NAIC Budget Comment 20041

Jgorman

Description

Comments on the NAIC’s “Proposed 2004 Budget and Business and Fiscal Impact Statements” Submitted By National Association of Independent Insurers AND National Association of Mutual Insurance Companies TABLE OF CONTENTS I. Introduction II. Presentation and Supporting Documentation III. NAIC Unrestricted Net Assets IV. Questions and Criticisms on Various Revenue and Expense Items 1) Revenues 2) Expenditures V. Comment on New Initiatives 2 I. Introduction The National Association of Independent Insurers and the National Association of Mutual Insurance Companies (the Associations) represent insurers that write the majority of the property-casualty premium in the United States. Given that major presence in the market, the Associations welcome the opportunity to review, analyze, and comment on content and trends manifest in the budget of the organization that plays so large a role in governance of the business conducted by their members. NAIC plans and programs for the coming year are in our observation particularly critical. The debate over whether regulation of the insurance industry is best left in the states, or should be transferred to federal control, continues to be considered in Washington. The hearings conducted by the House Financial Services Committee, scrutiny over compliance with the Terrorism Risk Insurance Act of 2002, and now a hearing ...

Informations

• Publié par: Mochag
• Nombre de lectures: 19
• Langue: English

Extrait

Comments on the NAIC’s

“Proposed 2004 Budget and Business and Fiscal Impact

Statements”

Submitted By

National Association of Independent Insurers

A

ND

National Association of Mutual Insurance Companies

2

TABLE OF CONTENTS

I.

Introduction

II.

Presentation and Supporting Documentation

III.

NAIC Unrestricted Net Assets

IV.

Questions and Criticisms on Various Revenue and Expense Items

1) Revenues

2) Expenditures

V.

Comment on New Initiatives

3

I.

Introduction

The National Association of Independent Insurers and the National Association of

Mutual Insurance Companies (the Associations) represent insurers that write the majority

of the property-casualty premium in the United States. Given that major presence in the

market, the Associations welcome the opportunity to review, analyze, and comment on

content and trends manifest in the budget of the organization that plays so large a role in

governance of the business conducted by their members.

NAIC plans and programs for the coming year are in our observation particularly critical.

The debate over whether regulation of the insurance industry is best left in the states, or

should be transferred to federal control, continues to be considered in Washington. The

hearings conducted by the House Financial Services Committee, scrutiny over

compliance with the Terrorism Risk Insurance Act of 2002, and now a hearing in the

Senate Commerce Committee that will include a review of “The Insurance Consumer

Protection Act of 2003” (S 1373) introduced by Senator Hollings. The NAIC can play a

pivotal role in efforts to improve the state regulatory system. We have a strong interest in

seeing such NAIC efforts succeed. Consequently, we have a strong interest in your

success. Our observations and criticisms here are offered constructively and in that

light—and with attention to the efficiency that we believe needs to be present in conduct

of NAIC business.

II.

Presentation and Supporting Documentation

In previous budget comment the Associations have repeatedly taken issue with the

magnitude of growth of NAIC budgets, which, in comparing projected 2002 data and the

2003 budget presented last year, was 7.2 per cent. Similar comparison of 2001 and 2002

showed an expected increase of 8.2 per cent. That such comparison—projected 2003

results and budgeted 2004—shows a 1.9 per cent increase for total revenues and 1.2 per

cent increase in expenses is not cause at this time, however, for the Associations to stand

silent about NAIC budgets in general and about specifics of the NAIC budget for 2004.

We must agree in part with Ms. Weatherford’s and Mr. Kelley’s memorandum of

introduction to the 2004 budget package that it is “one of the most inclusive and

transparent budgets that the NAIC has ever published.” The budget, however, may not

include sufficient information to regulators and others with a stake in operation of the

NAIC to permit full understanding and evaluation of existing and new programs with

respect to their maintenance or fulfillment of projects and priorities set by the NAIC.

4

We believe that the regulatory community should overcome what may be the natural

tendency to look primarily at new initiatives proposed in the budget document.

Evaluation needs to be given additionally to all increases and decreases in components of

existing activities and the personnel and costs associated.

Renewing, focusing, and

sharpening the regulatory effort requires comprehensive review of budgets and successes

or failures that may be included. In this manner, value is most likely to be inherent in

regulation of insurance.

