Common ground: state and national interests meet at the NAIC. A look at 10 years of operations shows an evolving focus.In the past decade, the National Association of Insurance Commissioners The National Association of Insurance Commissioners (NAIC) is an Internal Revenue Code Section 501(c)(3) non-profit organization which seeks to organize the regulatory and supervisory efforts of the various state insurance commissioners from around the United States. has adopted a business model that seems to guarantee growth for the state-based insurance regulatory framework that traces its roots back to 1871. Ten years ago, the NAIC NAIC See National Association of Investors Corporation (NAIC). adopted a budget approaching $40 million for the organization. In September, the association released a proposed annual budget of $59.6 million for 2006. Much of the revenue comes from database fees paid by the nation's insurers. Since 1995, they have paid some $206.7 million in database fees to the NAIC. The NAIC started collecting industry data at the urging of Michigan Insurance Commissioner Russell Van Hooser in the late 1960s after that state began converting annual statement filings into punch card A storage medium made of thin cardboard stock that holds data as patterns of punched holes. Each of the 80 or 96 columns holds one character. The holes are punched by a keypunch machine or card punch peripheral and are fed into the computer by a card reader. format, and loading it onto a Michigan State University Michigan State University, at East Lansing; land-grant and state supported; coeducational; chartered 1855. It opened in 1857 as Michigan Agricultural College, the first state agricultural college. computer. Van Hooser called for both financial and market data to be collected by NAIC in a uniform format and by an efficient means. The database, which came to be known as the Insurance Regulatory Information System The Insurance Regulatory Information System (IRIS) is a database of Insurance companies in the United States run by the National Association of Insurance Commissioners. IRIS is designed to provide information about insurers' financial solvency. or IRIS, contained financial, market and corporate governance Corporate Governance The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy, and rule of law. elements from its inception. The NAIC originally contracted the work out to private companies, including A.M. Best Co., which was instrumental in developing statistical tests of annual statement information that became known as the NAIC Early Warning System. In the early days, the annual financial statement that insurance companies filed with the NAIC was manually entered into a databank. The Early Warning System statistical tests were conducted on that data and the results showed where companies stood in relationship to industry norms. In addition, the NAIC convened a group of examiners once a year to review the results of the Early Warning System tests. This analysis allowed states to target limited examination resources where they were needed most. In return for the fee payments, the companies received an unbiased statistical analysis of financial condition as measured by industrywide in·dus·try·wide adv. & adj. Throughout an entire industry: sales that have decreased industrywide; industrywide cooperation. statistical norms, and a more efficient regulatory framework. Lodging insurance industry data with the NAIC and its contract database administrators presented a revenue opportunity for the association. The NAIC charged companies a fee for conducting the statistical tests on their data and furnished fur·nish tr.v. fur·nished, fur·nish·ing, fur·nish·es 1. To equip with what is needed, especially to provide furniture for. 2. the results to both the companies and the states. The filing fee was intended to pay for the value-added review of their finances that insurers received. The Early Warning/IRIS fees funded the early growth of the NAIC's central office to about 25 people in 1975. Some state laws contain clear statutory requirements for insurers to file with the NAIC and pay any fee charged. Other states have weaker provisions. Most states have had some statutory filing requirements since the early 1990s when the NAIC included The Participation in the Insurance Regulatory Information System (IRIS) Model Act in the Financial Regulation Standards and Accreditation Program. Through the payment of these fees alone, many insurance executives believe they hold a de facto [Latin, In fact.] In fact, in deed, actually. This phrase