the operation of the NFIP by FEMA and its industry partners and can result in the use of alternate, less than ideal measures that result in business and operational inefficiencies.

FEMA also proposed to remove the summary of the Financial Control Plan in Appendix B, because this information is contained in either FEMA's Financial Control Plan, /1/ or in 44 CFR Section 62.23. Reprinting these requirements elsewhere in the CFR is duplicative and unnecessary.

FOOTNOTE 1 See National Flood Insurance Program, The Write Your Own Program Financial Control Plan Requirements and Procedures (1999), http://bsa.nfipstat.fema.gov/manuals/fcp99jc.pdf (last accessed April 8, 2016). END FOOTNOTE

Finally, FEMA proposed to make conforming amendments to the language in 44 CFR 62.23 where FEMA references Appendix A and Appendix B of 44 CFR part 62, because those appendices will be removed.

II. Public Comments on the Proposed Rule

FEMA received five comments in response to the proposed rule, one from a WYO company (Allstate/FEMA-2016-0012-0003), one from a member of the public, two from organizations representing agents and brokers (Independent Insurance Agents & Brokers of America, Inc./FEMA-2016-0012-0004; National Association of Professional Insurance Agents/FEMA-2016-0012-0005), and one collective comment from four organizations representing insurance companies (The American Insurance Association (AIA), The Financial Services Roundtable (FSR), The National Association of Mutual Insurance Companies (NAMIC), The Property and Casualty Insurers Association of America (PCIAA)/FEMA-2016-0012-0006). FEMA responds to these comments below.

With this regulatory action, FEMA finalizes the proposed rule, with one revision made in response to the comments received. FEMA is adding a requirement to 44 CFR 62.23 that FEMA must publish the Arrangement in the Federal Register at least 6 months prior to the effective date of the Arrangement.

A. Notice to WYO Companies of Changes to the Arrangement

Under the terms of the Arrangement, FEMA must publish in the Federal Register each year, and make available to the WYO companies, the terms for subscription or re-subscription to the Arrangement. WYO companies must notify FEMA of their intent to re-subscribe or not re-subscribe within 30 days of the publication of the notice in the Federal Register . See Financial Assistance/Subsidy Arrangement, Article V(B).

FEMA received two comments requesting FEMA to provide WYO companies sufficient notice prior to the effective date of a revised Arrangement (FEMA-2012-2016-0003/FEMA-2012-2016-0006). The commenters said this would provide time for WYO companies to assess the impact to their business (FEMA-2012-2016-0003), and provide time for the marketplace to assess the impact of changes, thereby allowing WYO companies to determine what, if any, changes would be necessary (FEMA-2012-2016-0006). They stated that this would also provide WYO companies time to decide whether to continue in or withdraw from the NFIP (FEMA-2012-2016-0003; FEMA-2012-2016-0006). One commenter suggested this notice be at least 1 year prior to the effective date of the revised Arrangement (FEMA-2012-2016-0003).

The current Arrangement does not specify how far in advance FEMA must publish the Arrangement in the Federal Register . Typically, FEMA publishes the Arrangement in the Federal Register in August, and the Arrangement becomes effective October 1. /2/ As a result, WYO companies typically have less than a month to decide whether to subscribe, because they must notify FEMA of their intent to re-subscribe or not re-subscribe within 30 days of the publication of the Arrangement in the Federal Register . WYO companies commented that they accepted this short timeline because they knew that they would receive notice of substantive changes to the Arrangement as part of the notice-and-comment rulemaking process. (FEMA-2016-0012-0006).

FOOTNOTE 2 See, e.g., 81 FR 51460 (Aug. 4, 2016). END FOOTNOTE

FEMA agrees it should provide sufficient notice to WYO companies prior to the effective date of a revised Arrangement. Therefore, FEMA is adding a requirement to paragraph (a) of Section 63.23 which states that each year, FEMA must publish the Arrangement at least 6 months before the effective date of the Arrangement. FEMA adds this 6-month notice requirement to the NFIP regulations to provide the WYO companies time to assess the impact of any changes to the Arrangement, including whether to re-subscribe. In addition, by placing this requirement in the CFR, FEMA will preserve certainty and protect the ability of WYO companies to adjust to any changes to the Arrangement. FEMA believes the 6-month notice provision is an appropriate balance between the 1-year notice proposed by the commenter, and the language of the current Arrangement, which does not specify how much notice FEMA must provide WYO companies, other than it must publish it each year.

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rule.

CFR Part: "44 CFR Part 62"

RIN Number: "RIN 1660-AA86"

Citation: "81 FR 84483"

Document Number: "Docket ID: FEMA-2016-0012"

Federal Register Page Number: "84483"

"Rules and Regulations"