Insurance industry representatives are once again unhappy with a proposed budget of the National Association of Insurance Commissioners (NAIC), the quasi-governmental body that collects insurers’ annual financial statements and recommends model regulation and legislation to the several states.
While insurer lobbyists took pains to commend what they said was improved transparency in the NAIC’s budget, they also decried a proposal to increase the group’s reserves from 50 percent to 60 percent of annual expenses. Overall “unrestricted net assets”—a.k.a. reserves, or surplus—now total $38.3 million, which is actually more than two-thirds of projected 2004 expenses of $54.2 million, according to Steve Broadie, a lobbyist for the National Association of Independent Insurers (NAII).
The proposed 2004 budget only increases expenses by a quarter of one percent over 2003, but also includes a $3.5 million surplus.
Insurers finance the bulk of the NAIC’s budget in the form of fees required of them to file their annual financial statements with the group—45.7 percent, according to Broadie. The fee structure is based on the premium base of a carrier, and tops out at $65,000 a year for an insurer with more than $2.5 billion in premium or $95,000 for the top-level group of insurance companies. The states take in an estimated $12 billion annually in taxes collected on insurance premiums, though none of that money funds the NAIC.
For its part, the NAIC has argued that the reserves are a hedge against the risk of a major crisis in the insurance industry that might wipe out the group’s financial basis of support.
“They had cited a number of risks that caused them to want to have a higher unrestricted surplus, but we don’t believe that all of those risks would occur simultaneously,” said William Boyd, a lobbyist for the National Association of Mutual Insurance Companies, at a public hearing held via conference call on Nov. 3. “Further, the great breadth of their funding from so many companies is fairly reliable, so for that reason we don’t think they need as much in unrestricted net assets as they suggest they need.”
Context of federalization
The debate over the NAIC’s budget reserves does not occur in a vacuum, but within the context of hearings on Capitol Hill in both the Senate and the House on the fate of state insurance regulation. While most of the insurance industry, especially the property/casualty industry, opposes federalization, the prevailing system of state regulation established after World War II no longer demands unanimous support among insurers.
Both insurers and the NAIC have sought to use the possibility of federalization as leverage in their attempts to determine the future, if any, of state-based regulation. Many insurers still fear federalization’s danger as an unknown quantity, while the states fear the loss of income and authority that would be a result of federalization.
“This is just another attempt by the industry to squeeze regulators, to demonstrate to the regulators that the ones in control are the companies and not the regulators,” said Birny Birnbaum, executive director of the Center for Economic Justice and an NAIC-funded consumer representative.
“A few years back the insurance companies said they were going to withhold database fees,” Birnbaum told Insurance Journal. “Basically, they did that to get the NAIC to come around.”
Arkansas Commissioner Mike Pickens, chair of the NAIC’s Executive Committee, said the pressures on the NAIC coming from all sides have made the generous budgeting a necessity.
“We expected to hear much more about the reserving issue this year and we have,” Pickens said during the conference call. “Congress, the industry and consumers all are expecting state regulators working through the NAIC to do more and more each year. On speed-to-market and particularly the interstate compact, that initiative is very important and will take money to get management up and running and to hire staff when we need to do so. We think we’ll need [the surplus], not only for the interstate compact, but for continued upgrading of our technology, and other speed-to-market initiatives.”
Industry representatives were unconvinced by the argument.
“We appreciate all of that,” said Steve Broadie, “but I still think it needs to be linked to a specific need.”
Bills and headaches
Others, such as Lenore Marema of the Alliance of American Insurers, were even more blunt.
“Some Alliance members think that all they ever get from state regulation is higher bills every year and more headaches,” Marema said in a statement. “The fact is, the NAIC is currently collecting more from insurers that they can spend. Fees always go up, and the budget never comes down.
“We think, in this time when some in the federal government are questioning the cost and efficiency of state regulation, this would be a good time for the commissioners to show that they are serious about modernizing the regulatory system, and part of that process is reducing the cost of regulation.
“The database fees would be a good starting point,” Marema added. “Reduce those fees and send a message to your critics that you’re serious about operating in a cost-efficient manner.”
The commissioners did not seem too keen on that idea, and Pickens even argued that the NAIC was still a good deal.
“Look at our budget and what the cost of federal regulation would be,” he said during the hearing. “Our cost is very reasonable to what federal regulation would cost. …
Some sectors of the industry are saying you’re not doing enough, you need to do it faster. We’ve done some good things, but we have more work to do, and accomplishing that work will take money. The fact that we’ve cut our expenses and built our reserve is a good thing, not a bad thing.”
South Carolina Insurance Director Ernst Csiszar even said that the 60 percent figure was arrived at “more or less on gut instinct” and feared it wouldn’t be enough.
“I feel very uncomfortable with the reserve at 60 percent,” Csiszar said during the hearing. “I think it should be higher, given what’s going on with development of national standards, the technology changes as a result of that, what’s going on with the federal optional charter, the money it will take to capitalize the interstate compact.”
During the conference call, Marema also harshly criticized the NAIC’s meeting planning, where expenses for commissioner travel routinely exceed revenues from attendees.
“You guys have a real dog you’re trying to market in terms of your meeting product,” she said. “It was clear at the last zone coordination committee meeting. The commissioners never have to sell anything, they just enforce stuff. How can we force the industry to pay $249 for hotel rooms when they can afford $140 around the corner. You decide instead to meet in some place that doesn’t have a lot of hotels.”
The NAIC did respond in comments released Oct. 31 that it planned to hold future meetings in second-tier, less expensive locations.
NAIC claims IRS exemption
Industry representatives also raised concerns about the NAIC’s lack of transparency with regard to some of its operations. In particular, the NAIC claims the Internal Revenue Service (IRS) has exempted it from filing the 990 Form, which is usually required of non-profit organizations and includes information about a group’s highest-paid employees and contractors.
NAIC CFO Brady Kelly, who did not return repeated requests for comment by press time, responded to insurer concerns about the form by suggesting that all the information that would be included in the filing could be reconstructed from other statements and reports publicly released by the group.
“The budget contains gross information about salaries by department,” the NAII’s Broadie said. “I haven’t seen anywhere in the budget where it breaks out who the top five highest-paid employees are.”
NAMIC’s Boyd also said it was important to know who the top-five highest-paid contractors are, as insurers ultimately wind up footing the bill for any service vendors.
“It’s a good thing to have the salary information,” Boyd said. “They say they make that available. I haven’t seen it recently. It’s not something they choose to broadcast widely.”
There doesn’t appear to be any permanent solution to the perennial tug of war between insurers and regulators over the NAIC budget, though consumer advocate Birnbaum offers one suggestion.
“They could go someplace else for the funding,” he said. “They could find dedicated funding where each state might do something like for every policy issued in the state the insurance company has to contribute 20 cents to the NAIC.”
Broadie said the idea wouldn’t fly.
“That would be very difficult,” he said. “They have no legislative authority. State insurance departments would want to get their cut of those fees first. That’s probably not an alternative revenue source for them.”
So things now are at a standstill, with each side digging its heels in even deeper. It’s not a make-or-break issue for insurers yet, though, and their representatives seemed more resigned to their fate than angered about it.
“My feeling is this process is what it is,” the Alliance’s Marema said during the hearing. “The staff puts together a budget that members will like. At the end of the day the budget is a commissioners’ budget, based on having heard all the views, but it’s still a commissioners’ budget.”
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