NAIC BUDGET. Adopted by NAIC Membership. December 13, 2016

Transcription

1 2017 NAIC BUDGET Adopted by NAIC Membership December 13, 2016

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3 Table of Contents

4 PROPOSED 2017 NAIC BUDGET TABLE OF CONTENTS Executive Summary...1 Appendix...7 Revenue and Expense Summaries...21 Revenue Detail...27 Expense Detail...55 Investment Income Detail Fiscal Impact Statement Summary Fiscal Impact 1 Regulatory Data Collection Phase II Fiscal Impact 2 System for Electronic Rate and Form Filing (SERFF) Integration Expansion Phase II Fiscal Impact 3 Online Content Management System (CMS) Fiscal Impact 4 Information Technology Infrastructure Library (ITIL) Adoption Phase II Fiscal Impact 5 Job Scheduler Fiscal Impact 6 Recalibration of Database Filing Fee Structure Unrestricted Net Assets Annual Report...161

5 Executive Summary

6 2017 Proposed Budget Executive Summary The National Association of Insurance Commissioners (NAIC) is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia, and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate their regulatory oversight activities. NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally. NAIC members, together with the central resources of the NAIC, form the national system of state-based insurance regulation in the U.S. NAIC members are the elected or appointed state government officials who, along with their departments and staff, regulate the conduct of insurance companies and agents/brokers in their respective jurisdictions. The mission of the NAIC is to assist state insurance regulators, individually and collectively, in serving the public interest and achieving the following fundamental insurance regulatory goals in a responsive, efficient, and cost-effective manner, consistent with the wishes of its members to: Protect the public interest; Promote competitive markets; Facilitate the fair and equitable treatment of insurance consumers; Promote the reliability, solvency, and financial solidity of insurance entities; and Support and improve state regulation of insurance. The annual budget of the NAIC supports a wide variety of valuable services and benefits, which the NAIC provides to state regulators, insurance consumers, and the insurance industry. The development of the budget is a collaborative, thoughtful effort reflecting the key priorities of the NAIC members. The proposed 2017 budget reflects the NAIC s commitment and support of technology solutions as well as the continuing modernization of insurance regulation in areas such as the evolution of Principle-Based Reserving (PBR) and international standard setting. The NAIC offers state regulators a number of different programs, products, and services such as financial solvency and market regulatory training; publications, data, and information systems; accreditation reviews; and many other services to assist them in achieving their fundamental insurance regulatory goals in a timely and cost-effective manner. The NAIC provides significant value to state regulators by reducing the investment and ongoing costs for each member s insurance department, allowing them to leverage the regulatory tools, resources, and technical infrastructure available through the NAIC. Without this significant cost savings, many systems would be cost-prohibitive for the states to implement on their own. Without membership in the NAIC, the amount of state funding required to provide or access similar type of services and data the NAIC provides often at no extra charge would far exceed what a state pays in member dues to the NAIC. The NAIC provides important and timely information to consumers through multiple strategies and channels to assist in making informed decisions on insurance matters. The NAIC uses public service announcements (PSAs) to educate consumers on important insurance issues, most recently Rita 1

