The National Association of Insurance Commissioners responded today and Monday to industry criticisms of its budget, with current NAIC President Susan Voss of Iowa noting that the NAIC’s focus should be on the value of services to membership and the regulated industry, and that its budget is small in relation to industry premiums.
Voss made her remarks in a brief public hearing to address comments from interested parties around the proposed 2012 budget before its approval by the Internal Administration and Executive Committee.
Along with Voss’ responses, a letter dated Dec. 5 from Florida Insurance Commissioner Kevin McCarty, NAIC President-Elect and NAIC top staff, the NAIC rebutted many industry concerns, including operating reserve and surplus growth, by pointing to the growing complexity of insurance regulation coupled with states’ dwindling coffers to provide for members to travel or for assessments. Getting more money from the states is not “going to happen,” Voss said on the call.
Thus, the NAIC has to step up, according to the letter’s contents.
The NAIC 2012 proposed budget includes total revenues of $79.2 million and total expenses of $77.6 million, up almost 5% and 2.5% respectively. The 2012 budget would add an additional $1.5 million in net revenues to the surplus, for a total of $74 million in surplus at the end of 2012.
Various trade groups raised concerns about the level of the NAIC’s operating reserve, which they believe provides a financial cushion in excess of future needs. The American Council of Life Insurers specifically recommended the NAIC gradually reduce its operating reserve by funding a certain amount of annual deficits over the next few years.
The level of NAIC net assets (i.e., operating reserve) is monitored closely, the NAIC leadership stated and, given the “evolving nature of the insurance regulatory environment as well as the need to conduct a periodic review, the Executive (EX) Committee hired consulting firm Grant Thornton to study the issue, McCarty et al. wrote.
“The review focused on the NAIC’s unique business risks and uncertainties, and benchmarked the NAIC to comparable organizations. As a result of this review, the Executive (EX) Committee and Internal Administration (EX1) Subcommittee approved the consultant’s report, which changed the NAIC’s operating reserve target from a flat 80% to a target range of 80% to 91%. … As noted in this report, the complexity of insurance regulation is increasing, resulting in a higher level of uncertainty and increased business risk, thereby, warranting a higher operating reserve target,” the NAIC leadership stated.
As of Dec. 31, 2010, the NAIC maintained a liquid operating reserve ratio of 79.3%.
It has been difficult, said the NAIC letter, to predict the rate of return earned on investments. For instance, the NAIC experienced a 17.6% reduction in its liquid operating reserve ratio from Dec. 31, 2007 to Dec. 31, 2008, and this year has also been challenging with monthly fluctuations of more than 4%, so the operating reserve ratio is closely monitored to ensure it is aligned with the NAIC’s business risks and uncertainties, McCarty et al. responded.
On the public conference call, Wayne Mehlman, senior counsel for insurance regulation for the ACLI said, the study not withstanding, the total projected surplus is still an awful lot of money that “is mainly generated by our insurer members,” and which has been growing quite a bit over the past few years. He suggested “building it down,” and noted that, unlike other trade associations, members can’t just elect to drop out when the prices get too high.
“There is simply no need for the NAIC to maintain $74 million of excess funds in its coffers, especially since it is able to generate additional fees from our member insurers if needed,” Mehlman had written earlier to the NAIC protesting the budget proposal.
“We’re not a trade association, either,” Voss retorted.
In response to the request from one trade to adopt a budget with no growth,–this coming year the proposed 2012 budget reflects a $2.7 million increase in operating revenue and a $1.6 million increase in expense compared to the 2011 financial projection–the NAIC pointed to one-time events driven by regulatory prioritization or activities.
There are enhancements to support the states’ ability to comply with provisions of the Patient Protection and Affordable Care Act (PPACA) and the off-setting revenue/cost ($1,031,000) to host the International Association of Insurance Supervisors (IAIS) Annual Meeting in Washington in late 2012, the NAIC pointed out.
With respect to ongoing ibudget items, the most notable changes in expense is a $2.7 million increase in Salaries and Benefits driven by a projected 2.5% annual salary increase and the addition of five staff partially offset by a reduction of $1.7 million in occupancy cost due to the relocation of the Kansas City office, McCarty et. al noted.
In response to a request for the NAIC to consider pursuing a longer-term plan for assessing revenue and expense issues the NAIC said it “has a very comprehensive budget review process to ensure all financial requests align with regulatory priorities. The transparency of the NAIC budget process, including the requirement for Business and Fiscal Impact Statements for new projects, provides NAIC members, leadership and management with a very clear view of changes in existing revenues and expenses, as well as the impact of new initiatives.”
In response to a suggestion for the NAIC to make major reduction in travel expenses, the NAIC pointed to helping out the travel of members in states with cash crunches and to the growing complexity of insurance regulation due to health care reform, Dodd-Frank and international initiatives that require much more federal and international face-to-face meetings.
“It is important to recognize the value of the services provided by the NAIC to its membership is far greater than the NAIC’s annual operating budget,” concluded the NAIC in its letter, discussing its benefits at leveraging its unique position as a quasi-regulatory body or NGO (although it did not define itself as that.)
“Further, in discussions between industry executives and regulators, the NAIC is often asked to do more in terms of support services to state insurance regulators. These constituents urge the NAIC to continue its successful efforts to streamline and modernize regulatory processes and offer further efficiencies to the system through enhancements/upgrades to improve data collection process from industry and delivery to state regulators. Only by having adequate resources in place is the NAIC able to provide these additional services while continuing to maintain its high level of support to ongoing programs,” the association stated.