PIA National recently submitted comments in response to the July 8, 2019 Advanced Notice of Proposed Rulemaking (ANPR) published by Federal Emergency Management Agency (FEMA) regarding the National Flood Insurance Program (NFIP). The ANPR outlines potential changes to the methodology currently used for payments to Write Your Own (WYO) insurance companies selling flood policies in the NFIP.
This ANPR was published in response to a provision in the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) telling FEMA to develop a method for determining the amount of reimbursements paid to WYO companies for selling, writing, and servicing NFIP policies and adjusting claims. Insurance agents are compensated through this WYO reimbursement rate.
BW-12 says FEMA can use flood insurance expense data provided directly by WYOs, flood insurance expense data provided by the WYOs to the National Association of Insurance Commissioners (NAIC), or a combination of the two. FEMA must ultimately issue a rule adopting a new method for paying WYO companies; the revised method is supposed to track actual flood expenses as closely “as practicably possible.”
The current methodology for calculating the WYO expense ratio does not include actual flood insurance expense data because, when it was formulated, such data was not widely available. Even today, actual flood insurance expense data is imprecisely reported. The ANPR offers three new possible ways to calculate the WYO expense ratio, which is currently set at 29.9 percent. Unfortunately, none of the three proposed alternatives represent an improvement over the current methodology. In fact, Methods 2 and 3 could be catastrophic to consumers because it would rob them of the expertise they get from the NFIP’s uniquely qualified salesforce of independent insurance agents.
The first new method is credibility weighting, which it estimates would result in a 28.8 percent ratio (based on currently available data). This method would shift more weight to the actual flood data figures as those figures gain credibility (hence its name). It would keep the 15 percent allocated for agent reimbursement. This method is the only one of the three that specifically mentions retaining the 15 percent allocated to agent compensation.
The second method uses actual flood expense data, which would be easier for FEMA to administer but is likely to be inaccurate, especially short-term. Just like the current method isn’t an accurate reflection of the expense ratio, this method wouldn’t be either, at least for a while, until flood data reporting becomes more uniform and robust. This method would result in a ratio of 25.3 percent, based on currently available data. This could be catastrophic for both agents and WYOs; it’s hard to imagine WYOs staying in the program in this scenario. Plus, this method does not protect agent compensation, which would probably make agents the first to feel the financial strain.
The third and final option presented in the ANPR is based on invoices. WYOs would incur expenses, make expenditures, and submit invoices for reimbursement to FEMA for those expenditures. This would give FEMA a tighter hold on WYO expenses, but it would create a big administrative burden for FEMA and for WYOs. Like option 2, this option leaves the agent compensation figure out entirely, which means the WYO would pay an agent and submit an invoice to FEMA for reimbursement. FEMA could try to micromanage how the WYOs spend their money, including on agent compensation, and could refuse to reimburse WYOs for agent commissions over a certain percentage or amount.
The ANPR says this option would likely “result in reimbursement delays and disruption to both the policyholders and the WYOs.” This seems especially bad for agents; they have no guaranteed minimal percentage compensation by the WYOs, and the administrative burden could mean they field more than the usual number of calls/complaints from angry policyholders facing “delays and disruption.”
If any of these methods is adopted, those WYOs that stay in the program will be forced to cut agent commissions to account for the reduction in the expense ratio. This will prompt agents to stop selling NFIP policies, because the reputational risk associated with doing so will no longer be sustainable, given the low commission rate. The most qualified independent agents could leave the program if their commissions are cut, and that decrease in the NFIP sales force could devastate the program. Without an expert to guide consumers through the process, many consumers will follow the lead of their carriers and agents and opt out of the NFIP altogether.
PIA National was dismayed by FEMA’s overall apparent lack of interest in protecting agent compensation. We submitted comments expressing our concerns and look forward to, with FEMA and others, developing a methodology for calculating the WYO expense ratio that we all can live with.
 Title II, Subtitle A of Public Law 112-141, 126 Stat. 405.