To FEMA re: Insurance Requirements for the Public Assistance Program

April 10, 2000

Rules Docket Clerk
Office of the General Counsel
Federal Emergency Management Agency
500 C Street, SW Room 840
Washington, DC 20472

Dear Sir/Madam:

I am writing to provide comments on the advance notice of proposed rulemaking (ANPR) published on February 23 on insurance requirements for the Public Assistance Program on behalf of the National Association of College and University Business Officers (NACUBO), and the undersigned associations. NACUBO represents business officers at over 2,100 colleges and universities, public and private.

Our membership ranges from very small colleges with a few hundred students to large research universities with facilities valued at several billion dollars. They are located all over the United States, including Guam, Puerto Rico, and the U.S. Virgin Islands. Some institutions are part of large, multicampus state systems; others have only a few buildings in one location. Depending largely on location, some colleges and universities face much higher risk of suffering significant damages in natural disasters than others.

Public assistance funds administered by the Federal Emergency Management Agency (FEMA) are a vital resource for colleges and universities faced with catastrophic losses. The higher education community appreciates the opportunity to provide information and comments to FEMA before regulations mandating certain levels of insurance coverage as a condition of eligibility for public assistance under the Stafford Act are proposed.

NACUBO is not opposed to the principle that public entities and nonprofit organizations should invest in a reasonable amount of insurance, or establish self-insurance mechanisms, to protect against losses from natural disasters in order to be eligible for public assistance from FEMA. We are concerned, however, that FEMA’s proposal be structured in a manner that is equitable to entities facing a wide spectrum of risk, and often quite different market conditions for insurance. In some areas of the country, certain types of insurance, or insurance for some types of buildings, may be unavailable at reasonable cost. The proposal must also present clear rules and procedures that will not result in confusion, inadvertent lack of compliance, administrative backlogs, or lengthy disputes.

The ANPR asks for general information on insurance practices among potential Public Assistance applicants. Colleges and universities have capital assets valued at more than $700 billion and take their stewardship responsibilities seriously. We believe that institutions of higher education are generally adequately insured for property damage. In addition to working through a broker to purchase commercial insurance, colleges and universities obtain property insurance through a variety of arrangements, including captive insurance companies, risk retention groups, and insurance pools.

One risk retention mechanism, known as a captive, is formed as a subsidiary to finance losses, but theoretically is still a part of the institution financially. There are two types of captives, both of which are designed to operate in the same manner as an insurance company. A traditional captive only involves one institution, and a group captive has several institutions that join together to finance the losses of its members. The captive is incorporated, capitalized by the institution(s), and registered as an insurance company.
A risk retention group can be formed by like institutions with similar liabilities, who combine their resources as well as liability exposures, and essentially, form their own mutual insurance company. Similar to a captive, a risk retention group must be licensed to operate like an insurance company. However, the regulations differ with regard to location and licensing requirements from those for captives or commercial insurance companies.
Insurance pools have some similar characteristics to the methods described above, but a pool is not considered an insurance company and is generally less regulated, if monitored at all. The type of coverage a pool can offer is unlimited, but in most cases the arrangement is established to meet one or two specific exposures. Members fund the pool through premiums paid into a central fund that is then used to pay losses and administrative costs.
Institutions may also group together with similar institutions to purchase commercial insurance covering all members of the group. Because insurance costs are based on an analysis of maximum probable loss, spreading the risk over several campuses lowers the cost of coverage.

In some states, public institutions of higher education are limited by state law or policy in how and when they obtain insurance coverage. They may participate in pooling arrangements with other public entities in the state, using a combination of self-insurance and commercial insurance.

NACUBO believes that FEMA should take into account the various ways that institutions of higher education and other nonprofit organizations seek to balance their need for protection against loss and desire to keep expenses reasonable. Institutions need to be able to respond to changing market conditions and make business decisions as to the best mix of coverage.

While the majority of institutions that responded to our requests for review of the ANPR felt that they could meet the minimum insurance amounts, a number raised questions about the maximum deductibles. Some institutions, however, particularly those in areas prone to natural disasters, anticipate difficulties in obtaining insurance that meets the proposed requirements. Some flexibility should be built into the regulations, particularly for areas such as Guam that face a number of difficulties in obtaining insurance coverage. Self-insurance needs to be recognized as a legitimate alternative to commercial coverage.

NACUBO would like to raise a number of specific concerns with the ANPR, including the following.