is used to characterize an officer, a government, a past action, or a state of affairs that must be accepted for all practical purposes, but is illegal or illegitimate. investment in the NAIC, and along with that, the right to expect accountability. The same carriers form a customer base for other NAIC commercial products. In the same time 10-year period--1995 through 2004--the NAIC realized about $120.3 million in revenue from the sale of data and publications. Key Points * Much of the NAIC's revenue comes from database fees paid by the nation's insurers. * The NAIC is exempt from federal income tax as a 501(c)(3) organization. * In 2003, the NAIC said it would raise its surplus total to 75% of its annual budget. Correspondent Kevin Hennosy is an insurance writer and founder of Spread the Risk Inc., a Kansas City Kansas City, two adjacent cities of the same name, one (1990 pop. 149,767), seat of Wyandotte co., NE Kansas (inc. 1859), the other (1990 pop. 435,146), Clay, Jackson, and Platte counties, NW Mo. (inc. 1850). , Mo.-based nonprofit organization Nonprofit Organization An association that is given tax-free status. Donations to a non-profit organization are often tax deductible as well. Notes: Examples of non-profit organizations are charities, hospitals and schools. for insurance public policy research. Automation Initiatives A decade ago, the NAIC began work on two projects that still play a large role in the association's budget. One concerned the automation of agent licensing; the other, the automation of premium rate and policy form filings. The NAIC had debated the agent licensing issue for many years. Regulators opposed a national system of agent licensing, seeing it as a threat to states' ability to charge licensing fees, an important revenue stream. The Producer Data Base Project was designed to allow the states to continue charging licensing fees. The NAIC began work on a system without a dedicated funding mechanism, which resulted in a sharp rise in expenses in 1995. SERFF The System for Electronic Rate and Form Filing, an electronic rate and form filing submission and review/approval system was developed in response to insurers' complaints about how long it took to get new products and rates approved. Property/casualty industry groups generally opposed SERFE Some critics feared that the unincorporated Adj. 1. unincorporated - not organized and maintained as a legal corporation unorganised, unorganized - not having or belonging to a structured whole; "unorganized territories lack a formal government" NAIC could not hold data confidential. Antitrust Antitrust The antitrust laws apply to virtually all industries and to every level of business, including manufacturing, transportation, distribution, and marketing. They prohibit a variety of practices that restrain trade. concerns also surfaced. Others feared what market reports the NAIC might publish if it had a centralized cen·tral·ize v. cen·tral·ized, cen·tral·iz·ing, cen·tral·iz·es v.tr. 1. To draw into or toward a center; consolidate. 2. market database. Another faction fac·tion 1 n. 1. A group of persons forming a cohesive, usually contentious minority within a larger group. 2. Conflict within an organization or nation; internal dissension: didn't want the NAIC to have another database of information for sale, where the proceeds might expand its quasi-regulatory activities. Only alter passage of the Gramm-Leach Bliley Act in 1999 did the SERFF and agent-licensing initiatives receive new life. SERFF incorporates distributed architecture so the data resides at state insurance departments, rather than at the NAIC. This eased insurers' concerns. SERFF is part of the NAIC's Speed-to-Market Initiatives intended to streamline the rate and form filing process to make it more efficient and cost-effective for state insurance regulators as well as life and property/casualty, insurers. Agent Licensing Gramm-Leach-Bliley called for establishing the National Association of Registered Agents and Brokers if the states failed to achieve specified levels of uniformity or reciprocity reciprocity In international trade, the granting of mutual concessions on tariffs, quotas, or other commercial restrictions. Reciprocity implies that these concessions are neither intended nor expected to be generalized to other countries with which the contracting parties by a fixed deadline. The statute pressured the states to build a national system of producer licensing that built on the Producer Data Base concept. To garner the industry's financial support for the project, the NAIC