The NAIC’s 2013 proposed budget released Oct. 24 reflects (before adding investment income, fiscal impact statements and the structured securities project) total revenues of $78.5 million and total expenses of $78.1 million.
The NAIC 2013 proposed budget before fiscals and the modeling of structured securities includes total revenues of $80.8 million.
These numbers represent a 3.86% increase and a 0.33% increase, respectively, from the 2012 budget, for $440,560 in projected revenues over expenses.
However, viewed in relation to the 2012 projected totals, the 2013 proposal represents an operating revenue decrease of 1.75% and operating expense decrease of 3.82%.
The NAIC did better than expected in 2012. Based on actual operating results through June 30, the year-2012 projections indicate a net operating margin of negative $1.3 million compared to a budgeted net operating margin of negative $2.2 million.
When including investment income, plus the recovery of $6.9 million from the NAIC’s affiliate NIPR for prior period investments in the State Producer Licensing Re-engineering Project offset against budgeted transaction fees, the NAIC projects a total net revenue margin of $10.3 million for 2012.
Total net revenue margin including the 2011/2012 structured security project is projected to be nearly $11.9 million before the 2012 impact of 2013 fiscals.
The NAIC highlighted new business initiatives at a cost of increased revenue and expense of $1,548,032 and $3,159,038, respectively, producing a net contribution impact of negative $1,611,006, in 2013.
“While these proposals result in an overall net operating expense in 2013, they represent important capital investments in the NAIC’s products and services, some of which will generate net operating revenues in future years,” the NAIC stated.
Operating revenues are $4.3 million higher than budget and database fees are higher than budget due to 3.52 percent increase in industry premium growth, the NAIC stated.
According to the budget revenue composition mix, database fees are still the largest revenue generator for the NAIC among the various services, with a projected 33.5% of the budget or almost $26.8 million out of $80 million. However, although more money, this is down from 2012 where the percentage of the composite budget was 34.2%.
Service categories like SERFF and administrative/license fees are both projected to increase in percentage and dollar amount, perhaps due to anticipated health insurance exchange work. Publications—the second largest category—is up slightly but a bit down as a percentage of the total revenue budgeted. It is $19.5 million in revenue and 24.4 percent of the budget in 2013, down from almost 30% in 2012 but up from the $18.9 million in revenue.
Database fees and publications fees are the NAIC’s two largest revenue sources and together represent more than half of the group’s projected $80 million in revenues, one group noted.
By contrast, the NAIC projects to collect just $2.3 million in fees from state insurance departments, which benefit greatly from the education, actuarial, market conduct and securities valuation services the NAIC provides to the states, stated R Street Senior Fellow and Public Affairs Director R.J. Lehmann.
The last time the annual insurance department budget growth rate rose occurred in 2010-2011. Budgets have never fully recuperated from the double digit growth prior to the market crash in 2007-2008, when the growth rate plunged to negative 10.1% from 15.6% growth a year earlier.
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The NAIC said its publications category is higher than budget due to revenue from resellers –like AM Best and SNL.
Services higher than budget ($972k) principally due to advance ratings ($950k) by the Securities Valuation Office, and NAIC national meeting revenue is higher than budget due to “strong sponsorships and registrations for the International Association of Insurance Supervisors annual meeting in October.” It is unclear how much sponsorship money the NAIC generally receives, if any. A question on the sponsorships was referred to IAIS.
Notably, the NAIC will be making publications of the model laws, regulations and guidelines promulgated by its members available to the public free of charge.
The change is projected to reduce the fees the NAIC would otherwise collect to read its model law by just over $200,000.
Lehmann expressed hope that the move could signal a shift toward greater openness and transparency by the state regulators group.
Many associations and organizations have been critical in the past of the NAIC database and publication fees, all sold from collected proprietary information. Comments from groups are expected in the next couple of weeks. A public hearing is tentatively scheduled for Nov. 20, 2012.
However, Lehman noted that, “This is an important step, even if largely a symbolic one.”
“There is no justification for a private organization to profit from a monopoly on public data, nor for any regulator to withhold from the public crucial financial data about the companies they regulate,” Lehmann stated. “Just as the SEC makes filings by publicly traded firms available to the public through its EDGAR service and the Federal Reserve makes the financial reports of depository institutions available through the National Information Center, we hope someday soon the NAIC will do the right thing by consumers, taxpayers and the general public and make all of its insurance statutory reports available free of charge.”
“We believe this proposed budget reflects our inherent strength and transparency as an organization,” stated Jim Donelon, NAIC president-elect and Louisiana insurance commissioner who will be overseeing the 2013 leadership at the NAIC.
“The 2013 proposal supports important initiatives that will allow regulators to better protect insurance consumers and ensure a solvent industry. The allocation of NAIC financial resources continues to be guided by our astute investment in these principles to support the state-based system of regulation.”
The seven “fiscals” or new business initiatives for 2013 are:
- Health Insurance Exchange Plan Management Data Collection and Communication through SERFF – This is part of a multi-year project to assist states in the establishment of health insurance exchanges, specifically in the area of plan management. This initiative will be funded by participating member state grant funds of $1,520,984 in 2012 and 2013. This initiative also includes five additional headcount who will be required to implement and manage the system in the future. However, it is unclear ahead of the national elections, if Republicans led by Gov. Mitt Romney sweep in, how much the SERFF and state exchange implementation would develop or even wither if the health care reform law is repealed in part or whole.
- State Based Systems (SBS) Software Enhancement and Technology Compliance Initiative. The cost of Phase II is expected to be in the range of $3 million to $4.2 million.
- Financial Staff Exchange Program. This initiative will allow experienced regulators from one state to work with financial regulators from another state for a limited period of time to enhance the solvency expertise of the receiving state.
- Actuarial Guidelines 38 (AG 38)/Principle-Based Reserving (PBR) implementation and monitoring. This funding supports the implementation and monitoring of activities required by both AG 38 and PBR initiatives, huge initiatives in an approach to reserving in the life industry—although New York’s Department of Financial Services is still wary of some aspects of the valuation manual for PBR.
- OPTins Clearinghouse. This project includes the development and implementation of functionality within OPTins to allow Non-admitted Insurance Multi-State Agreement (NIMA) states to have a choice in clearinghouse software.
- Natural Catastrophe Stress Test – This initiative would conduct a financial stress test involving a natural catastrophic event to determine the financial impact on an insurer and its reinsurers as well as on the insurance sector as a whole.
- In-House Structured Securities Group – This initiative establishes an in-house structured securities group to support the current modeling of structured securities and would allow the NAIC to expand analysis into more complex structured investment products. This group would consist of four full-time staff resources re-allocated from other areas of the NAIC. As such, there is no net increase in headcount and would eliminate the need for two consultants who currently assist the NAIC with structured securities projects.
For more information following the proposed budget release Oct. 27, see: