The National Association of Insurance Commissioners responded today and Monday to industry criticisms of its budget, with current NAIC President Susan Voss of Iowa noting that the NAIC's focus should be on the value of services to membership and the regulated industry, and that its budget is small in relation to industry premiums.
Voss made her remarks in a brief public hearing to address comments from interested parties around the proposed 2012 budget before its approval by the Internal Administration and Executive Committee.
Along with Voss' responses, a letter dated Dec. 5 from Florida Insurance Commissioner Kevin McCarty, NAIC President-Elect and NAIC top staff, the NAIC rebutted many industry concerns, including operating reserve and surplus growth, by pointing to the growing complexity of insurance regulation coupled with states' dwindling coffers to provide for members to travel or for assessments. Getting more money from the states is not "going to happen," Voss said on the call.
Thus, the NAIC has to step up, according to the letter's contents.
The NAIC 2012 proposed budget includes total revenues of $79.2 million and total expenses of $77.6 million, up almost 5% and 2.5% respectively. The 2012 budget would add an additional $1.5 million in net revenues to the surplus, for a total of $74 million in surplus at the end of 2012.
Various trade groups raised concerns about the level of the NAIC's operating reserve, which they believe provides a financial cushion in excess of future needs. The American Council of Life Insurers specifically recommended the NAIC gradually reduce its operating reserve by funding a certain amount of annual deficits over the next few years.
The level of NAIC net assets (i.e., operating reserve) is monitored closely, the NAIC leadership stated and, given the "evolving nature of the insurance regulatory environment as well as the need to conduct a periodic review, the Executive (EX) Committee hired consulting firm Grant Thornton to study the issue, McCarty et al. wrote.
"The review focused on the NAIC's unique business risks and uncertainties, and benchmarked the NAIC to comparable organizations. As a result of this review, the Executive (EX) Committee and Internal Administration (EX1) Subcommittee approved the consultant's report, which changed the NAIC's operating reserve target from a flat 80% to a target range of 80% to 91%. … As noted in this report, the complexity of insurance regulation is increasing, resulting in a higher level of uncertainty and increased business risk, thereby, warranting a higher operating reserve target," the NAIC leadership stated.
As of Dec. 31, 2010, the NAIC maintained a liquid operating reserve ratio of 79.3%.
It has been difficult, said the NAIC letter, to predict the rate of return earned on investments. For instance, the NAIC experienced a 17.6% reduction in its liquid operating reserve ratio from Dec. 31, 2007 to Dec. 31, 2008, and this year has also been challenging with monthly fluctuations of more than 4%, so the operating reserve ratio is closely monitored to ensure it is aligned with the NAIC's business risks and uncertainties, McCarty et al. responded.
On the public conference call, Wayne Mehlman, senior counsel for insurance regulation for the ACLI said, the study not withstanding, the total projected surplus is still an awful lot of money that "is mainly generated by our insurer members," and which has been growing quite a bit over the past few years. He suggested "building it down," and noted that, unlike other trade associations, members can't just elect to drop out when the prices get too high.