The budget should serve as a maximally informative method to regulators and other

stakeholders for understanding plans for, and continuing activities related to, specific

programs. We would suggest that many, perhaps most, business and non-profit entities

operate via use of periodic evaluation of variances from budgeted amounts. Budgets

formalize priorities and activities and, as a result of the usually collective consideration

by stakeholders of those priorities, influence behaviors of managers and others who must

follow what the collective governance has determined are priorities and activities to be

executed and observed. Indeed, those in the top hierarchy of organizations and those

managers in the remainder of the organization are typically evaluated and rewarded with

respect to execution of what is manifest in a budget.

The NAIC's budget presentation does not include clear information collated in such a

way that the number (actual, vacancies, additions, etc.) of staff by area is determinable.

In budgets of several years ago organizational charts were included that were not

complete. In recent years, NAIC staff have indicated that organizational charts were not

included "to save paper and copying costs." (This is an example of budgetary control that

is misplaced.) We once again recommend that the NAIC present information regarding

the total number of employees (full-time and part-time), approved and vacant positions,

and the number of employees by department, activity and program. Additionally, we

recommend that projections of employee headcount for the current budget cycle be made

for each area within the NAIC. This is a critical component of budget information and

allows members to identify trends by budget period, as well as how and when expense for

salary and related benefits occur..

Further, a fully appropriate addendum to the NAIC budget would be the most recent

audited financial report of the organization and highlights of any report provided by

independent auditors to the organization.

Such information provides instruction and

assurance form a third party to those outside the NAIC concerned with its operation and

financial reporting.

The Associations have, year after year, sought program budgeting for the matching of

revenues and expenses that would be provided for NAIC programs. Various efforts have

been made by the NAIC toward such end, including much data in the proposed 2004

budget and the program-budgeting supplement issued this spring. These presentations

still do not fully match revenues and expenses, especially the latter, for each program.

In response to our inquiry made for the hearing on the proposed NAIC 2003 budget, we

learned that the NAIC has dispensation from the IRS that it need not, in exception to the

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general rule for 501 (C) (3) organizations, make available to the public its IRS Form 990.

We differ with this approach and believe strongly that disclosure is appropriate.

III.

NAIC Unrestricted Net Assets

The August 28, 2003, minutes of the Internal Administration Subcommittee include on

page 6. a paragraph concerning Ms. Weatherford recounting a directive of the

subcommittee that a larger net asset reserve would be built to “mitigate the risk”

perceived in relation to contingencies that were enumerated.

Understandably of

fundamental and major concern to the Associations is the magnitude of growth of

unrestricted net assets, since the greater part of such growth will be extracted from our

memberships. Of equal concern is future allocation of such assets, and here we must

suggest that projects and needs often grow to fit funds available.

Moreover, we

acknowledge need for some degree of cushion, yet we do not expect all the contingencies

enumerated to occur. At a time when companies and state governments are tightening

their belts, a surplus of this magnitude must be questioned.

A relevant question for NAIC budgeting is one parallel to that for government budgeting:

Should the budgeting entity collect any more from its taxpayers than is required for those

projects or duties that its governance has specifically elected or been charged to do?

Funds held by non-banking government units in excess of needs are unproductive. We

believe the NAIC must very carefully ask what is an appropriate amount or level of funds

to be held by the NAIC as unrestricted net assets.

What is striking to us—and easily visible in review of the “Consolidated Summary”—is

that the three years of activity presented generate $10 million in excess of expenses. We

realize that some of this surplus will be allocated, but the pattern evident in development

of amounts in excess of expense is frightening to those responsible for funding it. We

realize that the amount for 2002 (actual) may not have been fully planned, yet its amount

should ameliorate the need now to generate still more funds that will in part add to

unrestricted net assets. Moreover, we urge, for the reasons described above, a revision to

the intent for addition to unrestricted net assets—or at least a tempering of that goal. It is

not irresponsible to note that expenses and other funds can be reduced in the face of

contingencies that diminish revenues.

IV.

Questions and Criticisms on Various Revenue and Expense Items

1.

Revenues

a) Many of our members continue to be aggrieved by the

data-base fees they are assessed to file their annual

statements with the NAIC and the requirement that they

must pay yet again to obtain data from that very data base.

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We note that there has been some forbearance with respect

to data-base fees for 2004 but apparently for reason of

growth in premium.

Future data-base increases should

have the most careful scrutiny with specific and public

justification.

b) Meeting registration fees appear to be about 25 per cent

higher than needed with that excess over cost allocated to

provision of funds for the four zones. What do the zone

regulators do with these funds?

c) Attendance at the national quarterly meetings has declined.

