Follow the Money: Bankrolling the NAIC

Services, like SERFF [System for Electronic Rate and Form Filing] and SBS, now comprise 23.3% of revenue, up from 21.3% in 2010, or $17.5 million versus about $16 million. SBS fees are expected to rise by almost $800,000 next year over 2010. SVO fees constitute the lion’s share of those fees, although the 2011 budget is expecting a decrease in year-over-year revenue due to an anticipated decline in the volume of corporate security filings.

The NAIC and SERFF also get administrative fees and a license fee from the Interstate Insurance Product Regulation Commission for services.

SERFF was developed through the 1990s by the NAIC to provide a cost-effective method for handling insurance policy rate and form filings between regulators and insurance companies and its development hurried along under the Speed to Market initiative. Filings have ballooned from 3,694 in 2001 to more than half a million filings, although 2009 saw about 27,000 fewer filings than the previous year’s 554,261 filings.

This coming year, the Speed to Market NAIC Task Force and SERFF are going to be expanding to PPACA [health care reform legislation] filings. “We have to enhance that system to our members to conform with that law,” Kelley said.

License fees from states cover costs of enhancements. The states get federal grants for reform implementation and a portion of that will be remitted to the NAIC. “We are collecting some revenue from the states “to cover the cost of the work we do,” he said. “But nine times out of 10, the states don’t pay registration fees to national meetings and we fund a lot of their travel.”

Insurance trade groups like NAMIC and the ACLI have historically protested the growth of the NAIC over the decade, asking why it is necessary for the nonprofit to maintain such a high net income when it has a large surplus already, and urged it to reign in costs for such “big-ticket” items, as database fees, SVO fees, salaries, employee benefits and travel, as an ACLI letter put it a little over year ago. Of course, there was a salary pay freeze, which was lifted at the end of July.

There will be a salary increase for 2011, but it is not larger than normal and employees won’t recover the lost increase of the previous year, according to Kelley.

The surplus that groups like NAMIC have criticized as too large was intended to reach a total of 57.2% of the 2010 operating budget, with a standard goal of an 80% ratio of liquid operating reserve to operating expenses.

“The purpose of the operating reserve is to ensure adequate levels of NAIC net assets to fund and/or overcome risks and uncertainties in NAIC operations in future budget years,” stated the leadership in a letter last fall, citing an independent consultant’s analysis. NAIC leadership then pointed out the hefty liquid reserves of the industry trade groups, which, save for AIA were all high, or had been so the previous year before suffering an economy-driven dip.

As of year-end 2007, the NAIC maintained a liquid operating reserve ratio of 70%. This reserve reduced to 52% at year-end 2008 (down 18% over 2007), primarily due to big hits to long-term and defined benefit plan investment portfolios, which reduced net assets by $12.7 million in 2008 alone, illustrating, the NAIC explained, the need for a robust surplus.

Regarding costly international travel, some in the NAIC and insurance company representatives say it is necessary. Travel is critical for the NAIC to be involved in the International Association of Insurance Supervisors and the promulgation of global standards, Kelley explained.

“Given the new requirements being imposed on all financial companies, including insurance, by the G-20 and FSB, the world’s regulators have a lot to do,” said a source with vast international and state regulatory experience. “Now that the Basel Committee, IAIS and other groups of world regulators are raising the bar regarding solvency oversight to include Colleges of Supervisors, and will also include governance, compliance and market conduct as key components, the U.S. regulators need to be a part of the global community and be at many tables as these new standards are being established.”

The source added, “One might be concerned if one looked around the table and saw the UK, Canada, France, Germany, Switzerland, Japan, Malaysia, Dubai, Brazil–and not the U.S.” Indeed, the retiring head of the IASB recently observed that he anticipates the greatest leverage regarding such standards will likely come in the future from China.

Kelley also defended capital spending information technology, where the value added is exponential compared with the cost, creating savings in the industry and faster approvals for producers. Every insurer in the country files to the NAIC repository, he pointed out, and everything is loaded within 24 hours. The benefits are “monumental,” he said, and the states can act faster than they would if they were processing one filing at a time.

Although the NAIC has also strengthened its D.C. office at the Hall of States, it is not, nor can it be, a lobbying body or a regulator, so sometimes it cannot go out on a limb in either direction. In 2009, the NAIC established the Center for Insurance Policy and Research within its D.C. office, which became its executive office under Weatherford, to support the collection of information and analysis for use by state and federal officials, agencies, and policymakers. CIPR coordinates the vast insurance data and research for the stated purpose of enhancing cooperation among federal, state and international agencies and regulators, by way of instructing federal policy makers (such as the Treasury Department, Department of Health and Human Services and federal banking regulators) on the ways of state-regulated insurers. It also allows itself and its members a seat at the table in federal public policy discussions and decisions.

The NAIC claims regulation and the model laws are the domain of its members, not its staff, but the organization is holding itself together with data, institutional knowledge, required assessments and fees, filings and indispensable services at a time when the membership of state insurance commissioners is increasingly unstable. Members are also under extreme pressure to be cohesive while tasked with implementation of federal health care reform. At the same time, the organization has seen its lunch get nibbled, if not eaten outright, by various federal financial oversight and consumer protection agencies under the Dodd-Frank Act.

The mid-term elections may result in as many as 20 new insurance commissioners among the states, according to a health insurance regualtory source. Indeed, NAIC President-Elect, Florida Insurance Commissioner Kevin McCarty, could be out of a job with the new Florida administration. Pass the bucket.