W-7: Reporting NFIP Expenses to the NAICPresenters: Sara Robben, NAIC

Tom Hayes, FEMA Phil Zakas, iService

Reporting NFIP Expenses to NAICAGENDA

Introduction / Background Tom Hayes NAIC Perspective Sara Robben Federal Flood Line of the IEE –

FEMA’s Expectations Tom Hayes Overview of Data

with Key Findings Phil Zakas WYO Expense Allowance –

past experience applied to future time periodsTom Hayes WYO Compensation –

Where do we go from here? Tom Hayes Q&A

BackgroundWYO Compensation

WYO program began in 1983Types of WYO Company compensation

• WYO Expense Allowance• Marketing Bonus• Allocated Loss Adjustment Expenses• Unallocated Loss Adjustment Expenses• Special Allocated Loss Adjustment ExpensesWYO Expense Allowance currently based on industry’s

five-year average for five property lines weighted by premium

• Fire• Homeowners• Allied Lines• Farmowners• CMP (Non-Liability)

BackgroundGAO’s Review of WYO Compensation

Prior to BW12: Post-Katrina, GAO addressed WYO Company compensation in

Opportunities Exist to Improve Oversight of the WYO Program (GAO 09-455) http://www.gao.gov/new.items/d09455.pdf)

GAO’s Key Findings re: WYO Compensation• “FEMA does not systematically consider actual flood insurance

expense information when it determines the amount it pays the WYO for selling and servicing flood insurance policies and adjusting claims.”

• “When GAO compared expense payments FEMA made to six WYOs to the WYOs’ actual expenses for calendar years 2005 through 2007 … payments exceeded actual expenses by … 16.5 percent of total payments made.”

• “Considering actual expense information would provide transparency and accountability over payments to the WYOs.”

BackgroundBiggert-Water 2012 Reform Act

Provisions of Section 224: Oversight and Expense Reimbursements of WYOs

Paragraph (b) – Methodology to Determine Reimbursed ExpensesWithin 180 days of passage, “develop a methodology for determining the appropriate amounts … companies … should be reimbursed …”

FEMA instructed to use NAIC data, special data calls, or some combination of the two

Paragraph (c) – Submission of Expense Reports (authorizes data calls) Paragraph (d) – FEMA Rulemaking Paragraph (e) – Report to Congress (60 days after final rule)

Report on how new compensation methodology “accurately represents the true operating costs and expenses” of WYO companies

Paragraph (f) – GAO Study and Report on WYO Expenses (details next slide)

BackgroundBiggert-Water 2012 Reform Act

Provisions of Section 224(f): GAO Study and Report(1) STUDY – “Not later than 180 days” after FEMA’s final rule(A) Study “efficacy, adequacy, and sufficiency of the final rule …”(B) Report to Congress

(2) GAO AUTHORITY –The GAO(A) “may use any previous findings, studies or reports” GAO completed on

the WYO Program(B) “shall determine if” (i) the final rule allows FEMA to “access adequate information regarding the actual

expenses” of WYO companies(ii)“the actual reimbursements paid out under the final rule … accurately reflect

the expenses reported by” WYO companies, “including the standard business costs and operating expenses”

(C) “shall analyze the effect of the final rule … on the level of participation of property and casualty insurers in the Write Your Own program.”

FEMA has three possible sources of data: A.M. Best NAIC Federal Flood line on the Insurance Expense Exhibit

The NAIC has been very helpful in providing us multiple years of extensive data from Annual Reports – especially the Insurance Expense Exhibit

Data Calls of WYO Companies At least two previous data calls: Principle Residents and LAE Data calls for company operating expenses might require

supporting audits and company site visits

There are two sources of NFIP data to balance the above against: NFIP Financial Statement Data NFIP Statistical Data (TRRP)

BackgroundBiggert-Water 2012 Reform Act

BackgroundBiggert-Water 2012 Reform Act

Data Calls or NAIC Data? Data Calls

Expensive to design and administer Time consuming for FEMA to compile results Audit control assurances Should result in best quality data – when properly designed

NAIC Data Readily available Subject to NAIC reporting and auditing standards Historically data has been reported under a variety of accounting

interpretations, rendering it unusable by FEMA NAIC and FEMA have worked together to issue new guidelines

beginning with the reporting of calendar year 2012 expense data for the Federal Flood line of IEE

NAIC Perspective Sara Robben, NAIC

National Association of Insurance Commissioners

NAIC History

HISTORY

May 24, 1871

Annual Statement Blank

National Association of Insurance Commissioners

Solvency Modernization Initiative - Background

Evolution of the U.S. Solvency System

Detailed and Uniform Financial Regulatory System

Detailed and Uniform Financial Regulatory System

Early 1990s –Major Changes to Financial Regulation

Early 1990s –Major Changes to Financial Regulation

Continuous ImprovementContinuous Improvement

National Association of Insurance Commissioners

Solvency Modernization Initiative

SMISMI

Capital Requirements

Governance & Risk Management

Group Supervision

Statutory Accounting Financial Reporting

Reinsurance

US Solvency

Regulation Framework

http://www.naic.org/index_smi.html

National Association of Insurance Commissioners

Regulatory Principles

National Association of Insurance Commissioners

Statutory Accounting Principles

National Association of Insurance Commissioners

The Insurance Expense Exhibit

INSURANCE EXPENSE EXHIBIT

(IEEE)

