[Federal Register Volume 65, Number 191 (Monday, October 2, 2000)]
[Proposed Rules]
[Pages 58720-58721]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25017]
[[Page 58720]]
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FEDERAL EMERGENCY MANAGEMENT AGENCY
44 CFR Part 206
Disaster Assistance; Insurance Requirements for the Public
Assistance Program
AGENCY: Federal Emergency Management Agency (FEMA).
ACTION: Notice of findings for the advance notice of proposed
rulemaking.
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SUMMARY: We (FEMA) published an Advance Notice of Proposed Rulemaking
(ANPR) on February 23, 2000 on insurance requirements, procedures and
eligibility criteria with respect to buildings under the Public
Assistance Program. The ANPR described a range of problems with the
insurance element of the Public Assistance Program, listed possible
options to address them, and finally, included several specific
questions about how the Program could be improved. The overwhelming
majority of comments responded to an aspect of insurance coverage for
which our preferred option (referenced in the ANPR as Option 3) would
condition Public Assistance grants for buildings on adequate property
insurance being in place at the time of the disaster. Comments on other
approaches to the insurance issues were received as well.
The deadline for comments was April 10, 2000. We received nearly
300 responses to the ANPR. The purpose of this notice is to provide a
summary of these responses and an update on our process of developing a
proposed rule on insurance requirements for the Public Assistance
Program.
FOR FURTHER INFORMATION CONTACT: Curtis Carleton, (202) 646-4535.
SUPPLEMENTARY INFORMATION:
I. Background
The Robert T. Stafford Disaster Relief and Emergency Assistance
Act, 42 U.S.C. 5121 et seq. (Stafford Act), authorizes the President to
pay at least 75 percent of the costs to repair public and certain
eligible private non-profit infrastructure and buildings damaged by a
presidentially declared major disaster. The Public Assistance Program
provides grants to applicants--including State and local governments,
Native Americans or authorized tribal organizations, Alaskan Native
villages and organizations, as well as certain eligible private non-
profit organizations--for emergency protective measures, for debris
removal, and for disaster-damaged infrastructure and buildings.
We published the ANPR in the Federal Register at 65 FR 8927,
February 23, 2000. As discussed in the ANPR, we believe that our
current program regulations, 44 Code of Federal Regulations (CFR), Part
206, Subpart I--Public Assistance Insurance Requirements, are
inadequate in meeting the insurance considerations of the Stafford Act,
in particular, with respect to buildings. The ANPR was intended to
surface what we consider to be the important issues, and to seek
commentary and advice for program improvements. The issues address two
major considerations. First, there is the matter of how best to
encourage proactive risk management: this is where we discuss property
insurance against major natural hazards for public buildings as a pre-
disaster program eligibility requirement. And second, there is the
failure of our current program regulation to adequately address:
Guidance for State insurance commissioners' waivers of the
post-disaster insurance purchase requirement;
Whether the Public Assistance Program will fund insurance
deductibles for buildings, and if so, how much do we fund; and
How we define insurance (or what qualifies as insurance),
among other issues.
The ANPR was entirely successful in meeting its objectives, and we
are very grateful to the many respondents who provided needed
information and thoughtful perspectives on the issues.
The substance and quantity of the ANPR comments were remarkable,
and are cause for a full and deliberative analysis before continuing to
the next stage of developing a proposed rule. Therefore, we wanted to
give you an idea as to the nature of the ANPR responses, and advise you
of where we stand in the analytical process.
II. ANPR Findings
We received 291 comments representing 32 States (including Guam and
Puerto Rico). The distribution of responses is: 63 percent from
California; 7 percent from Washington; 4 percent from Florida; and 26
percent representing the remaining 29 states that submitted comments.
The respondents offered a variety of perspectives, but many of them
prefaced their comments with a statement to the effect that they agreed
with the Public Assistance program's objective of seeking aggressive
risk management on the part of public and private non-profit building
owners.
While the comments address many issues, most are captured in the
following topics.
Adequate Insurance
This area deals with the reasonableness of our schedule of
eligibility criteria with respect to insurance.
The majority of comments focus on earthquake coverage. Many of
these contend that the private insurance market does not have the
capacity to provide adequate coverage, and that, because of the
unpredictable and potentially catastrophic nature of earthquakes,
insurance companies tend to exact high prices for their coverage. The
result is that some entities can only get very limited coverage, and
some find that the coverage that they can get makes little economic
sense given the high premiums and deductibles required.
Earthquake coverage is separate and apart from all other property
coverage. The insurance industry has trouble offering coverage for
perils such as earthquakes that have no known probable frequencies;
therefore, the insurance industry has limited its exposure in this
area. The public entities tend to have little confidence that insurance
companies will be willing or able to provide service at an acceptable
price and shared concerns that the market will have the capacity to
provide coverage to the levels outlined in the ANPR.