Has analysis been performed to understand this decline?

With respect to value perceived by quarterly meeting

attendees, executive sessions diminish incentive or reason

to attend the national meetings. Attendees are simply met

by too many blanks in the extensive meeting agenda.

Sessions without content are a similar irritant.

Simply

because a working group or other body exists is not reason

for it to convene at every national meeting.

Failure to

reverse this trend may result in continued loss of revenue

from meeting attendance.

d) What is the status of the negotiation—and what is the

larger role of the revenue involved—with software vendors

over the new license agreement with the NAIC? Does the

NAIC maintain that it has a proprietary interest in

specifications that are created by and for state government

and that includes substantial work by the industry as well

as the software vendors?

Are we correct that the

agreement contemplates collection of $250 from every

company?

Is such revenue now included in budget

numbers?

e) August, 2003, minutes of the (EX1) Subcommittee include

expression that the NAIC needed more reserve funds

because of threats to intellectual property the NAIC is

interested in protecting. What property? Is this concern

related to what is mentioned in e) above or to other

property?

2.

Expenditures

a) Salary information can only be effectively evaluated when

it is accompanied by specific headcount by department, as

well as some explanation of what that department does,

how it relates to the NAIC mission and how performance is

measured.

b) It

appears

that

the

NAIC

is

spending

more

for

commissioner travel. Who decides what is appropriate for

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payment by the NAIC? In the case of some international

activities it may be more appropriate to send a high level

technical person than a commissioner, and we understand

this is done in some instances.

What are the rules for

determining whether staff or commissioners attend? What

rules prescribe appropriate spending levels on official

NAIC travel?

c) What is NAIC policy on the allocation of expenses to

business activities such as the SVO, SERFF, etc.?

Are

direct and indirect costs allocated?

d) There appears to be a significant part of the budget devoted

to market-analysis activities. Has a majority of the states

accepted the notion that this activity deserves this sort of

commitment and support of NAIC resources?

e) Basic questions on the matter of how State-Based Systems

(SBS) should be operated are evident to the Associations.

Does the NAIC truly have advantages and efficiencies not

available via the private sector? How much of this large

set of services should be done by the NAIC and what part

or whole could rationally be done by private industry? An

additional concern with the SBS initiative is the lack of

participation by the majority of states. Is there reason for

affirmation of these projects with only a very limited

number of states benefiting? It appears that SBS is not

self-sustaining when costs not now allocated are included.

SBS may or may not be necessary to cause the Congress to

desist from asserting greater power over insurance entities.

This, in light of prospects for SBS’s components sustaining

themselves, deserves the basic review we have suggested

above.

f)

Is it necessary to maintain the separate fund for the

financial data repository? We are not aware of background

decisions

that

may

have

occurred

to

cause

this

arrangement—and that may make this fully appropriate.

V.

Comment on New Initiatives

As general commentary on the several new initiatives, we would ask how many originate

with NAIC staff and how many with the NAIC membership. We do not object to staff

input, but states rather than staff should be in control of policies and projects that result in

allocation of very substantial amounts of the NAIC budget.

1) The focus of the new educational programming budget appears to be in

offering online training for regulators who may be otherwise find it

difficult to attend actual classroom sessions due to state insurance

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departments’ limited resources.

What seems evident in this effort is

greater emphasis on “delivery” of programs than programs’ content. The

fiscal impact statements prepared for each of these new educational

initiatives provide little understanding for this emphasis and little

information on content of these educational programs.

2) The creation of a database of information on receiverships being

administered in the U.S. is urgently needed as noted by a recent report by

the Center for Risk Management and Insurance Research at Georgia State

University. We question, however, the need to create such a data base for

alien companies. The budget document does not reveal if the database

will be available to the public, as recommended by the Georgia State

Study. Also, we suggest that much information can be obtained from

NCIGF and NOLHGA to limit the amount of data collected from

individual receivers. To further encourage the participation of all states in

this project, the data collection must be limited to essential information, at

least at the onset of the effort.

3) We note that once again several new initiatives are aimed at technology-

driven programs. For example, the Market Analysis Program and Market

Information Systems provide support for over fourteen major computer

applications and databases.

Use of technology is no doubt a key

component in improving state regulation and making if more efficient. It

should not, however, be assumed that all such programs accomplish this

result.

All technology-based programs at the NAIC should undergo

continuous cost-benefit analysis to determine if the benefits they produce

in fact outweigh the costs they create for both the regulator and the

regulated industry.