ALLOCATION TO EXPENSE GROUPS

ALLOCATION TO LINES OF BUSINESS NET OF REINSURANCE

ALLOCATION TO LINES OF DIRECT BUSINESS WRITTEN

National Association of Insurance Commissioners

Insurance Expense Exhibit – Summary

Purpose of the Insurance Expense Exhibit

National Association of Insurance Commissioners

Insurance Expense Exhibit – Summary

What is Expected of Reporting Entities

National Association of Insurance Commissioners

Contact Information:

Sara Robben, Statistical Advisor(816) 783-8230

srobben@naic.org

National Association of Insurance Commissioners

Federal Flood Line of the IEE– FEMA’s Expectations

Federal Flood Line of the IEE– FEMA’s Expectations

Tom Hayes, FEMA

Federal Flood Line of the IEE– FEMA’s Expectations

FEMA’s Expectations for the Federal Flood line on the IEE[Note: NAIC expectations are what companies should meet]• Written Premium – Should match amounts reported on NFIP

Financial Statement (after adjusting for differing time periods) NAIC WP (Calendar Year YY) =

NFIP Fin’l Stmt WP (first 3 mos of FY YY+1) + NFIP Fin’l Stmt WP (full 12 mos of FY YY) – NFIP Fin’l Stmt WP (first 3 mos of FY YY)

• Earned Premium & Unearned Premium Reserve – should also balance

• Paid Loss, Incurred Loss and Unpaid Losses (Direct) should also balance to amounts reported on the NFIP Financial Statement. On a net basis, these should be reported as $0 on the IEE.

• LAE – Defense and Cost Containment (DCC) and Adjusting and Other Expenses (AOE) have no specific amount to balance to on the NFIP Financial Statement, but reasonability tests can be performed as ratios to Paid and Incurred Loss.

FEMA’s Expectations for the Federal Flood line on the IEE• Other Underwriting Expenseso Commission & Brokerage Expenseso Taxes, Licenses & Feeso Other Acquisition, Field Supervision & Collectiono General Expenses• On a direct basis, these should reflect the actual expenses of the

WYO Company. The Company may use a vendor service and the expenses paid the vendor for these expense categories should be reported as well as their own company expenses. The latter category includes salaries and benefits of employees of the WYOs working full or part time on the NFIP, as well as prorated expenses that are apportioned among all lines (HR department, facilities, etc.)

• On a net basis, the direct amounts should be reduced to reflect the income received from the NFIP under the WYO Allowance and the Marketing Bonus

Federal Flood Line of the IEE– FEMA’s Expectations (continued)

Overview of Data with Key Findings

Overview of Data with Key Findings

Phil Zakas, iService

Overview of Data with Key Findings

Data Reviewed NFIP Financial Statement vs. NAIC’s IEE NAIC vs. A.M. Best WYO vs. Non WYO Federal Flood from IEE

• Overall Reasonableness • Year to Year Consistency• Comparison to Homeowners

Reporting under revised NAIC Instructions Observed Improvements

Areas for Improvement

Overview of Data w/Key FindingsNFIP Financial Statement vs. NAIC’s IEE

Data Differences between NAIC and A.M.Best are expected due to:

Nature of A.M. Best’s “voluntary” data subscription service

Tendency of A.M. Best to update/revise data in certain circumstances

By design, NAIC data requested by FEMA is known to exclude some smaller writers

Insurance Expense Exhibit is an NAIC base report. It is supported by A.M. Best

Overview of Data w/Key FindingsNAIC vs. A.M.Best

Overview of Data w/Key FindingsNAIC vs. A.M.Best

Overview of Data w/Key FindingsNAIC vs. A.M.Best

Overview of Data w/Key FindingsNAIC vs. A.M.Best

Overview of Data w/Key FindingsNAIC vs. A.M.Best

Overview of Data w/Key FindingsWYO vs. Non WYO

How we grouped companies for our review

WYO vs. Non-WYO: Study of Homeowner Expense Ratios

Note: WYO companies are ranked based on their Homeowners Premium volume, not on their Flood Insurance Premium volume.

