PCI Asks Regulators to Put Caps on Budget Reserve

The Property Casualty Insurers Association of America (PCI) urged regulators to show budget discipline and responsibility by capping the National Association of Insurance Commissioners’ (NAIC) budget reserve at a stated dollar amount.

The NAIC has been criticized in recent years by insurance carriers regarding the size and growth of the NAIC operating reserve which has increased over the last five years as NAIC budgets have consistently had revenues in excess of expenses. Of concern in the proposed 2005 budget was the NAIC’s proposal to further increase its reserve to 100 percent of its annual expenditures.

A public hearing was held by conference call last week to allow interested parties to provide comments on the proposed 2005 budget.

“PCI provides commissioners with an external view of their budget,” said Lenore Marema, PCI vice president, industry and regulatory affairs. “The fact is that those making budget requests and overseeing the NAIC are not necessarily spending their own money so there is no real built-in incentive to exercise any control over expenses. Our primary issue today is that NAIC’s annual intake of revenues is in excess of its expenses and its build-up of reserves.”

PCI, along with other industry trade associations, suggested that the first step in the right direction should be a discussion about what contingencies the NAIC needs to reserve against and how much is actually needed in reserves to protect the organization. PCI was pleased to see that NAIC appears to be more willing to engage in this dialogue in 2005.

“We recommend that the NAIC’s Revenue Considerations Working Group should be charged in 2005 to review the NAIC’s reserving practices and arrive at a stated cap for its operating reserve,” Marema said. “If the reserve becomes a fixed item then it doesn’t have the opportunity to become a cushion of extra money for the NAIC to draw on. A reasonable cap and stated purpose for the NAIC’s operating reserve may be the ‘built-in budget discipline’ that the industry has always sought.”

Another PCI recommendation is that the NAIC reconsider a proposal submitted several years ago that the operating reserves be placed in a trust fund or some other segregated account which would be overseen by a separate board of directors similar to the joint regulatory/industry boards that currently exist for the National Insurance Producer Registry (NIPR) and the System for Electronic Rate and Form Filing (SERFF).

PCI noted that the NAIC has taken one positive step in the 2005 budget in limiting its expenditures by creating the Regulatory Modernization and Initiative Fund, which will cap additional expenditures beyond the 2005 budget at 1.5 percent of the NAIC’s budget or $700,000.

“This action is a step in the right direction,” Marema said. “PCI would like to see this step institutionalized in the NAIC by-laws as an annual limit, as well as the cap that the PCI has suggested on the overall amount of the NAIC’s reserves.”

The NAIC 2005 budget must be approved during the NAIC meeting in New Orleans, Dec. 4 -7, 2004.

Topics Legislation