Tag: Liquid Operating Reserve

The National Association of Insurance Commissioners (NAIC) is cutting back costs to insurers and others by reducing fees in assessments and database filing fees, areas where it has historically gotten much of its revenue.
According to its proposed budget, the NAIC is pretty comfortable–at least for now–with its liquid operating reserve ratio and is even revisiting the target number.
In its budget proposal unveiled this week, it proposed reducing the filing fee structure for database filings by five percent and the filing fee caps by five percent, among other service reductions in a total of four areas.
In other areas, travel and salaries continue to rise. Salaries, taxes and benefits comprise the largest share of the 2015 budget at almost 60% of the total operating expense.
Salaries, taxes and expenses are projected to total $57,563.4 million for 2015 compared with $53.679 million projected for 2014. Salaries alone will total $44.872 million for 2015, a 4.6% increase over 2014, for the NAIC, which has about 470 full-time employees, reflecting pay increases and overtime, among other factors, according to the NAIC budget spreadsheet.
And the projected 2014 net revenues is $5.5 million over expected amounts, in part due to investment income and database fees as well as valuation services revenue due to revenue from structured securities project revenue including third party dataset sales.
Database filing fees are part of the NAIC’s bread and butter revenue, used to support the NAIC’s financial solvency program in-house and via state insurance departments.
In 2014, a total of 4,817 companies, including 29 groups, were assessed a total of $26,823,629, up $500,00 from 2013.
But for 2015, the NAIC budget plans an overall decrease of 2.32% to $25.744 million for database fee revenue.
Database fees have always been a key component of NAIC’s total revenue, and once were contested by some in the industry back in the 1990s. They are 29.5% of the 2014 budget composite mix, and were 27.2% in 2013. N One of the reasons the 2014 spending is expected to exceed the budget is because database fees were $467,000 higher than budgeted due to higher than budgeted insurance premium growth.
Now, they are projected to go down to 28.4% in 2015 because of the NAIC’s newly proposed reduction for industry.
Publications and valuation services are other sizable components of the budget which the NAIC is proposing to rein in a bit.
The NAIC is funded in a number of different ways including member assessments; database filing fees; the sale of publications; the provision of security designations; evaluation of some mortgage-backed securities owned by insurers; education and training registration fees; transaction filing fees; meeting registration fees; and a number of other services.
The NAIC is projected to generate service revenues of $91.6 million in 2014 with projected costs of just over $92.7 million.
The NAIC’s proposed 2015 budget includes total revenues (including investment income) of $94.3 million and total expenses of $96.1 million, a 1.1% and 3.4% increase, respectively, from the 2014 budget.
In addition, the NAIC is projected to generate a healthy investment income of nearly $6.9 million which could be more, or less, depending on the financial returns from the association’s long-term investment portfolio during the second half of 2014.
The long-term portfolio of investment income is one of the key factors in the NAIC being able to maintain its financial position The NAIC says it will continue to exercise close oversight of this portfolio and invest in a prudent manner but it is impossible to predict outcomes. Returns generated by the long term investment portfolio, garnered the NAIC net assets of almost $115.4 million at the end of 2013.
Thus, the NAIC leadership is choosing now, when the association is apparently flush and healthy, apparently, as the time to pass on some reductions to its stakeholders.
Given the NAIC’s financial results for the first half of 2014, “it is an appropriate time to review the association’s revenue streams and make a recommendation to modify the current structure,” the NAIC stated in the proposed budget summary.
The main objective of the proposed modification is to take into consideration all
funding sources and develop an approach that is “fair, equitable and viable in the future,” the NAIC stated.
Back in 2001, projected revenue was a little less than $47 million and database feels were continuing their rise based on premium volumes for insurers.
The 2012 NAIC proposed budget was for about $79 million.
The Liquid Operating Reserve
The NAIC has long been concerned about maintaining a healthy liquid operating reserve even as insurers have complained about excess funds in the NAIC’s coffers over the years.
The NAIC-retained consultant, Grant Thornton recommended back in 2011 that the NAIC’s operating reserve target from a flat 80% to a target range of 80% to 91%.This targeted ratio was based on current and future identified risks and was benchmarked to “comparable organizations.”
The NAIC leadership wrote at the time, “…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.”
This ratio is calculated by subtracting net fixed assets from total net assets and then dividing by projected expenses for the next year.
The NAIC uses this ratio as a gauge in determining the level of funding available to an association in times of financial distress.
As of Dec. 31, 2010, the NAIC maintained a liquid operating reserve ratio of 79.3%. By the at the end of 2013 was 106%.
The NAIC said this week in its proposal that a new review will be undertaken in the latter part of 2014 to recommend a new reserve target ratio for the association. The report should be completed in the latter part of 2014 or early part of 2015.
Other areas seeing reductions
The other areas for reductions as part of this initiative are:
2) to remove Securities Valuation Office (SVO) assessment instituted in 2004 when the SVO restructured product pricing. An assessment of $1,580,000 was implemented to ensure theNAIC had adequate financial resources to provide services. This assessment is allocated to insurance companies with total investments in nongovernment securities and preferred stock of $1 billion or more. Although the NAIC budget included the assessment from 2005 through 2011, insurance companies were only billed half of this amount. In the 2012 and subsequent budget, the assessment was reduced to $790,000. The entire amount has been billed in July of each year.
3) Eliminate fees for consumer guides and all publications
provided in an on demand electronic format, except for the top 10 publications
reducing 2015 budgeted revenues by $953,264
and
4) Lower the member assessment by 5% and institute a cap of $125,000. The current assessment structure was implemented in 2001 and is based on each member’s share of total insurance premium volume within their jurisdiction.
This would result in a reduction of $194,024 in 2015 projected revenue.

The continuation of these reductions in future years is contingent upon the NAIC being able to maintain a solid financial foundation to be able to
support to state insurance regulators, the NAIC said in its budget proposal.
Many had not reviewed the document yet.
A public hearing is tentatively scheduled for Nov. 12. Once the conference call time has been finalized (by mid-October), the details will be posted on the NAIC website.