created the Insurance Regulatory Information Network under a separate board consisting of regulators and industry advocates. This became the National Insurance Producer Registry, a 501(c)(6) nonprofit corporation nonprofit corporation n. an organization incorporated under state laws and approved by both the state's Secretary of State and its taxing authority as operating for educational, charitable, social, religious, civic or humanitarian purposes. . All 50 states, the District of Columbia District of Columbia, federal district (2000 pop. 572,059, a 5.7% decrease in population since the 1990 census), 69 sq mi (179 sq km), on the east bank of the Potomac River, coextensive with the city of Washington, D.C. (the capital of the United States). and Puerto Rico Puerto Rico (pwār`tō rē`kō), island (2005 est. pop. 3,917,000), 3,508 sq mi (9,086 sq km), West Indies, c.1,000 mi (1,610 km) SE of Miami, Fla. participate in the producer registry. Defining the Organization Since the early 1990s, the NAIC has grown significantly and made material changes to its corporate structure. On March 1, 2000, it became a tax exempt, nonprofit A corporation or an association that conducts business for the benefit of the general public without shareholders and without a profit motive. Nonprofits are also called not-for-profit corporations. Nonprofit corporations are created according to state law. charitable, education organization incorporated in Delaware. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. an independent audited balance sheet, the NAIC's total assets on Dec. 31, 1991, were about $21.8 million. The NAIC's most recent independent audit reported net assets Net assets The difference between total assets on the one hand and current liabilities and noncapitalized long-term liabilities on the other hand. net assets See owners' equity. of about $50.2 million on Dec. 31, 2004. During this era of growth, the association's leadership made material changes to the organization's corporate structure. As the 1990s began, the NAIC still operated as an "instrumentality Instrumentality Notes issued by a federal agency whose obligations are guaranteed by the full-faith-and-credit of the government, even though the agency's responsibilities are not necessarily those of the US government. of the states." For example, new NAIC employees were told that commissioners were entitled en·ti·tle tr.v. en·ti·tled, en·ti·tling, en·ti·tles 1. To give a name or title to. 2. To furnish with a right or claim to something: to any documents they requested. The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. first applied the "instrumentality" language to the NAIC's corporate governance on Dec. 23, 1955. This status exempted the NAIC from numerous levels of taxation and financial reporting for more than 40 years. The NAIC received exemption from federal income tax as an organization described in an IRS provision that was a predecessor to Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. section 501(c)(6).The NAIC operated under this exemption until it applied for and received an exemption as a 501(c)(3) in March 2000 (although it voluntarily complied with certain 501(c)(3) provisions that were included in its bylaws The rules and regulations enacted by an association or a corporation to provide a framework for its operation and management. Bylaws may specify the qualifications, rights, and liabilities of membership, and the powers, duties, and grounds for the dissolution of an in 1989, according to a statement by the NAIC).The NAIC charitable purposes and activities, including lessening the burden of state government, were in line with these new obligations and restrictions. In 1989, the NAIC qualified for an exemption from the New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of state sales tax sales tax, levy on the sale of goods or services, generally calculated as a percentage of the selling price, and sometimes called a purchase tax. It is usually collected in the form of an extra charge by the retailer, who remits the tax to the government. in connection with the operations of the rating of securities in its Securities Valuation Office in New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. . An IRS opinion letter on Nov. 2, 1989, approved the sale of database elements to interested parties, although the IRS limited this approval by observing that the NAIC application stated: "The information you will be selling to nonmembers is in substantially the same form as that you provide your members and that you will not be tailoring the product