W-7: Reporting NFIP Expenses to the NAIC
Presenters:
Sara Robben, NAIC
Tom Hayes, FEMA
Phil Zakas, iService
Reporting NFIP Expenses to NAIC
AGENDA
 Introduction / Background
 NAIC Perspective
 Federal Flood Line of the IEE –
FEMA’s Expectations
 Overview of Data
with Key Findings
 WYO Expense Allowance –
past experience applied to future time periods
Tom Hayes
Sara Robben
Tom Hayes
Phil Zakas
Tom Hayes
 WYO Compensation –
Where do we go from here?
 Q&A
Tom Hayes
Background
WYO Compensation
 WYO program began in 1983
Types of WYO Company compensation
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WYO Expense Allowance
Marketing Bonus
Allocated Loss Adjustment Expenses
Unallocated Loss Adjustment Expenses
Special Allocated Loss Adjustment Expenses
WYO Expense Allowance currently based on industry’s five-year
average for five property lines weighted by premium
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•
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Fire
Homeowners
Allied Lines
Farmowners
CMP (Non-Liability)
Background
GAO’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.”
Background
Biggert-Water 2012 Reform Act
Provisions of Section 224:
Oversight and Expense Reimbursements of WYOs
 Paragraph (b) – Methodology to Determine Reimbursed Expenses
Within 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)
Background
Biggert-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.”
Background
Biggert-Water 2012 Reform Act
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)
Background
Biggert-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
National Association
of Insurance Commissioners
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
Early 1990s –Major Changes to Financial
Regulation
Continuous Improvement
National Association
of Insurance Commissioners
Solvency Modernization Initiative
Capital Requirements
US
Solvency
Regulation
Framework
Governance & Risk
Management
SMI
Group Supervision
Statutory Accounting
Financial Reporting
Reinsurance
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
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]
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•
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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.
Federal Flood Line of the IEE–
FEMA’s Expectations (continued)
 FEMA’s Expectations for the Federal Flood line on the IEE
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Other Underwriting Expenses
o
o
o
o
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Commission & Brokerage Expenses
Taxes, Licenses & Fees
Other Acquisition, Field Supervision & Collection
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
Overview of Data with Key
Findings
Overview of Data with Key Findings
Phil Zakas, iService
Overview of Data with Key
Findings
 Data Reviewed
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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 Findings
NFIP Financial Statement vs. NAIC’s IEE
 WYO Financial Statement Data to NAIC data
 Unable to perform this year (due to time constraints…)
 Our analysis and conclusions generated in 2011 remain unchanged
• Acceptable comparisons observed for premiums and losses
• Many large WYOs matched within a few
percentage points
• Some displayed greater variations
• A few companies matched exactly every year
• Generally, premiums matched more closely than losses
 Conclusion: While nothing alarming appeared, it is worth further
investigation. It seems likely that FEMA (and probably NAIC also)
would be questioning why numbers aren’t exact
Overview of Data w/Key Findings
NAIC vs. A.M.Best
 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 Findings
NAIC vs. A.M.Best
Overview of Data w/Key Findings
NAIC vs. A.M.Best
Overview of Data w/Key Findings
NAIC vs. A.M.Best
Overview of Data w/Key Findings
NAIC vs. A.M.Best
Overview of Data w/Key Findings
WYO vs. Non WYO
How we grouped companies for our review
WYO vs. Non-WYO: Study of Homeowner Expense Ratios
Largest
companies
WYO
Non-WYO
(74% of HO prem)
(26% of HO prem)
~65% of WYO HO
~34% of non-WYO HO
~23% of WYO HO
~24% of non-WYO HO
(7 companies)
Second Tier
(15 companies)
Note: WYO companies are ranked based on their Homeowners Premium
volume, not on their Flood Insurance Premium volume.
Overview of Data w/Key Findings
WYO vs. Non WYO
Overview of Data w/Key Findings
WYO vs. Non WYO
Overview of Data w/Key Findings
WYO vs. Non WYO
Overview of Data w/Key Findings
WYO vs. Non WYO
Overview of Data w/Key Findings
WYO vs. Non WYO
Overview of Data w/Key Findings
WYO vs. Non WYO
Overview of Data w/Key Findings
WYO 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 Findings
Federal Flood From IEE
How we grouped companies for our review
WYOs: Study of Federal Flood Expense Ratios
WYOs
Largest companies
(7 companies)
Second Tier
(15 companies)
~70% of WYO FF
~24% of WYO FF
Note: WYO companies are ranked based on their Federal Flood Insurance
Premium volume
Overview of Data w/Key Findings
Federal Flood From IEE
Overview of Data w/Key Findings
Federal Flood From IEE
Overview of Data w/Key Findings
Reporting under revised NAIC Instructions
Observed improvements
Overview of Data w/Key Findings
Reporting under revised NAIC Instructions
Observed improvements
Overview of Data w/Key Findings
Reporting under revised NAIC Instructions
Observed improvements
Overview of Data w/Key Findings
Reporting under revised NAIC Instructions
Areas for improvement
Overview of Data w/Key Findings
Federal Flood From IEE
 Review of Federal Flood U/W expense ratios to DWP:
 Comparison to Homeowners:
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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.
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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:
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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 Findings
Federal Flood From IEE
 Review of Federal Flood U/W expense ratios to DWP:
 Final Additional Observations/ Updates from 2011 Analysis:
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Of the largest 22 WYOs (ranked by size of Federal Flood Direct
Written Premiums):
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6 have relatively high (i.e. relative to the average value) U/W
Expense ratios to DWP. 4 of these are fairly stable (i.e. relatively
small variations for their 2008 through 2012 values)
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5 have relatively low (i.e. relative to the average value) U/W Expense
ratios to DWP. 4 of these are fairly stable (i.e. relatively small
variations for their 2008 through 2012 values)
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9 are closest to the overall average indications. 3 of these are fairly
stable (i.e. relatively small variations for their 2008 through 2012
values)
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2 have indications that are negative or 0
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 Findings
Reporting 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?
?