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Insurance Industry Tells NAIC to Hold Down Expenses

Source: AM Best

Posted on 29 Nov 2010

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A proposed National Association of Insurance Commissioners budget of $75.4 million in expenses and $75.2 million in revenue for 2011 takes welcome steps to control costs but should do more to hold down expenses and a rising liquid reserve ratio, according to the insurance industry.

The budget reflects increases of 5.3% in expenses and 1.6% in revenue over 2010's budgeted/projected levels. The largest increase in expenses came from salaries, which accounted for nearly $2.4 million over the 2010 budget, in part due to the lifting of a year-long salary freeze on July 1, 2010. On the revenue side, increases came from the NAIC's fee-for-service programs, including State Based Systems transaction fees ($789,533) and System for Electronic Rate and Form Filing fees ($742,724).

A budget with no increase in revenue or expenses would send a message to the insurance industry that it is tightening its own belt, said Deirdre Manna, vice president of industry, regulatory and political affairs for the Property Casualty Insurers Association of America. "If this budget is implemented, the NAIC will have missed an opportunity to send a message that it recognizes the constraints that the insurance industry faces. This shift would be recognized and well received by the payers in the industry, as well as by key audiences before which the NAIC is facing increasing scrutiny, including Congress, state legislatures and international audiences," Manna said in a letter to the NAIC.

The NAIC budget is built to meet the tasks the association is asked to perform, said NAIC Chief Financial Officer Brady Kelley . "The demand from both regulator and industry users is on the rise," he said. "Volume is up. Demand is up."

The NAIC is proposing an expansion of State Based Systems software partnership, including eight new full-time employees "to establish the appropriate staffing level on the SBS team to reduce the NAIC's future reliance on consulting services," according to the budget document. Six additional full-time employees will implement short-term initiatives to improve effectiveness and consumer satisfaction with new interfaces and state projects. The NAIC is also seeking funding to accommodate data collection and reporting requirements under the Patient Protection and Affordable Care Act.

The resulting budget increase of 31.9% in SBS fees over the 2010 budget needs to be more fully explained, Manna said. "PCI encourages the NAIC to develop and make public a long and short-term plan for the SBS," she said.

The NAIC publishes a budget, but it needs to be more transparent by disclosing detailed, specific salary information and other data, said Eli Lehrer , national director of the Center on Finance, Insurance and Real Estate at the Heartland Institute. "Relative to a private association, they're pretty open. Relative to government, which is what they want to be, they're very secretive," he said.

While the budget continues to rise, "We nevertheless see a carefully crafted budget that, assuming even paltry improvement in the economy and the insurance industry, will leave the NAIC still stronger financially than its current triple-A status," said William Boyd , financial regulation manager for the National Association of Mutual Insurance Companies.

But Boyd questioned the need for "a quasi-governmental body with broad sources of revenue from a largely captive set of payers" to budget for a 73.3% liquid reserve ratio in 2011. The reserve has risen from 57.2% at the end of 2009 to 60.3%, projected, at the close of 2010. Such a sizable reserve would seem to be more than enough to cover "the very worst doomsday scenario -- beyond the hundred-year storm often used in the industry," Boyd wrote in a letter to the NAIC.

"Our concern, as stated in prior years, originates in possibility that large projects, unwanted or excess to the needs of solvency or market supervision, may be executed without consultation with those who provide the bulk of NAIC revenue," Boyd said.

The NAIC has a targeted goal of an 80% reserve, which is not excessive in comparison to other nonprofit organizations -- and is significantly smaller than many insurance trade associations, Kelley said.

As in prior years, industry representatives took issue with an increase in the NAIC's travel budget, which is budgeted to rise nearly $475,000 despite the shift in 2010 from four to three national meetings per year. "Historically, NAIC needs to consider that the 2011 budget represents an increase from $156K to over $1 million in commissioner travel between the 2008 and 2011 budgets," Manna said.

The association is continuing to subsidize the cost of state commissioners' attendance at NAIC meetings, plus grants of $13,000 per state, Kelley said.

The NAIC is also planning two interim national meetings in 2011, he said, the details of which have not been announced.

The $200,000 gap between budgeted revenues and expenses will be at least equaled by a deal linked to the NAIC's January 2012 relocation to new office space, still within Kansas City, Mo., incoming NAIC President and Iowa Insurance Commissioner Susan Voss previously said. The future lessor is subsidizing a portion of the NAIC's 2011 costs as part of the deal and the NAIC will receive $1.8 million in tax incentives from the city over the course of a 10-year lease.