  WYO (74% of HO prem)

Non-WYO (26% of HO prem)

Largest companies

(7 companies)

~65% of WYO HO

~34% of non-WYO HO

Second Tier(15

companies)

~23% of WYO HO

~24% of non-WYO HO

Overview of Data w/Key FindingsWYO vs. Non WYO

Overview of Data w/Key FindingsWYO vs. Non WYO

Overview of Data w/Key FindingsWYO vs. Non WYO

Overview of Data w/Key FindingsWYO vs. Non WYO

Overview of Data w/Key FindingsWYO vs. Non WYO

Overview of Data w/Key FindingsWYO vs. Non WYO

Overview of Data w/Key FindingsWYO vs. Non WYO

Review of Homeowners U/W expense ratios to DWP: Expense ratios for WYOs appear to be higher than

Non WYOs when commission and brokerage is excluded from the ratio

Expense ratios for WYOs appear to be equal to, or lower than Non WYOs when commission and brokerage is included in the ratio

Further reviews of total U/W expenses versus the component parts may be warranted in support of future Expense Allowance determinations

NAIC data allows us to readily perform these detailed reviews

Overview of Data w/Key FindingsFederal Flood From IEE

How we grouped companies for our review

WYOs: Study of Federal Flood Expense Ratios

Note: WYO companies are ranked based on their Federal Flood Insurance Premium volume

  WYOs

Largest companies

(7 companies)~70% of WYO FF

Second Tier(15 companies)

~24% of WYO FF

Overview of Data w/Key FindingsFederal Flood From IEE

Overview of Data w/Key FindingsFederal Flood From IEE

Overview of Data w/Key FindingsReporting under revised NAIC Instructions

Observed improvements

Overview of Data w/Key FindingsReporting under revised NAIC Instructions

Observed improvements

Overview of Data w/Key FindingsReporting under revised NAIC Instructions

Observed improvements

Overview of Data w/Key FindingsReporting under revised NAIC Instructions

Areas for improvement

Overview of Data w/Key FindingsFederal Flood From IEE

Review of Federal Flood U/W expense ratios to DWP: Comparison to Homeowners:

• U/W expense ratios, both excluding and including commission and brokerage expenses, are well below those observed for the HO line. Further review is required however.

• U/W expense ratios reported appear to be lower for largest WYOs, however further review may indicate that this trend may be reversing.

Overall Reasonableness / Year to Year Consistency:• Overall reasonableness may be improving in the reporting of

U/W Expenses. That is, several WYOs now appear to be converging to similar values, variations from the average U/W expense ratios being reported each year are now improving, and for certain companies, negative entries observed in prior reviews are now positive. Improvements are still needed for some WYOs

Overview of Data w/Key FindingsFederal Flood From IEE

WYO Expense Allowance past experience applied to future time periods

WYO Expense Allowance – past experience applied to future time periods

&

WYO Compensation – Where do we go from here?

Tom Hayes, FEMA

WYO Expense Allowance past experience applied to future time periods

WYO Expense Allowance % Calculation• Data currently provided by A.M. Best Company’s “Aggregates

and Averages” publication featuring consolidated industry data

• Data is from Part III of the Insurance Expense Exhibit

• Uses data published, as of March 15 of the prior Arrangement year

• Data used is for the five property lines of coverages: Fire, Allied Lines, Farmowners, Multiple Peril, Homeowners Multiple Peril, and Commercial Multiple Peril (non-liability portion), all insurers combined

• An average of the latest 5 years of data is used for each Expense Allowance % calculation

• Typical time lag from mid point of experience to average date of Expense Allowance % application is over 4 years

• Methodology favors stability over responsiveness

WYO Expense Allowance past experience applied to future time periods

WYO Expense Allowance past experience applied to future time periods

WYO Expense Allowance past experience applied to future time periods

WYO Expense Allowance past experience applied to future time periods

WYO Expense Allowance past experience applied to future time periods

WYO Expense Allowance past experience applied to future time periods

WYO Expense Allowance past experience applied to future time periods

WYO Compensation

Where do we go from here?

WYO Compensation -Where do we go from here?

Biggert Water instructs FEMA to use WYO Expenses to construct the Expense Allowance……

Overview of Data w/Key FindingsReporting under revised NAIC Instructions

Observed improvements

WYO Compensation -Where do we go from here?

Reporting NFIP Expenses to the to NAIC: Federal Flood expense data reported to the NAIC is showing

improvements in overall consistency

Federal Flood expense data reported to the NAIC will need to become increasingly more credible in order to use it most effectively in the annual WYO Expense Allowance Percentage calculation.

Currently, Federal Flood U/W expense ratios, both excluding and including commission and brokerage expenses, are well below those observed for the HO line. Further review is required.

WYO Compensation -Where do we go from here?

While BW12 requries WYO compensation to be based on actual WYO expenses … it does not require WYO compensation to be based solely on actual WYO expenses

So possibly, WYO Allowance could be a blended result of current method and actual flood insurance expenses

One big remaining question: LAE -- How reliable are IEE numbers?

Relationship of WYO company to their vendor will need to be monitored. If WYO company has financial interest in vendor, that will complicate reporting expenses

QUESTIONS?

?QUESTIONS?QUESTIONS?

QUESTIONS?

QUESTIONS?

QUESTIONS?

QUESTIONS?