1.5.1. JA FIMA 53 Broker Support - Approved.pdf

J&A Control Number 22-135

Justification and Approval for Other Than Full and Open Competition Template v3.3 (July 2021)

JUSTIFICATION AND APPROVAL FOR OTHER THAN FULL AND OPEN

COMPETITION, 42 U.S.C. 4081 and/or 41 USC 3304(a)(5)

Pursuant to 42 U.S.C. § 4081 and, as applicable, the requirements of the Competition in

Contracting Act (CICA) as implemented by the Federal Acquisition Regulation (FAR) Subpart

6.3 and in accordance with the requirements of FAR 6.303-1, the justification for the use of the statutory authority under FAR Subpart 6.3 is justified by the following facts and rationale required under FAR 6.303-2 as follows:

1. Agency and Contracting Activity.

The Department of Homeland Security (DHS), Federal Emergency Management Agency

(FEMA), Office of Chief Component Procurement Officer (OCCPO), 500 C St. SW, Washington DC 20472, henceforth referred to as “FEMA”, proposes to issue a contract on a basis of other than full and open competition.

2. Nature and/or Description of the Action being Approved.

(a) Nature of action:

FEMA intends to issue a sole source contract to Guy Carpenter & Company (GC) for continued brokerage support services for the issuance of reinsurance on behalf of the

FEMA’s National Flood Insurance Program (NFIP). FEMA requires skilled contractor support from a reinsurance broker on behalf of the Federal Insurance Mitigation

Administration (FIMA) continues to implement the NFIP Reinsurance Program (NRP).

This contactor support which is authorized by 42 U.S.C. § 4081, “Services by Insurance

Industry,” and/or FAR 6.302-5, “Authorized or Required by Statute,” will enable FIMA to meet the primary objective of this effort to reduce the risk and volatility of the NFIP caused by spikes in flood insurance claims and payouts through implementation of a shared financial risk model and the purchase of reinsurance.

To support the continued execution of the NRP, FIMA requires reinsurance brokerage expertise to provide the services set forth within the applicable Statement of Work

(SOW). FIMA intends to use a single broker to achieve this objective.

(b) Name and address of the contractor:

Guy Carpenter & Company, LLC

1166 Avenue of the Americas

New York, NY 10036

(c) Contract type: Firm Fixed Price (FFP)

(d) Estimated total value (including options). The total estimate amount is

$24,036,383.85, summarized below:

Period of Performance

12 Months Each

IGCE

Base Year $7,776,500.00

Option Year 1 $8,009,795.00

Option Year 2 $8,250,088.85

Total $24,036,383.85

(e) Type of funding: National Flood Insurance Fund (NFIF) funding.

(f) Year of funding: FY-23 funds will be used for base period.

(g) Solicitation number: 70FA6023R00000001

(h) Background information about the requirement:

This is a follow-on action to GC’s contract No. 70FA6018D00000004, which has a period of performance of March 15, 2018 through March 14, 2023, with a total contract value of

$53,450,000, summarized below. This contract was also issued on a non-competitive basis pursuant to FAR 6.302-5:

Period of Performance

12 Months Each

IGCE

Base Year $10,950,000.00

Option Year 1 $10,950,000.00

Option Year 2 $10,950,000.00

Option Year 3 $10,300,000.00

Option Year 4 $10,300,000.00

Total $53,450,000.00

GC as the incumbent contract has successfully enabled FIMA to reduce the risk and volatility of the NFIP caused by spikes in flood insurance claims and payouts through implementation of a shared financial risk model and the issuance of reinsurance.

The NFIP has experienced many large flood disasters over its history, particularly in the years 2005, 2008, 2012 and 2017, and has thereby incurred a significant debt to the US

Treasury because of these flood disasters and the carrying charges on the debt. Historically, FIMA has utilized a limited set of tools in managing the volatility of the NFIP’s risk exposure. As such, FIMA is exploring reinsurance as a continued method of managing its financial risk and sharing risk with the private sector.

FEMA has determined reinsurance to be an important mechanism to transfer a portion of the

NFIP’s insurance risk to the private sector reinsurance and capital markets. The reinsurance model allows primary insurers to transfer some portion of insurance risk exposures to reinsurance markets. This risk transfer mechanism spreads the impact of the insured risks of disasters across the global financial system rather than falling on a single insurer or handful of institutions.

