W-7: Reporting NFIP Expenses to the NAIC

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W-7 Reporting NFIP Expenses to the NAIC
Presenters Sara Robben, NAIC Tom Hayes,
FEMA Phil Zakas, iService
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Reporting NFIP Expenses to NAIC AGENDA

• Introduction / Background Tom Hayes
• NAIC Perspective Sara Robben
• Federal Flood Line of the IEE FEMAs
  Expectations Tom Hayes
• Overview of Data with Key Findings Phil Zakas
• WYO Expense Allowance past experience applied
  to future time periods Tom Hayes
• WYO Compensation Where do we go from here? Tom
  Hayes
• QA

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Background WYO Compensation

• WYO program began in 1983
• Types of WYO Company compensation
• WYO Expense Allowance
• Marketing Bonus
• Allocated Loss Adjustment Expenses
• Unallocated Loss Adjustment Expenses
• Special Allocated Loss Adjustment Expenses
• WYO Expense Allowance currently based on
  industrys five-year average for five property
  lines weighted by premium
• Fire
• Homeowners
• Allied Lines
• Farmowners
• CMP (Non-Liability)

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Background GAOs 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)
• GAOs 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.

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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)

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Background Biggert-Water 2012 Reform Act
Provisions of Section 224(f) GAO Study and
Report (1) STUDY Not later than 180 days
after FEMAs 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.
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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)

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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

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National Association of Insurance Commissioners
NAIC Perspective Sara Robben, NAIC
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National Association of Insurance Commissioners
NAIC History
HISTORY
May 24, 1871
Annual Statement Blank
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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
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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
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National Association of Insurance Commissioners
Regulatory Principles
INSURERS
Regulation is Simple
Money to Pay Claims
Treat Policyholders and Claimants Right
Policyholder Protection
Fundamental Principles
Capital Adequacy
Conservatism
Consistency
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National Association of Insurance Commissioners
Statutory Accounting Principles
Common Reporting Form
Authoritative Guidance to Users
Conservative
GAAP vs. SAP
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National Association of Insurance Commissioners
The Insurance Expense Exhibit
INSURANCE EXPENSE EXHIBIT (IEEE)
PART 1
ALLOCATION TO EXPENSE GROUPS
PART 2
ALLOCATION TO LINES OF BUSINESS NET OF REINSURANCE
PART 3
ALLOCATION TO LINES OF DIRECT BUSINESS WRITTEN
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National Association of Insurance Commissioners
Insurance Expense Exhibit Summary
Purpose of the Insurance Expense Exhibit
Allocates Expenses (Part 1)
Allocates Elements of Total Profit to Lines of
Business Net of Reinsurance (Part 2)
Allocates Elements of Profit to Lines of Business
on a Direct Basis (Part 3)
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National Association of Insurance Commissioners
Insurance Expense Exhibit Summary
What is Expected of Reporting Entities
Accuracy
Consistency
Conformity
Timeliness
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National Association of Insurance Commissioners
Contact Information Sara Robben, Statistical
Advisor [phone] srobben_at_naic.org
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Federal Flood Line of the IEE FEMAs
Expectations
Federal Flood Line of the IEE FEMAs
Expectations Tom Hayes, FEMA
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Federal Flood Line of the IEE FEMAs
Expectations

• FEMAs Expectations for the Federal Flood line on
  the IEENote 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 Finl Stmt WP (first 3 mos of
  FY YY1) NFIP Finl Stmt WP (full 12
  mos of FY YY) NFIP Finl 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.

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Federal Flood Line of the IEE FEMAs
Expectations (continued)

• FEMAs Expectations for the Federal Flood line on
  the IEE
• Other Underwriting Expenses
• 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

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Overview of Data with Key Findings
Overview of Data with Key Findings Phil Zakas,
iService
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Overview of Data with Key Findings

• Data Reviewed
• NFIP Financial Statement vs. NAICs 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

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Overview of Data w/Key FindingsNFIP Financial
Statement vs. NAICs 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 arent exact

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

• Data Differences between NAIC and A.M.Best are
  expected due to
• Nature of A.M. Bests 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

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Overview of Data w/Key FindingsNAIC vs. A.M.Best
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Overview of Data w/Key FindingsNAIC vs. A.M.Best
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Overview of Data w/Key FindingsNAIC vs. A.M.Best
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Overview of Data w/Key FindingsNAIC vs. A.M.Best
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Overview of Data w/Key FindingsWYO vs. Non
WYOHow we grouped companies for our review
WYO vs. Non-WYO Study of Homeowner Expense
Ratios
  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
Note WYO companies are ranked based on their
Homeowners Premium volume, not on their Flood
Insurance Premium volume.
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Overview of Data w/Key FindingsWYO vs. Non WYO
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Overview of Data w/Key FindingsWYO vs. Non WYO
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Overview of Data w/Key FindingsWYO vs. Non WYO
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Overview of Data w/Key FindingsWYO vs. Non WYO
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Overview of Data w/Key FindingsWYO vs. Non WYO
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Overview of Data w/Key FindingsWYO vs. Non WYO
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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

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Overview of Data w/Key FindingsFederal Flood
From IEE How we grouped companies for our review
WYOs Study of Federal Flood Expense Ratios
  WYOs
Largest companies (7 companies) 70 of WYO FF
Second Tier (15 companies) 24 of WYO FF
Note WYO companies are ranked based on their
Federal Flood Insurance Premium volume
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Overview of Data w/Key FindingsFederal Flood
From IEE
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Overview of Data w/Key FindingsFederal Flood
From IEE
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Overview of Data w/Key FindingsReporting under
revised NAIC Instructions Observed improvements
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Overview of Data w/Key FindingsReporting under
revised NAIC Instructions Observed improvements
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Overview of Data w/Key FindingsReporting under
revised NAIC Instructions Observed improvements
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Overview of Data w/Key FindingsReporting under
revised NAIC Instructions Areas for improvement

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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

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Overview of Data w/Key FindingsFederal Flood
From IEE

• Review of Federal Flood U/W expense ratios to
  DWP
• Final Additional Observations/ Updates from 2011
  Analysis
• Of the largest 22 WYOs (ranked by size of Federal
  Flood Direct Written Premiums)
• 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)
• 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)
• 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)
• 2 have indications that are negative or 0

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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
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WYO Expense Allowance past experience applied to
future time periods

• WYO Expense Allowance Calculation
• Data currently provided by A.M. Best Companys
  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

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WYO Expense Allowance past experience applied to
future time periods
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WYO Expense Allowance past experience applied to
future time periods
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WYO Expense Allowance past experience applied to
future time periods
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WYO Expense Allowance past experience applied to
future time periods
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WYO Expense Allowance past experience applied to
future time periods
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WYO Expense Allowance past experience applied to
future time periods
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WYO Expense Allowance past experience applied to
future time periods
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WYO Compensation

• Where do we go from here?

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WYO Compensation -Where do we go from here?

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

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Overview of Data w/Key FindingsReporting under
revised NAIC Instructions Observed improvements
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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.

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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

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QUESTIONS?
QUESTIONS?
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QUESTIONS?
QUESTIONS?
QUESTIONS?
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QUESTIONS?
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