The NAIC is a growing, almost 140 year-old, $75 million-a-year plus organization that NPR recently called an “obscure group” on a Morning Edition show about implementing health care. If it is obscure, it certainly has more insurance data than any other known repository and has a deep relationship to every insurer underwriting the health, businesses, homes and retirements of lives in every U.S. state and territory. This relationship will only grow as the states work to implement health care reform and as the move to global insurance accounting standards requires the NAIC to dramatically increase its profile.
A crucial element to the makeup and direction of the NAIC is its funding. As its critics and supporters will agree, the NAIC makes an awful lot of money, and it spends an awful lot, too. So much so, in fact, that some critics have openly wondered why exactly a tax-exempt, nonprofit trade association–ostensibly meant to coordinate public officials for the benefit of insurance consumers–even needs to raise and wield the capital that it does. Why, indeed.
The NAIC is trade group of state insurance regulators, a 501c(3) that is undertaking a lot of business to sustain its multi-pronged efforts of efficient regulation, promoting solvency of insurers and more recently, its survival amid federal and international forces.
What is funding this large operation is apparent when reviewing the NAIC budget, although the different components of the revenue stream and the reserves all tell of the evolving nature of the organization. The NAIC has slightly more than 400 full-time employees in Kansas City, New York (home of its Securities Valuation Office) and Washington. The group is budgeting for more, and recently stopped the pay freeze it had instituted in 2009 and lifted a year later, this past July.
As most insurers are well aware, most revenue to the NAIC comes from database filing fees, which will bring in a projected $25.7 million in 2011, comprising 34.2% of its total revenue. That is down slightly from 35% or $25.8 million, in 2010′s expected revenue.
State assessments, which vary by premium dollars written in each state, only make up 2.2% of revenue, although New York, California and Florida pay the heftiest share.
The NAIC has been trying to be less dependent on database filing fees for years, ever since the mid-1990s, when property/casualty insurers withheld the fees in protest. The growth of the organization under Cathy Weatherford, who was replaced by new CEO Terri Vaughan, had been criticized even as Weatherford was striving to become more independent of the filings through technology development and accompanying fees.
According to sources who spoke on background, the growth was part of a push to become more efficient, globally situated and relevant, especially with federal and international solvency and accounting pressures. This was compounded by health care reform and financial services reform demanding stronger marketplace oversight, considering AIG’s implosion due to excessively risky behavior in its Financial Products division.
The NAIC budget even graphs the database fees in its budget proposal as a percentage of NAIC revenue, possibly to hold detractors at bay. The ratio is holding pretty steady, with a bump up in 2008, when Weatherford left mid-year. Database fees were nearly $23 million in 2002, and are projected to be only $25.7 million nine years later. (Database fee increases are based on a 2% premium growth).
The 2011 budget revenue is about $2.3 million more than the projected 2010 budget. Interestingly, the heftiest portion of that increase coming from State-Based Systems transaction fees (more NAIC staff in 2011 are budgeted to beef up the SBS team) and, to a lesser extent, insurance data product sales.
The extra staff will be added to reduce the NAIC’s future reliance on consulting resources from its SBS business partner, Aithent, in anticipation of the expiration of that relationship in July 2012.
SBS is a web-based application, licensed in 20 jurisdictions so far by state insurance regulators, to process license applications, license renewals, consumer inquiries and enforcement actions, among other regulatory applications, as well as to remain compliant with uniformity initiatives.
The NAIC is also hoping added SBS staff can work on an initiative to increase continuing education revenues through incentives for providers to submit online course roster uploads, which generate additional transaction fees to SBS. Initial resource investments in this proposal are projecting to generate additional revenues of $472,661 in 2011 and $1.2 million in 2012.
Another recent funding source for the NAIC is the National Insurance Producer Registry. In January 2006, the NAIC began a service agreement with the NIPR, an affiliated entity. The NAIC receives a fee computed on 30% of certain NIPR revenues. In addition, the NAIC receives an administrative fee of $1 million and a transaction usage fee for the State Producer Licensing Reengineering Project.
Significant budget revenue line items are publication, insurance data revenue, and the growth of “services,” such as SBS, the SERF, SVO (a blend of fee-for-services and a fee assessment on the industry’s stock investments).
Sales of publications and insurance data comprise $18.7 million of the $75.2 million 2011 budget, or almost 25% of total revenue.
The NAIC’s rich trove of data, culled from company filings, is an important source of information for aggregators and financial analytic companies: the NAIC has 400 million data elements in its Financial Data Repository, according to the proposed 2011 budget. The NAIC is no Google, but its butter, if not bread, is data. And it is always gathering more through its services and affiliate relationships.
The NAIC leverages its 400 million-plus data points in the market effectively. This magazine, National Underwriter, is owned by Summit Business Media, which also owns financial information provider Highline Data, a major NAIC customer in the multi-million dollar NAIC insurance data products business. Other customers include the Bloomberg Professional service, and SNL Financial.
Special insurance publications revenue will be lower than expected in 2010 because companies are trying to save money and buying fewer hard copies, explained NAIC CFO and Business Strategy Officer Brady Kelley. The NAIC expects to make $682,602 more in insurance data product sales in 2011 over 2010, but it is suffering from a $390,524 decrease in its publications business.