W-7: Reporting NFIP Expenses to the NAIC

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

2. Reporting NFIP Expenses to NAIC AGENDA • Introduction / Background Tom Hayes • NAIC Perspective Sara Robben • Federal Flood Line of the IEE – FEMA’s ExpectationsTom 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 • Q&A

3. 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 industry’s five-year average for five property lines weighted by premium • Fire • Homeowners • Allied Lines • Farmowners • CMP (Non-Liability)

4. 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.”

5. 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)

6. 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.”

7. 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)

8. 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

9. National Association of Insurance Commissioners NAIC Perspective Sara Robben, NAIC

10. National Association of Insurance Commissioners NAIC History HISTORY May 24, 1871 Annual Statement Blank

11. National Association of Insurance Commissioners SolvencyModernizationInitiative - Background Evolution of the U.S. Solvency System Detailed and Uniform Financial Regulatory System Early 1990s –Major Changes to Financial Regulation Continuous Improvement

12. National Association of Insurance Commissioners SolvencyModernizationInitiative US Solvency Regulation Framework Capital Requirements Governance & Risk Management SMI Group Supervision Statutory Accounting Financial Reporting Reinsurance http://www.naic.org/index_smi.html

13. National Association of Insurance Commissioners RegulatoryPrinciples INSURERS Regulation is Simple Money to Pay Claims Treat Policyholders and Claimants Right Policyholder Protection Fundamental Principles Capital Adequacy Conservatism Consistency

14. National Association of Insurance Commissioners StatutoryAccountingPrinciples Common Reporting Form Authoritative Guidance to Users Conservative GAAP vs. SAP

15. National Association of Insurance Commissioners TheInsuranceExpenseExhibit 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

21. National Association of Insurance Commissioners InsuranceExpenseExhibit – 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)

22. National Association of Insurance Commissioners InsuranceExpenseExhibit – Summary What is Expected of Reporting Entities Accuracy Consistency Conformity Timeliness

23. National Association of Insurance Commissioners Contact Information: Sara Robben, Statistical Advisor (816) 783-8230 srobben@naic.org

24. Federal Flood Line of the IEE– FEMA’s Expectations Federal Flood Line of the IEE– FEMA’s Expectations Tom Hayes, FEMA

25. 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.

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

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

28. 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

29. Overview of Data w/Key FindingsNFIP 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

30. 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. 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

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

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

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

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

35. Overview of Data w/Key FindingsWYO vs. Non WYOHow 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.

36. Overview of Data w/Key FindingsWYO vs. Non WYO

37. Overview of Data w/Key FindingsWYO vs. Non WYO

38. Overview of Data w/Key FindingsWYO vs. Non WYO

39. Overview of Data w/Key FindingsWYO vs. Non WYO

40. Overview of Data w/Key FindingsWYO vs. Non WYO

41. Overview of Data w/Key FindingsWYO vs. Non WYO

42. 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

43. 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

44. Overview of Data w/Key FindingsFederal Flood From IEE

45. Overview of Data w/Key FindingsFederal Flood From IEE

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

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

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

49. Overview of Data w/Key FindingsReporting under revised NAIC Instructions • Areas for improvement

50. 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