THEY WHO PAY THE PIPER

Rough Notes, Jan 2005 by Hennosy, Kevin P

NAIC management oversteps its bounds on budget

Twenty years ago, I ran for state representative in Ohio in a sacrificial lamb race. The party needed someone to run in the district to round out the ballot and force the other side at least to have to spend something above the filing fee.

It was a "great experience" campaign. I had no chance in the world of winning. I ran in the most one-sided district in the state-the hardest of rock-ribbed Republican districts, and I was a Democrat. The morning paper ran a story in which my "campaign" was mentioned under the headline: "Parties always able to find someone willing to lose."

My cousins in Columbus enjoyed that headline, and let they me know it-repeatedly. So several years later, I moved to Kansas City, Missouri, and began a new life writing about insurance. The family still insists that I steal family pets for sale to animal testing labs, which generally puts an end to questions from friends about what happened to Kevin.

One reason I still think the public drubbing was worth it is that from time to time I remember some nugget of political smarts that party elders imparted to their candidates. If I had not "done them a favor," I would not have been in the room to benefit from their experience.

Vernal G. Riffe was the dean of Ohio politics for more than a quarter century. I remember hearing him address his candidates for the statehouse in 1984-even the candidates chosen for electoral cannon fodder.

Vern Riffe told us that he never voted against a budget. "No matter how bad, how fake or how corrupt a budget might be, voting against it is political suicide." He explained that there were too many good things in the worst of budgets-good things that the other side could use against you in the next election.

In other words, a budget can establish tax breaks and kickbacks for the governor's family, contributors and political cronies. The budget might be based on ridiculous revenue or expense assumptions. Nevertheless, when the budget comes to the floor for the final vote, Riffe's Rule on Budget Resolutions remains clear: vote "Yea."

That same budget contains funding for schools, the elderly, veterans' homes, stray animals etc. Vote "Nay" and your next opponent will buy an ad pointing out that you voted against schoolchildren, grandma, the heroes of past wars and Benji. Your mother will vote against you and your cousins will force you to leave the state.

The "used car" syndrome

I remembered the Riffe Rule the other day when I was looking over the budget of the National Association of Insurance Commissioners (NAIC). (Just call me "Mr. Excitement.") I am the first to admit that I am a "word guy" and not a "numbers guy," so I cannot opine on the accounting correctness of the figures; however, when I read the narrative declarations that accompany the NAIC budget, I get the feeling that I am about to purchase a used car.

I am not alone. The insurance industry trade associations that oversee the NAIC's operations raised material questions about the NAIC budget. These questions were not limited to the funding of one NAIC policy initiative, which is rather common. Industry representatives questioned the transparency of NAIC's budgeting procedures.

Without directly charging deception, the industry representatives presented examples of accounts, set-asides, reserves and "surplus surplus" that make budget analysis, at the least, difficult. From a layman's perspective, the approach seems deliberately confusing.

The primary area of conflict centers on the NAIC staffs proposal to build a "100% reserve"-enough money to run the association for one year without cutting current expenditures.

The industry representatives blanch at this proposal. According to a comment letter signed by a consortium of trade associations, "A budget with such a large projected surplus provides for very little expense discipline." Furthermore, the trade association representatives argue that the NAIC administrators have not documented the financial risks that the reserve is supposed to balance.

This is not the first time that industry representatives have raised the issue of the NAIC financial reserve. In the past, the arguments appeared contrived-designed to keep the NAIC weak and beholden to the regulated industry.

The NAIC began the practice of holding a reserve in the early 1980s. An outside audit of the association's management recommended a reserve of 75%.

At the time, the vast majority of NAIC revenue came from fees paid by insurers when they filed their annual financial statements. In 1981, industry leaders threatened to withhold these fees as a coercive measure to change regulatory policy. The auditors believed the reserve would "purchase" the NAIC at least nine months of independence.

Two forces converged to force a reduction in the NAIC operating reserve in 1991. First, the NAIC had received IRS approval to sell data, which increased the association's revenue and decreased its reliance on database fee revenue. Second, the General Accounting Office, responding to a request from Rep. John Dingell (D-Mich.), had reviewed NAIC finances and recommended a reduction based on its revenue sources and other factors.