Over half of the comments were from California, and virtually all
of these tell us that an eligibility requirement involving earthquake
insurance is unreasonable. Some contend that money spent on earthquake
premiums would reduce money available for seismic retrofits, and that
the net effect would be counterproductive. Several writers suggest that
our schedule of eligibility criteria in earthquake insurance coverage
is biased against small entities, because those with less valuable
buildings would need to have a higher percentage of them insured. (Note
that this concern is expressed by the larger entities on behalf of the
smaller entities; we received a very low number of responses from
smaller entities.) Several also suggest that the $125 million cap is
too high: it is hard to get that much coverage even in today's soft
market for all but a few of the largest entities and pools.
We hear that, based on past experience, few insurers will be able
to
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fully indemnify earthquake policyholders after a major quake.
There was a suggestion that a requirement for an eligibility
criterion on earthquake insurance would be viable only if FEMA were to
promote a nationwide pool for earthquake coverage for public entities.
This suggestion rests on the presumption that the commercial insurance
market does not have the capacity to deal with the scope of the
coverage needed. Along these lines, other writers suggest that we
establish a National Earthquake Program, similar to the National Flood
Insurance Program.
Other than the comments on earthquake insurance, there were
questions about the meaning of ``highest-valued single location.''
There was also the suggestion that we provide for a cap on all risk
insurance, just as we do for wind and earthquake in our insurance
schedule.
Premium Thresholds
There was broad agreement with the need for a safety net provision
in the form of a premium threshold. While some find it to be
reasonable, most writers tell us that the $.30 per $100 is far too
high, based on what they currently pay. For example, some entities are
telling us that they pay just a few pennies per $100 for their hazard
insurance. Many writers also point out that by using an absolute dollar
threshold, insurance companies will quickly price their products to
meet that threshold.
Quite a few writers suggest that a threshold based on a percentage
of an entity's operating budget would be a better way of offering a
safety net. No writer suggested an actual percentage to be used in this
regard.
Self-Insurance
There is a lot of interest in this area. All comments support the
idea that self-insurance be an option for all entities. Several writers
suggest that there should be specific, stringent requirements for self-
insurance--for example, the retention of a dedicated fund--but, most
simply state that the self-insurance should be an option to commercial
insurance. In many cases, writers felt that self-insurance is a more
sensible risk management technique than commercial insurance.
In this context, quite a few writers speak to the ``all or
nothing'' provision of Option 3. They refer to the notion that a
failure to have adequate insurance in force would result in zero aid
for a damaged building--the ``all or nothing'' provision. They suggest
that this would be unreasonable, particularly for a very low
probability hazard. The remedy put forth is to treat an uninsured
building as self-insured, which would disqualify it for Public
Assistance below our schedule of eligibility criteria coverage, but
would allow it to remain qualified for Public Assistance above that
amount.
Deductibles
This is one area where we received opposing viewpoints.
Some writers tell us that deductibles are, by their very nature,
the responsibility of the insured, and should not be funded by FEMA.
They point out that the size of the deductible is a major factor for
the premium amount, and is a calculated business decision on the part
of the building owner. It is their expression of risk tolerance or risk
aversion, and should be their issue, not FEMA's. Other, more numerous
writers are not only comfortable with the concept of deductibles being
funded under the program, but offered suggestions for increasing the
amounts. One person suggests increasing the deductible for blanket
flood coverage from $25,000 to $100,000 if the loss limits exceed 150
percent of the NFIP maximum coverage. The suggestion is that this would
encourage building owners to carry higher limit flood policies, and
that it would better correspond to the actual deductibles associated
with most blanket flood policies. Another person suggests that we
eliminate the deductible cap of $100,000 for wind coverage, but reduce
the amount that we would fund from 5 percent to 2 percent, which, the
commenter tells us, is the industry standard.
The writers express concerns that if they had a higher deductible
than the amount we would fund they would not be eligible for FEMA
assistance. This misconception caused concerns similar to the concerns
related to the ``all or nothing'' provision.
Incentives
There is strong support for some form of incentive regarding a
provision to condition future Public Assistance on insurance being in
place at the time of the disaster. Fifty-two respondents favor
incentives for purchasing insurance. However, the vast majority limit
their comments to broad statements in support of the concept, rather
than spell out specific ways of implementing an incentive arrangement.
Administrative Burdens
Many respondents are concerned that an eligibility criterion for
pre-disaster insurance will result in added delays and problems in
obtaining Public Assistance grants. The thought is that FEMA would have
to determine whether adequate property insurance is in effect on an
applicant's buildings at the time of the disaster. This would require
insurance experts, and would slow and complicate the process of
awarding grants. Further, some respondents suggested that smaller
Public Assistance applicants may not presently have property insurance
on their buildings. A pre-disaster insurance eligibility criterion
would necessitate them buying property insurance for the first time,
and that, in so doing, they would encounter significant administrative
burdens.
III. Next Steps
While we have received many valuable comments on this subject, we
are still seeking information on the feasibility of encouraging new or
expanded property insurance coverage as a means to improving risk
management analysis and decisions about public and certain private non-
profit buildings. For this reason, and in order to assist us in the
evaluation of options, as well as to establish a benchmark for whatever
criteria are eventually implemented, we plan to perform a study of
public entity building insurance coverage.
Dated: September 20, 2000.
James L. Witt,
Director.
[FR Doc. 00-25017 Filed 9-29-00; 8:45 am]
BILLING CODE 6718-02-P