for marketability." This IRS opinion cleared the way for the NAIC to become a major seller of insurance industry data, which in turn brought tens of millions of dollars in database sales revenues. In 1999, after incorporating for the first time in the association's history, the NAIC applied for another tax-exemption opinion from the IRS under section 501(c)(3). The NAIC received a favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. opinion letter and announced its change in corporate organization in early 2000. Operations The NAIC hired a significant number of staff members in the early 1990s amid congressional scrutiny over the adequacy of state regulation. In 1990, 137 people worked /or the NAIC. By 1993, that number increased to 239, when solvency and health insurance-related systems came online. By 2000, the NAIC staff increased to 342 full-time employees. The NAIC posts detailed information regarding its annual budget and financial results of operations, in addition to the salaries of the top five employees. The historic mission of the NAIC requires it to engage in public education and congressional liaison, but the association faces political restrictions on its lobbying activities. The NAIC hired a lawyer to staff its Washington, D.C., office in the mid-1980s. The NAIC's executive vice president and the elected officers develop most of its political and legislative strategy. The Government Affairs Task Force of the Executive Committee also serves as a venue for forging strategy. A 1990 legal memorandum written by NAIC staff addresses the lobbying issue. At the time, the association hadn't fully incorporated and wholly assumed the identity of a 501(c)(3) nonprofit organization. Legal counsel warned that under the NAIC bylaws and tax law, "no substantial part of the activities of the organization shall be carrying on propaganda, or attempting to influence legislation" except as delineated de·lin·e·ate tr.v. de·lin·e·at·ed, de·lin·e·at·ing, de·lin·e·ates 1. To draw or trace the outline of; sketch out. 2. To represent pictorially; depict. 3. in the tax code. Surplus Account In early 1981, the NAIC underwent a review by outside auditors and consultants: they recommended that the NAIC guard against future disruption of income from database filing fees by building a surplus fund of 75% of the NAIC's annual budget. On Feb. 10, 1982, NAIC officers and several insurance company trade associations signed a memorandum of understanding A Memorandum of Understanding (MoU) is a legal document describing a bilateral or multilateral agreement between parties. It expresses a convergence of will between the parties, indicating an intended common line of action and may not imply a legal commitment. that committed the NAIC to focusing on solvency oversight. But continued non-solvency-related activities, including studies of urban redlining Identifying text that has been changed in a word processing document by displaying it in a special color, for example. It allows the original author of the text or other users to see ongoing revisions. The term comes from manual editing where a red pen is used to mark up the pages. by NAIC staff, led to the fee boycott boycott, concerted economic or social ostracism of an individual, group, or nation to express disapproval or coerce change. The practice was named (1880) after Capt. 12 years later. The boycott seemed to end after the NAIC passed a resolution in June 1998 that revived re·vive v. re·vived, re·viv·ing, re·vives v.tr. 1. To bring back to life or consciousness; resuscitate. 2. To impart new health, vigor, or spirit to. 3. some of the basic themes of the 1982 accord. Only North Carolina North Carolina, state in the SE United States. It is bordered by the Atlantic Ocean (E), South Carolina and Georgia (S), Tennessee (W), and Virginia (N). Facts and Figures Area, 52,586 sq mi (136,198 sq km). Pop. Insurance Commissioner Jim Long spoke out against the deal, stating in open session that the day after it was agreed to. "State Farm paid its database fees." According to the March 8, 2005, report, the NAIC still believes it is owed about $3.3 million in late fee payments dating to 1992. The NAIC surplus account that was created in response to the 1981 independent auditors' report remains controversial. In the early '80s, the NAIC spent some of the surplus to fund solvency and health insurance related initiatives. The NAIC lowered its surplus target to 50% of its annual budget until 2003. Then the NAIC announced it would raise its surplus total to 75% once again. Industry advocates argued