The National Association of Insurance Commissioners (NAIC) has released its proposed budget for 2005 and announced a public hearing to discuss the budget via a conference call, scheduled for Nov. 17, 2004.
“Significant analysis went into this 2005 budget. We have been able to effectuate significant expense reductions from the prior year by reducing the costs or reallocating human and budget resources from less essential to more essential projects and services,” said NAIC President Diane Koken, who also serves as Pennsylvania Insurance Commissioner. “I’m pleased to report that we have cut expenses by $1.6 million overall, representing a 2.83 percent reduction from 2004.”
Koken said that, upon approval and inclusion of 12 individual fiscal impact proposals, the NAIC consolidated budget calls for projected revenue of $58.8 million, a 2.06 percent increase over 2004 budget levels, with projected expenses of $55.0 million, a 2.83 percent decrease from 2004 budget levels.
Significant revenue changes from 2004 to 2005 include:
· Database revenues are projected to increase approximately $422,780, or 1.68 percent over the 2004 budget and $705,985, or 2.83 percent over 2004 projections. This increase is based on the assumption that the industry’s 2004 premium base would increase by 6 percent. This is down slightly from the 7 percent budgeted for the 2003 premium base, which actually came in at 6.2 percent, causing the $283,205 or 1.12 percent budget variance in 2004.
· Publications and subscriptions revenue will increase by $486,229, or 3.53 percent, from the 2004 budget, but will decrease 1.09 percent from 2004 projections. This is due to the decrease resulting from a change in the business model for the sale and distribution of various custom guides. The NAIC plans to outsource these processes in 2005 pursuant to a royalty-based sales arrangement to effectively recover the existing net revenue stream on these projects. The decrease is offset by the royalty generated by the sale of annual statement software from the NAIC’s business partners.
· Services revenue is budgeted to decrease by $859,612, or 8.83 percent. Part of this decrease is due to a change in the approach to budgeting for the SBS project in 2005, which generated a significant expense reduction in 2005. Rather than projecting that a certain number of states will license and implement SBS as the back-end system in their states, the 2005 budget proposes that the budget will be amended only when the states have negotiated and are ready to sign the SBS license. Another significant amount of the decrease is due to a lower projected volume of non-rated security filings with the NAIC’s Securities Valuation Office (SVO). The budget does not anticipate any increase in the annual SVO assessment to recover the reduction in non-rated security filings. These decreases are offset by a significant improvement in SERFF filing fee revenues projected for 2005.
· Investment income will increase by approximately $124,965, or 18.7 percent, from 2004 budgeted levels. This increase is related to a change in investment allocation during 2004 as a result of recommendations from the NAIC’s investment advisor, retained in late 2003.
Significant expense changes from 2004 to 2005 include:
· Salaries are budgeted to increase $1,112,288, or 4.5 percent, from the 2004 budget. This increase represents an average annual increase of 3.5 percent on base salaries, offset by an increase in turnover. The 2005 salary budget also includes the elimination of six full-time employee positions, resulting from management’s review of the business processes and workloads in various NAIC departments, representing a reduction to 2005 salaries.
· Travel is budgeted to decrease by $193,982, or 9.2 percent, from the 2004 budget and 5 percent from 2004 projections, due primarily to continued reductions in the staff travel line of the NAIC’s budget as a result of anticipated savings in interim committee meetings, NAIC education programs, state visits and professional development travel by NAIC staff.
· Professional services are budgeted to decrease by $1,214,165, or 29.9 percent from the 2004 budget, which results from: 1) a decrease in consulting costs and expenses associated with accreditation reviews in 2005; and 2) a significant decrease in the professional consulting services requested within the base budget for 2005 projects.
· Printing and production expenses are projected to decrease by $796,330, or 80.7 percent from the 2004 budget. This represents the most significant expense impact from the change in the NAIC’s business model for the production and distribution of various custom guides in 2005.
· The target operating reserve level for the NAIC was a key factor in preparation of the 2005 budget. Using 2004 projected results, the net asset balance by year-end 2004 is expected to represent a total net asset to 2005 operating expense ratio of 83.8 percent, on a consolidated basis. The NAIC leadership and management believe that this increase and future increases in the reserve, up to a target reserve of 100 percent, are prudent given the risk factors facing the NAIC’s business and finances, which include, but may not be limited to, introduction of federal tools and dual charter legislation in Congress, participation with the U.S. Treasury in the Terrorism Risk Insurance Act, and initial start-up capitalization of the Interstate Compact Commission.
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