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NAIC Releases 2017 Annual Report and Strategic Plan

Actuarial Report-SF
April 11, 2018

On March 26, the National Association of Insurance Commissioners (NAIC) released its 2017 annual report and blueprint for strategy titled State Ahead. The report outlines the NAIC's financial health, focuses on its budgeted initiatives and operations, and illustrates state insurance regulator efforts to safeguard insurance markets and protect consumers. The report also provides a review of regulatory activities in operations and technology, financial regulation, consumer education, market regulation and health, and federal and international policy.

While most captive insurers do not have to follow all of the NAIC protocols, it is wise to keep up with regulator activities. In fact, the NAIC views captive insurers as being almost synonymous with traditional commercial insurers. The following is drawn directly from their definition of a captive insurer. "Captives are established to meet the risk-management needs of the owners or members. They are essentially a form of self-insurance whereby the insurer is owned wholly by the insured. Once established, the captive operates like any commercial insurer—i.e., it issues policies, collects premiums and pays claims, but it does not offer insurance to the public—and it is regulated as a captive, rather than as a traditional insurer."

Although this article will focus on some of the highlights drawn from the NAIC's Strategic Plan, there are other regulatory bodies interested readers may want to follow. We'd suggest you bookmark the following websites and sign up for their new releases to stay current.

The IAIS is of particular interest given the work between the United States and Europe to harmonize their financial market regulations. Captive insurers in Europe are subject to more regulatory scrutiny than US-based captives. While, to date, the NAIC has successfully defended the state-based regulatory process, US captives should be aware of European regulatory developments.

We previously touched on the NAIC's Strategic Plan in an article, "NAIC Roundup: Looking Back, Looking Ahead." At the time, we found it interesting that, while the insurance industry as a whole is under scrutiny for using data and analytical models to create better underwriting and rate-making models, the regulatory community is looking to develop similar models for further regulation of the industry. We support a dialogue between the insurance industry (including captive insurers) and regulators regarding big data and predictive analytics where the parties seek consensus on how best to utilize these tools.

Like many governmental or quasi-governmental bodies, the NAIC has found itself behind the curve, especially in terms of the deployment and technology utilization. In the annual report's opening letter, the NAIC officers acknowledge this problem.

"Our system of regulation must keep pace with a rapidly evolving marketplace fueled by seismic shifts in consumer behavior, huge technological advances, and a dynamic policy and regulatory environment. The NAIC has never experienced such a convergence of forces with the potential to reshape the industry. We need to evolve with the marketplace around us, lest we be left behind."

Undoubtedly, the NAIC has no intention of being left behind, and we commend it for setting forth a public road map of how it proposes to respond. The report outlines three themes on which the NAIC believes it needs to build in order to adapt.

  1. Safe, solvent, and stable markets through providing insurance regulators with the data, training, and tools necessary to support a collaborative regulatory environment

  2. Consumer protection and education by ensuring consumer protection keeps pace with changes in the marketplace and consumers have the information and education to make informed decisions

  3. Superior member services and resources by providing optimal services to support state insurance departments and equip them with the necessary talent and resources

Furthermore, the report has identified data, technology, and talent as the foundational pillars of the three themes. It is sprinkled with references to how the NAIC intends to harness the collection and interpretation of data with technology to enhance its ability to deliver on these three goals. In fact, the NAIC budget suggests it is prepared to commit upwards of $20 million in order to do so.

We mention the dollar amount simply because this money has to come from somewhere. The most likely source is through insurance industry fees and assessments. While $20 million does not seem like a huge number in context of the dollars being expended on insurtech, the problem, as most consumers of technology recognize, is expense/project creep. Almost everyone involved with technology change has a horror story about derailment or exploding costs—many times, both occur at the same time.

Andrew Beal, NAIC chief operating officer, is quoted in the report.

"State Ahead is a living, breathing document. It's fluid and dynamic. NAIC staff will work closely with our members to evaluate where we are and what's been accomplished with the plan, but we'll also continuously monitor for changes in the marketplace and evaluate any modifications we may need to implement."

While insurance companies, including captive insurers, are not "members" of the NAIC, we hope all insurers will be invited to participate in the ongoing NAIC discussions. We believe in keeping state-based insurance regulation in the United States and that captive insurers, through various state and national associations, should make sure their voices are heard in this process.

Copyright © 2018, International Risk Management Institute, Inc.

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