Insurance Groups Raise Concerns About NAIC Funding Reserve
November 27, 2013 by Thomas Harman
WASHINGTON – Insurance industry associations raised concerns to the National Association of Insurance Commissioners about the group’s increasing financial reserve and the need for greater transparency.
The discussions came during a public hearing on the proposed 2014 NAIC budget, which has $93 million in revenues, a slight increase over 2013, along with new funding for staff resources to aid implementation of the Own Risk and Solvency Assessment model act and the controversial principles-based reserving method for life insurers that states can adopt (Best’s News Service, Oct. 17, 2013).
The National Association of Mutual Insurance Companies and the American Council of Life Insurers, both of which voiced issues in earlier letters about the size of NAIC’s growing reserve, expressed their concern at the hearing. NAIC kept its comments short, having issued a single letter on Nov. 22 responding to the concerns of each group.
Wayne Mehlman, ACLI senior counsel, insurance regulation, said NAIC’s accumulated surpluses have grown from $37 million at the end of 2002 to an estimated $100.5 million at the end of 2014 and at the current rate could reach $170 million by the end of 2019. Mehlman said while the surplus is needed, it could be maintained “at what we think would be a more reasonable level.” He proposed that NAIC’s reserve ratio be set at 85%, which would bring the surplus down to $78 million by the end of 2017 — the cuts being made by budgeting for deficits during the next three years.
Neil Alldredge, NAMIC senior vice president, state and policy affairs, said the NAIC reserve is much too high, given that the most of the funding revenue generated by NAIC comes from a stable source — dues-paying states.
In response, NAIC’s summary on the comments it received concerning the budget showed that a pair of reviews, the last in 2011, have recommended that operating reserve ratio range from 80% to 91%, in part due to the increasing complexity of global and national insurance regulation and the higher level of uncertain and risk that resulted. As of Dec. 31, 2012, NAIC had a liquid operating reserve ratio of 82.5%, which is expected to be 87.1% at the end of 2013. However, the summary said the operating reserve ratio is expected to decline to 85.4% at the end of 2014, based on the proposed 2014 budget and 2013 projections. Achieving the 2013 and 2014 ratios depends on NAIC’s ability to meet its operating margin and generate positive returns on investments, the summary said.
Alldredge told Best’s News Service after the hearing the comments in the response letter dealing with the reserve were the least satisfactory of the responses he read, because they did not deal with the reserve’s growth and the certainty of revenue. While NAIC as a group helps increase efficiency of state-based regulation, he said the gain in efficiency should be reflected in lower-cost operations. While NAIC should be making money to cover its costs and have a reserve, he questioned whether that reserve should stand at $80 million when NAIC is proposing a $90 million operating budget.
NAMIC expressed concern about the overall growth of the NAIC, which in a summary said that despite growing requirements on state insurance regulators, the NAIC has helped them meet the new demands “with a small increase in the organization’s annual expenses.”
NAMIC also wanted to see steps taken to improve NAIC budget transparency, which NAIC President Jim Donelon said was under review because it had been loosely adhered to in the past. Alldredge was given the offer of submitting suggestions to improve transparency, which he gladly accepted but remarked that submitting them would extend beyond the current budget process.
The NAIC summary rejected the notion of a public, independent review of the group’s budget process, as NAMIC suggested. The NAIC summary cited numerous opportunities for NAIC members and interested parties to comment on the proposed budget. NAIC members provide monthly financial statements whose results are reviewed with NAIC’s Audit Committee, the summary said. An independent public accounting firm also audits NAIC’s financial statements annually. “The current budget process has served the members and their constituents well and we do not believe an independent review of the process is necessary at this time,” the summary said.
(By Thomas Harman, associate editor, BestWeek: Tom.Harman@ambest.com)