that the NAIC should cut database fees rather than increase the surplus balance. NAIC Headquarters: Kansas City, Mo. 2005 Projected Revenue: $58,389,977 * The National Association of Insurance Commissioners is the organization of insurance regulators from the 50 states, the District of Columbia and the four U.S. territories. * The NAIC budget represents approximately 4 cents of every $1,000 in insurance premiums paid by insurance consumers and regulated by the NAIC membership. * The NAIC provides a forum for the development of uniform policy primarily through four quarterly national meetings each year. Showing the Flag:The plenary session Plenary session is a term often used in s to define the part of the conference when all members of all parties are in attendance. These sessions may contain a broad range of content from Keynotes to Panel Discussions and are not necessarily related to a specific style of delivery. of the NAIC Summer National Meeting in Boston in June continued the traditional colorful practice of displaying the state flags of the commissioners. Pictured above from left: Connecticut Commissioner Susan F. Cogswell; Delaware Deputy Commissioner Michael Vild; Washington, D.C. Commissioner Larry Mirel; Hawaii Commissioner J.P. Schmidt and Illinois Director Michael McRaith. Pictured above, right, Massachusetts Insurance Commissioner Julianne Bowler jokes with NAIC President and Pennsylvania Insurance Commissioner Diane Koken, seated. [ILLUSTRATION OMITTED] KEEPING IN TOUCH: About 1,500 state regulators, insurers and others affiliated with the insurance profession attend the quarterly national meetings of the National Association of Insurance Commissioners. The next meeting is scheduled for Dec. 3-6 in Chicago. At the meeting, State insurance commissioners will elect Officers and vote on the 2006 budget. [ILLUSTRATION OMITTED] GATHERED IN BOSTON: Several hundred state insurance commissioners and their staffs, insurance company executives, trade association representatives and consumer liasions attended the NAIC meeting in June. Throughout the quarterly national meetings, dozens of working groups meet to discuss topics ranging from capital adequacy to reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. . Pictured above are keynote speaker Uwe Reinhardt of Princeton University's Wilson School of Economics, left, and Alabama Insurance Commissioner Walter Bell. [ILLUSTRATION OMITTED]
NAIC Revenues and Expenses
Revenue ($ Thousands) 1995 2000 2005 *
State Assessments $1,282 $1,601 $1,910
Database Fees 17,349 19,998 25,609
Data Sales 9,268 12,775 14,244
Service Income 4,743 6,952 8,928
Meetings 1,766 1,697 1,804
Interest 1,458 1,476 787
Education 471 1,546 907
Other Income 413 1,396 4,634
Total Revenue $36,750 $47,441 $58,823
Expenses ($ Thousands)
Salaries $16,974 $23,865 $31,343
Professional Service 4,186 4,088 5,051
Training 1,704 1,992 1,748
Travel 1,071 1,660 1,428
Occupancy 2,886 3,578 3,640
Printing 1,317 1,624 1,107
Depreciation 4,012 1,951 2,676
Other Expense 6,774 7,238 8,088
Total Expenses $38,924 $44,536 $55,081
Revenue less Expenses ($2,174) $2,905 3,742
* Projected revenue and expenses
NAIC--2006 Consolidated Budget
Members will vote on this budget at the Winter
National Meeting in December.
Increase
2006 (Decrease) from
Revenue Budget 2005 Budget
State Assessments $1,968,635 $58,522
Database Fees 24,239,191 -1,369,974
Publications & Insurance Data Products 14,484,775 240,549
Services 9,604,552 319,426
National Meeting Registration Fees 2,094,899 110,899
Investment Income 1,019,950 227,232
Education and Training 916,270 142,520
Other Income 5,010,918 378,451
Total Revenues $59,339,190 $107,625
Expenses
Salaries $27,358,932 $1,333,504
Temporary Personnel 511,744 42,039
Payroll Taxes 1,996,621 134,574
Employee Benefits 5,471,964 175,905
Employee Development 542,770 38,516
Professional Services 2,690,954 -856,941
Computer Services 1,691,494 -104,298
Travel 2,203,889 265,044
Analyst Team 93,344 19,344
Occupancy 4,696,351 649,960
Equipment Rental and Maintenance 2,354,366 -936
Depreciation and Amortization 3,959,832 293,588
Insurance 434,774 79,584
Telephone 330,047 -49,313
Supplies 419,111 -27,860
Mail Services 94,552 -26,562
Reference Materials 538,688 26,698
Printing and Production 190,832 -46
National and Interim Meetings 898,944 -3,413
Education and Training 604,850 69,103
State and General Training 727,364 40,675
Other Expenses 523,898 -54,177
Total Operating Expenses $58,335,321 $2,044,988
Revenues Over (Under) Expenses $1,003,869 ($1,937,362)
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