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Regulation and Compliance > State Regulation

Too big to pardon?

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This Thanksgiving holiday, some insurance industry representatives say the feast is at the National Association of Insurance Commissioner’s (NAIC) table. 

Some interested may have walked away from the discussion though. This year, only two organizations, rather than the bevy of trade associations and other interested parties – the American Council of Life Insurers (ACLI) and the National Association of Mutual Insurance Companies (NAMIC) — responded to what they feel is the outsized growth of the NAIC’s proposed 2014 budget. 

These two trades annually wonder why the size of the NAIC needs to be so big, especially since most of its revenues come from the industry itself, and worry about how it will reflect upon state-based regulation.

The 2014 proposed budget includes total revenues of $93.2 million, and is expected to exceed 2013’s by $7.3 million.

The NAIC is expected to have $100.5 million in accumulated surplus by the end of 2014.

Since 2002, the accumulated surplus will have grown from $37 million to a projected $100.5 million at the end of 2014 — a 171 percent increase from the $37 million in 2002, the ACLI noted. 

“At this rate of growth, the accumulated surplus will climb to $170.9 million at the end of 2019. At what point does the surplus begin to level off or actually decrease? Or will it continue to increase year after year until it eventually reaches $200 million, and then $300 million and beyond?” the ACLI asked in its mid-November comment letter. 

NAMIC acknowledged that while the growth of the NAIC is not unlike that experienced by other bureaucracies such as state and federal government agencies, but pointed out that governmental entities, unlike the NAIC, are subject to fiscal constraints and realities as well as reform efforts that, from time to time, are able to curb and even reverse trends. 

In addition to the call for reductions in operating reserve and concern for the growth in accumulated surplus, there was a recommendation to retain an independent consultant to review NAIC processes and practices.

NAMIC, for its part, continued its call for great transparency in the budget process.

“We feel that the 2013 projections and the 2014 proposed budget once again show the NAIC to be on a steady path of self-sustaining growth and expansion, which makes it subject to criticism, and especially to criticism by those who do not support the preservation of a state-based insurance regulatory system,” NAMIC wrote in its comment letter.

The best way to counter critics of state regulation and the NAIC is to introduce transparency around NAIC actions and operational/financial decisions and adopt sound and open governance practices, NAMIC said.

The NAIC is accustomed to this yearly ritual and provided ready responses on Nov. 22, after comments came in Nov. 15. 

“There are numerous opportunities for both NAIC members and interested parties to comment on the proposed budget and offer suggestions. Ultimately, the final decision on the budget resides with the NAIC members as each member has a vote on the budget,” the NAIC responded.

In the memo to NAIC members and interested parties, NAIC president-elect Adam Hamm of North Dakota, along with lead staff officers, stressed internal oversight by the members, and the need for an independent public accounting firm to audit the financials. 

“The current budget process has served the members and their constituents well and we do not believe an independent review of the process is necessary at this time,” the NAIC leadership stated

As far as growth, the NAIC again pointed to internal monitoring by members, which are the individual state insurance heads and their departments.

The NAIC also noted it has done two outside reviews of its operating reserves during the past nine years, in 2005 and 2011, which resulted in a recommendation of a liquid operating reserve (net assets minus fixed assets, divided by operating expenses of following year) of 80 percent to 91 percent.  

Why? The growing complexity of global and national insurance regulation results in a higher level of uncertainty and increased business risk, according to consultants.

The NAIC liquid operating reserve is in that range now, settling in at the mid-80 percentile by year-end 2014, Hamm, CEO Ben Nelson and others noted in the leadership’s memo. 

The 2014 proposed budget reflects the NAIC’s commitment to prudently manage expenses while investing in important projects to enhance the association’s ability to evolve with changes in insurance regulation,” Hamm stated when the 2014 proposed budget was unveiled earlier this fall.  


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