FIMA implemented the NFIP Reinsurance Program (NRP) on January 1, 2017. The primary objective of the NRP is to reduce the risk and volatility of the NFIP through implementation of a shared financial risk model. FIMA is building a long term NRP and expects that it will continue to evolve and reduce the risk and volatility of the NFIP. FIMA’s primary condition of success for the NRP will be the extent to which the NRP reduces the risk and volatility of the NFIP at a fair and reasonable price to the Government and subject to the availability of funds.

3. Description of Supplies/Services.

The purpose of this acquisition is to obtain support services from a reinsurance broker since there is an ongoing need to reduce FIMA’s financial exposure to flood insurance claim payouts. FIMA has separated the required broker support services into three Work Areas with additional details provided in the SOW– Strategic and Advisory Support to provide reinsurance strategy development and financial and general advisory services; Placement and

Execution Administration that encompasses the market outreach and placement of the

FEMA-FIMA approved structure; and Modeling and Risk Analytics to provide quantitative skills and modeling tools to help optimize reinsurance decision making. The Modeling and

Risk Analytics support includes the Reinsurance Broker System (RBS). Additional detail for these work areas is included in the SOW. The RBS is used to model the NFIP-risk for reinsurance and Risk Rating (RR) 2.0 and it was originally owned by GC and is currently in the process of being transferred over to FEMA. FIMA intends to issue a single award IDIQ contractor for reinsurance broker support for the NRP.

4. Identification of Statutory Authority Permitting Other Than Full and Open

Competition.

The statutory authority permitting other than full and open competition is 41

U.S.C.3304(a)(5), implemented by FAR Subpart 6.302-5, entitled “Authorized or Required by Statute.”

The Homeowners Flood Insurance Affordability Act of 2014, 42 U.S.C. 4081, “Services by

Insurance Industry,” applies to this effort. It provides, among other things, that the FEMA

Administrator may enter “[a]ny such contracts, agreements, or other arrangements” in administering the flood insurance program “without regard to the provisions of section 3709 of the Revised Statutes (41 U.S.C. 5) [41 USCS § 6101] or any other provision of law requiring competitive bidding and without regard to the provisions of the Federal Advisory

Committee Act (5 U.S.C. App.).” It further specifies that “[t]he Administrator may secure reinsurance of coverage provided by the flood insurance program form the private reinsurance and capital markets at rates and on terms determined by the Administrator to be reasonable and appropriate, in an amount sufficient to maintain the ability of the program to pay claims.”

As expressly authorized by the statute, the acquisition will be made for a skilled reinsurance broker in order to meet the FEMA Administrator’s mission critical requirement to provide a

NFIP Reinsurance Program (NRP), which was instituted on January 1, 2017. The purchase of reinsurance is a recurring task completed yearly.

5. Demonstration that the proposed contractor’s unique qualifications or the nature of the acquisition requires use of the authority cited.

FEMA, FIMA, and the NFIP face unique challenges and opportunities. Congress established statutory authority, 42 U.S.C. 4081, “Services by Insurance Industry,” to facilitate the effective execution of contracting actions for purposes of administrating the flood insurance program. On January 1, 2017, FEMA established the NRP as a high-priority initiative to reduce the risk and volatility of the NFIP through implementation of a shared financial risk model.

As a result, FEMA is utilizing its statutory sole source authority to execute this contract.

FAR 6.302-5 applies as there is a statutory authority permitting other than full and open competition. The cited authority is necessary to ensure continued performance of the NRP while FIMA continues to analyze the needs of the program and determine the best way to expand upon the current NRP business model in order to build and manage a sustainable program for the agency.

An historical anomaly developed in which GC continues to own and operate the Reinsurance

Broker System (RBS), which is used to model the NFIP-risk for reinsurance and Risk Rating

(RR)2.0. Since 2017, FEMA and GC have invested significant resources and time to design and develop the infrastructure for the RBS. FEMA is currently working to transfer the RBS to the government, which will require significant resources, to include getting the system through the authority to operate (ATO) process. The planned operational date for RBS is

FY23 Q1. If FEMA’s efforts to transfer RBS are delayed, FEMA may be unable to enter into a new IDIQ contract and design an alternate modeling environment with sufficient time to place reinsurance in 2024 and to support RR 2.0. Until FEMA is able to operate the RBS system internally, it will continue to rely on GC for modeling and therefore cannot be segregated to allow for competition thus making award to another vendor unsound at this juncture.

If the current contract for these services is subject to open competition, the resulting delay would jeopardize reinsurance purchases. The services must be transitioned to a qualified vendor in order to avoid an unacceptable delay in purchasing reinsurance, substantially harming FIMA’s ability to manage risks, costs, and FIMA’s Sound Financial Framework.

6. Description of Efforts Made to Ensure that Offers are Solicited from as Many Potential

Sources as is Practicable.

(a) On 03/03/2022 an announcement was published on SAM.gov.

Extensive market research including in-person, phone, and email conversations with knowledgeable individuals in government and industry were conducted to identify market capability and potential sources. The program office leveraged and expanded upon extensive market research that was done to establish the prior GC IDIQ and this proposed IDIQ to inform the pool of competition for this procurement. As determined by market research, the reinsurance market has three industry leaders, these brokers are:

Guy Carpenter & Company, LLC;

AON Reinsurance Solutions; and

Gallagher Re Inc.

Throughout the market research process, FIMA has engaged with these brokers in some capacity, and all of them have expressed interest in this requirement. An RFI for this requirement was published to ensure wide dissemination, and to make a concerted effort to consider all qualified vendors. FEMA, however, has determined that GC would provide the program with the best support services based on their ownership of the RBS license noted above, their proven previous experience including extensive analytics support on the previous contract with FEMA, and market research including their response to the RFI.

The Reinsurance Analytics Division is a newly created entity for the purpose of managing

FIMA’s reinsurance directives. At this point in time, the new division does not have the time and knowledge base to change contractors. This is a follow-on contract that gives the division time to put in the appropriate structures and SOPs in place to successfully determine the appropriate methods to openly compete the next contract action for selecting a new broker. As it currently stands, Guy Carpenter is best suited to remain the broker because of the knowledge and its current modeling work for Risk Rating 2.0 and Reinsurance.

7. Determination by the Contracting Officer that the Anticipated Cost to the Government will be Fair and Reasonable.

Pricing is expected by the Contracting Officer to be fair and reasonable based on comparison with published commercial prices, the Independent Government Cost Estimate (IGCE), market research conducted with knowledgeable individuals in Government and industry, and prior reinsurance broker acquisition history with FIMA.

8. Description of Market Research.

Entities conducting Market Research

Market research was conducted by members of FIMA’s Funds Management Division (FMD) and FEMA Office of the Chief Component Procurement Officer (OCCPO). Market research was conducted via internet searches, review of acquisition history of similar contracts, in-person, and phone and email conversations with knowledgeable individuals in Government and industry to discuss the market capability. Market research identified that other federal agencies or DHS Components cannot fulfill this requirement via an interagency agreement under existing DHS strategic sourcing vehicles, or through General Services Administration

(GSA) schedules.

Requests for Information

Extensive market research was conducted prior to the award of the incumbent GC contract, which included the use of a Sources Sought Notice, Number HSFE601650001, Reinsurance

Broker Services, which was posted on the Federal Business Opportunities (FBO) website on

April 7, 2016. There was recently an RFI posted in March of 2022 in preparation for this procurement. The government received four responses to this notice. Through these notices, FIMA learned that interested small businesses were not able to perform all the required service because they did not have any experience acting as an intermediary in the reinsurance industry. Reinsurers only work with intermediaries, aka brokers, in the reinsurance industry.

Reinsurance Industry Capabilities (Modeling and Analytics Services)

Extensive NFIP data analysis and catastrophe modeling support is required by RMD’s

Actuarial and Catastrophic Modeling Branch to develop and update the flood cat models applied to the reinsurance analyses used by FIMA. Also required by FIMA, broker actuaries apply stochastic modeling software (generically referred to as post-processing tools in the

SOW) that combines and adjusts the cat model output from multiple vendors, as well as generates statistical output for alternative reinsurance structures. The largest brokers own the most sophisticated versions of this software, but at least one independent option can be licensed as well. While other brokers have strong analytics capabilities, the market research report cites questions raised as to whether their capabilities are sufficiently extensive to meet

FIMA’s needs currently.

