Insurance industry associations engaged in their annual rite of passage this month, criticizing on many fronts the proposed National Association of Insurance Commissioners (NAIC) budget for the coming year, especially targeting the association’s growing accumulated surplus which one organization predicted could break the $100 million mark in just four more years, in 2016.
Total unrestricted net assets are projected to be $81.5 million at the end of 2012. The 2013 proposed budget would increase this amount to $83.3 million by year-end 2013, which would amount to a 72 percent increase in just five years, it was noted. Total unrestricted net assets were $48.4 million at the end of 2008; $59.1 million at the end of 2009.
The NAIC 2013 proposed budget before fiscals and the modeling of structured securities includes total revenues of $80.8 million and total expenses of $78.1 million, which represent a 2 percent and .33 percent increase, respectively, from the 2012 budget.
“While we understand the need for an organization of your size to maintain a reasonable surplus in case it generates occasional deficits, there is simply no justifiable reason for the NAIC to have this extraordinary high amount of accumulated surplus,” wrote the American Council of Life Insurers (ACLI) in its comment letter dated Nov. 9.
“What organizational or economic risks exist that could possibly warrant the NAIC to hold onto $80-plus million in reserves, most of which is generated from industry through database fees, meeting registration fees, and the Securities Valuation Office (SVO) and other service fees?” asked the letter, addressed to NAIC President-Elect James Donelon and signed by Wayne Mehlman, ACLI senior counsel, insurance regulation.
The growing accumulated surplus, referred to in the budget as “unrestricted net assets” include operating revenues and expenses, investment income, defined benefit plan adjustments, project cost recovery payments and other projects, and business and fiscal impact statements.
Although the NAIC has rarely swayed in passing its proposed budget as-is, the ACLI urged the NAIC to gradually reduce the total accumulated surplus to a much lower, but still sufficient, level (e.g., $40-50 million) by using a portion of it to fund some of future years’ operations, offering a game plan consisting of annual deficits fully paid for by applying an equal amount of the accumulated surplus over the next few years.
The National Association of Mutual Insurance Companies (NAMIC) in its letter also cited concern with the overall growth of the budget and the hope—but without any influence, it suggested—that NAIC would change its tack in future years.
“We observe that the growth of the NAIC is not unlike that experienced by other bureaucracies such as state and federal government agencies. But at least those are subject to fiscal constraints and realities as well as reform efforts which from time to time are able to curb and even reverse trends,” stated NAMIC’s letter, signed by Paul Tetrault, NAMIC state & policy affairs counsel.
NAMIC noted NAIC lacks such checks and balances.
“This is a matter of great concern to NAMIC since, as we consider the budget, we are mindful that the costs reflected therein are borne by insurers initially and by the insurance-buying public ultimately.”
The Property Casualty Insurers Association of America (PCI) said that the NAIC should also consider whether there is a longer-term plan for assessing revenue and expense issues because it remains concerned about the long-term growth of the NAIC’s budget asked again for a full discussion.
"PCI urges the NAIC to adopt a 2013 budget that projects no growth in revenues and expenses. The majority of NAIC revenues come from PCI members and the rest of the insurance industry, and the NAIC’s budget should be viewed in conjunction with the current economic environment in which those companies operate. With the additional pressure from the federal and international levels, PCI believes NAIC would benefit from a zero growth budget," stated the Nov. 12 letter from Deirdre Manna, PCI regulatory and political affairs.
NAMIC also zeroed in on what it termed significant increases in NAIC travel expenses.
“One of the most frankly eye-popping areas of growth within the NAIC budget is the increase in travel expenses,” NAMIC stated.
"We note that the proposed budget amount for 2013 is a staggering $4.9 million, representing a 21 percent increase over the 2012 amount budgeted for travel,” said the NAMIC letter, addressed to NAIC CFO Jim Woody.
NAIC said in its proposed budget that travel is expected to be over budget by $340,000.
NAIC staff and officers and state commissioner are travelling more internationally as the scope of supervision widens to an increasingly global stage of work product with the growing influence of the International Association of Insurance Supervisors (IAIS), while other federal measures like U.S. health care reform, Dodd-Frank implementation efforts in the states and in Washington, D.C., with federal committee advisory meetings and multiple federal agency/Congressional meetings and hearings keep state regulators and staff on planes and trains.
"People travelling all over the world to attend these meetings," said Federal Insurance Office (FIO) Michael McRaith during a meeting of his Federal Advisory Committee on Insurance Nov. 14th, reflecting on state insurance department staff travel to Basel, Switzerland, Brussels and India just this Fall in order to work on IAIS issues such as ComFrame.
“We are at the point where travel budget amounts thought by the industry to be excessive just a few years ago now appear quaint in comparison to the 2012 projection and 2013 budget,” the NAMIC letter said. “Year to year this is clearly to be an area of rapid growth and we believe it merits further scrutiny and modification.”
The NAIC is scheduled to hold a public hearing on the budget on Nov. 20 where every year criticism is heard and explanations made. The annual budget is usually adopted in December during a plenary conference call.
The ACLI also quibbled the four full-time positions that are assigned to the Structured Securities Project and wondered if these four professionals will be able to make the modeling results available to the public before December of each year.
There was some praise offered, though. The ACLI said it appreciates the NAIC’s forethought to plan for the actuarial support to both the Actuarial Guideline 38 (AG 38) reviews and future principles-based reserving (PBR) work.
Like others, NAMIC also commended the NAIC for its budgetary decision to end the practice of charging fees to access NAIC model laws, regulations, and guidelines and expressed hope that the move would mark the beginning of a favorable trend.
By way of background, the NAIC 2013 proposed budget before fiscals and the modeling of structured securities represents a 3.86 percent increase and a 0.33 percent increase, respectively, from the 2012 budget, for $440,560 in projected revenues over expenses.
However, viewed in relation to the 2012 projected totals, the 2013 proposal represents an operating revenue decrease of 1.75 percent and operating expense decrease of 3.82 percent.
The NAIC did better than expected in 2012. Based on actual operating results through June 30, the year-2012 projections indicate a net operating margin of negative $1.3 million compared to a budgeted net operating margin of negative $2.2 million.
In terms of comments on specific proposals, PCI and NAMIC have concerns regarding the NAIC Natural Catastrophe Stress Testing initiative.
"The proposed development of a NAIC Natural Catastrophe Stress Testing initiative and its lack of details raise serious concerns. Effective stress testing is a comprehensive approach and the NAIC and the industry are taking a critical step towards that with the recently developed ORSA model. With a likely optimistic upward bound cost estimate of $2 million, this endeavor appears to be a conceptual solution in search of an application," stated PCI.
The industry wonders whether testing would occur at the NAIC or at the state level and wants a full vetting of the project and its costs.