Confusion in terms used. FEMA needs to better define the terms it is using. Lack of clarity makes it difficult to assess the potential impact of the limits suggested in the ANPR and would generate a great deal of confusion and uncertainty for those trying to comply with the rules.
- The ANPR refers to the "applicant" in setting the parameters for insurance. We understand that the Public Assistance program serves a variety of public and nonprofit entities and that there is flexibility in whether a state, an agency, a school, a state higher education system, or an individual campus is considered an "applicant." This flexibility results in considerable ambiguity in interpreting the proposed insurance requirements. If the appropriate entity cannot be specified, FEMA needs to provide greater discussion of the issue in a proposed rule.
- For higher education institutions, the use of "single location" is particularly confusing and could refer to a campus, a building complex, or a single building. Thank you for clarifying this term in the frequently asked questions document posted to your Web site during the comment period. A comprehensive definition, with examples, would be helpful as part of a proposed rule.
- The ANPR uses several terms relating to value of buildings when laying out proposed minimum insurance coverage and maximum deductibles. Distinctions between "replacement cost value," "building value," and "insurable value of the building" need to be made or one term should be used consistently. The discrepancies between insurance amounts and maximum deductibles noted below may be due to inconsistency in the use of these terms.
All-risk insurance. There may be inconsistencies in what is meant by "all-risk" insurance. The sense from the ANPR is that FEMA is using this to refer to property insurance covering a variety of hazards. However, smaller colleges and universities often purchase "all-risk" policies that include automobile and liability coverage in addition to insurance on buildings and their contents. It would be necessary to separate this type of policy into its components in order to determine if an institution meets the FEMA thresholds.
Earthquake insurance. For areas prone to earthquakes, earthquake insurance is probably the hardest coverage to obtain. The market is volatile and dependent on the supply of capital. Institutions find that in some years they can obtain earthquake insurance for a reasonable premium, but in other years, earthquake insurance simply is not available. FEMA needs to carefully consider what the effect will be on the markets for earthquake insurance of requiring public and nonprofit entities in states where the risk of earthquakes is high to purchase coverage for buildings worth billions of dollars. Given the volatility of these markets, FEMA also needs to ensure that the process for obtaining certification that insurance is not available does not result in undue burden or backlogs of requests to state commissioners.
Flood insurance. The proposed amounts for flood insurance are unclear. It is our understanding that the National Flood Insurance Program (NFIP) does not operate in all areas. Is it your intention to only require flood insurance where the NFIP operates or to require a set amount of flood insurance in all locations pegged to NFIP limits? In conversations with FEMA staff, we have been told that the NFIP limit is $500,000 per building. A clear statement as to the currently applicable limit would be helpful to those unfamiliar with the program.
Maximum deductibles. We understand the reasoning behind the proposal to set a maximum limit on the deductible amounts FEMA would cover. It is important that you make clear that failure to adhere to the maximum limits on deductibles will not make an organization ineligible for Public Assistance. Our understanding is that FEMA just will not cover deductibles greater than those specified. We have some questions about the proposed limits.
- The limits for deductibles on flood insurance seem more suited to single-family residential property than to public buildings. Not all flood insurance is purchased through NFIP which may routinely offer policies with low deductibles. These thresholds seem quite low for large entities.
- While the earthquake insurance amounts and the deductible may seem reasonable taken alone, for insurable values greater than $30 million, the deductible exceeds the minimum insurance coverage required. At an insurable value of $30 million, the required coverage for the first $10 million of $1.25 million equals 2.5 percent of $30 million. When coverage of 5 percent of the value above $10 million is added total coverage required is 7.5 percent—the same as the maximum deductible.
Cap on costs. The proposed cap on insurance costs of $.30 per $100 is considerably higher than institutions pay today for comprehensive insurance coverage in most areas of the country. We are curious about how FEMA arrived at this number. The University Risk Management and Insurance Association provides more details of current rates in its comments, which we endorse.

The higher education community appreciates FEMA’s willingness to provide an opportunity to comment on the ANPR. Please contact Anne Gross, director of policy research and analysis at NACUBO, at 202-861-2544 or by e-mail at agross@nacubo.org, if you would like to discuss our concerns or need additional information.

Sincerely,

Christine E. Larger
Vice President, Public Policy and
Government Relations

The undersigned associations join in these comments:

American Association of Community Colleges
American Association of State Colleges and Universities
APPA: The Association of Higher Education Facilities Officers
Association of American Universities
Association of Jesuit Colleges and Universities
Council of Graduate Schools
National Association of Independent Colleges and Universities
National Association of State Universities and Land-Grant Colleges
University Risk Management and Insurance Association