The required analytics service is more than just having technically qualified individuals on their staff, but their ability to make the right individuals available for a client that is specialized in US flood (or other specialties). With a limited private market for US flood, particularly residential, there are limited opportunities to apply the same resources to other clients, so this is much more feasible for larger brokers. However, qualified their technical staff, the smaller brokers are most often forced to focus their smaller head count on more mainstream lines of insurance to leverage them more easily for other clients.

Reinsurance Industry Capabilities (Broker Services)

As part of the market research process, FIMA researched recently updated information about the leading reinsurance brokerage firms following significant merger and acquisition activity during the past few years. From these efforts, FIMA learned about and identified the reinsurance industry leaders – originally four companies in the 2016 market research now reduced to the three companies identified in Section 6, reflecting the acquisition activity cited above.

Due to the need for reinsurance brokerage support from leading industry companies with past performance and experience in the private and federal sectors, this procurement is not suitable for small business concerns, as there are no identified capable small businesses, nor did any capable small businesses respond to the RFI. Small reinsurance broker firms do not interact with individual consumers and may not meet the federal procurement definition of a small business. Even if they are too large to meet this definition, small brokerage firms have very limited capabilities in flood insurance thus lacking the relationships with the flood reinsurance underwriters that the large brokers have. They also lack the modeling and analytics capabilities of the large brokerage firms that are required to meet FIMA’s extensive needs.

Conclusions of Market Research

FIMA’s need for these analytical services also limits the pool of qualified reinsurance brokers to the three leading reinsurance brokerage firms. The 2022 Gallagher Re acquisition has temporarily disrupted their actuarial resources, so their ability to qualify as a sole broker in the very near future is questionable. Also discussed were questions as to whether Aon Re’s analytics capabilities are sufficiently extensive to meet FIMA’s needs currently.

As part of this effort, FIMA investigated the: management and administrative logistics around executing this type of model; industry’s insights on the negative and positive aspects that impact this model; the execution requirements related to the data modeling scope of work; and the best way to divide the world marketing efforts required to attract the best reinsurance companies to the NRP.

Via the RFI the Government inquired about brokers’ experiences pertaining to traditional, and unique market strategies, requested feedback on its draft Statement of Work, and similar work with government or quasi-governmental agencies, appropriate scope of level of effort, aspects of successful broker business models, and challenges. These responses helped FIMA adjust its requirements documentation and narrow down their selection to GC as the incumbent due to their demonstrated ability to adapt to FEMA culture, their demonstrated strong modeling capabilities, and their large market share.

9. Any Other Facts Supporting the Use of Other Than Full and Open Competition.

The subject services will be procured using FAR Part 12 for commercial services.

10. A Listing of the Sources, if Any That Expressed, in Writing, an Interest in the

Acquisition.

During the market research activities conducted three companies expressed continued interest in this procurement:

Guy Carpenter & Company, LLC

AON Reinsurance Solutions

Gallagher Re Inc.

Of these three firms it was determined that GC would provide the program with the best support services based on their ownership of the RBS license noted above and because of their proven previous experience including extensive analytics support. At this time GC is best suited to remain the broker because of their knowledge and current modeling work for

Risk Rating 2.0 and Reinsurance.

11. A Statement of the Actions, if Any, the Agency May Take to Remove or Overcome Any

Barriers to Competition Before Any Subsequent Acquisition for Supplies or Services

Required.

FEMA intends to continue to use reinsurance brokers and additional broker contracts as the

NRP evolves. As part of FIMA’s recurring business model analysis for the NRP, the program office is exploring ways to increase competition amongst the reinsurance industry to further increase industry participation in the NRP by increasing industry outreach and utilizing RFIs to establish greater interest in the marketplace and use sources sought notices and industry days. FEMA is also exploring using a reverse auction type feature to drive broker competition. FEMA is committed to creating a collaborative, competitive environment amongst reinsurance brokers desiring participation in the NRP.

(Remainder of this page left blank intentionally)

12. Contracting Officer’s Certification. I certify that the data supporting the recommended use of other than full and open competition is accurate and complete to the best of my knowledge and belief.

Contracting Officer Date

13. Technical/Requirements Personnel Certification. I certify this requirement meets the

Government’s minimum need and that the supporting data, which forms a basis for this justification, is complete and accurate.

Technical Representative Date

APPROVAL:

Contracting Officer Date

Procuring Activity Advocate for Competition Date

Head of the Contracting Activity Date