7 Moreno s Life Unscripted campaign providing insight to seniors on insurance-related issues. Launched in 2015, the NAIC also continues its popular RJ Mitte social media campaign targeting millennials. NAIC resources address insurance concerns triggered by major life events: new home, new car, wedding, birth of a child, new job, and turning 50. These consumer education efforts are enhanced with news releases, consumer alerts, radio media tours, the consumer-focused website InsureUonline.org, and mobile applications such as WreckCheck and myhomescr.app.book. The NAIC also hosts a consumer hotline to help consumers contact their state insurance departments for assistance. In addition, the NAIC conducts national media relations efforts while providing each member s public information office toolkits and information to complement these consumer outreach efforts. NAIC products and services create valuable efficiencies and significant cost savings for insurers and provide benefits to state regulators as well. These efficiencies and cost savings are accomplished through numerous initiatives involving automation, standardization, and streamlining of many regulatory processes through web-based systems to transmit data and regulatory transactions between insurers, consumers, and state insurance regulators. These systems include, among others, the System for Electronic Rate & Form Filing (SERFF), which processed 637,717 transactions in 2015; the Automated Valuation Service (AVS), which gives users the ability to complete regulatory filings quickly and easily; the VISION System, released in September 2016, which allows insurers to file electronically with the NAIC s Securities Valuation Office; Online Premium Tax for Insurance (OPTins), which gives users the ability to file state premium tax filings and processed 45,389 transactions in 2015; and State Based Systems (SBS), which currently has 26 states in service with three additional states in various stages of implementation. The NAIC is committed to maintaining and enhancing these systems to provide high-quality service to all stakeholders a completely new SBS is being deployed to its member states throughout 2016 and In addition, the proposed 2017 budget includes several fiscals to update, enhance, and continue to improve the NAIC s technology solutions. The NAIC continually looks for ways to reduce its cost structure. For example, several years ago the NAIC froze the Defined Benefits Plan while increasing its contributions to the Defined Contribution Plan resulting in more predictable and controllable expense. In 2017, a self-funded health plan will be implemented, thereby assisting with the management of health insurance costs while continuing a valuable benefit to its staff. In addition, staff salary annual increases are typically lower than market, to keep salaries in line with many nonprofit organizations and governmental agencies. The NAIC is a technology-driven company charged with support of state departments of insurance, and therefore needs to continually invest in its systems and infrastructure. In 2016, the NAIC released an updated VISION platform to (1) support insurers filing security investments with the NAIC and (2) allow NAIC staff to analytically assess credit quality of these securities in an efficient and timely manner. The new SBS platform with improved functionality and usability has been implemented in seven states with an additional six slated by year end, and all remaining states are scheduled during The NAIC is enhancing and expanding its application testing infrastructure to increase the quality and delivery speed of its systems. By late 2016, the NAIC will deploy the Life Insurance Policy Locator, a system designed to assist consumers in locating life insurance policies after the death of the policy owner when the consumer has little or no documentation or information regarding the policy. Over the past two years, the NAIC has also invested in cybersecurity infrastructure improvements in order to protect the security and integrity of its technology solutions. These and many more products and services require proven technology solutions and methodologies, which require hardware, software, consulting, and staffing investments. The NAIC currently has 50% of staff resources assigned to systems and systems support. 2

8 In addition to technology solutions, the NAIC is focused on modernizing the insurance regulatory regime in an increasingly global marketplace. Areas of focus include but are not limited to: Principle-Based Reserving (PBR) Group capital Own Risk and Solvency Assessment (ORSA) Accreditation program changes Long-term care insurance Variable annuities International standard-setting Health insurance reform Cybersecurity Flood insurance Systemic risk The Budget Process Each year a zero-based budget proposal is developed by each NAIC department. Each department projects its current-year results and begins to build its proposal for the coming year, carefully focusing on variances between the current year s budget and projected results, and anticipated needs for the coming year. This process includes a review and evaluation of all projects, products, programs, services, committee charges, and technology initiatives in relation to the strategic priorities identified by the membership and tied to the NAIC s mission. The NAIC s senior management team reviews each budget in detail with the respective Division Director to make adjustments according to the strategic and financial needs of the Association and ultimately consolidates all requests into one budget. Following the extensive development and internal review process, the proposed budget is presented to the NAIC Officers, the Executive (EX) Committee and Internal Administration (EX1) Subcommittee, and the full NAIC membership before being released for public review and comment. A public hearing is held to receive public comments before final consideration and adoption by the NAIC Executive (EX) Committee and Plenary Projections Based on actual operating results through June 30, 2016 projections indicate a net negative operating margin of $5.9 million compared to a budgeted net negative operating margin of $8.5 million, an improvement of $2.6 million. Including projected 2016 investment income, the NAIC projects a reduction in net assets of $1.8 million. Additional information regarding 2016 projected variances is included throughout the detailed footnotes of the budget proposal Proposed Budget, including Fiscal Impact Statements The NAIC operating budget (before adding investment income) reflects revenues of $98.9 million and total expenses of $102.1 million, which represent a 5.2% increase and a 0.4% decrease, respectively, from the 2016 budget, resulting in $3.2 million in projected expenses over revenues. Viewed in relation to the 2016 projected totals, the 2017 proposal represents an operating revenue increase of 4.2% and operating expense increase of 1.2%. Additional information about the 2017 proposed budget is included throughout the detailed footnotes of the budget proposal. The 2017 proposed budget includes $2.9 million in investment income from the NAIC s Long-Term Investment Portfolio. Investment income is composed of interest earned and dividends received investment gains and losses are not projected nor included in the proposed budget. Combining budgeted results from operations with budgeted investment income, the proposed 2017 budget has a reduction in net assets of $0.2 million. 3

9 Fiscal Impact Statements Generally, a fiscal impact statement (fiscal) is prepared for any new NAIC project/initiative or existing project/initiative with revenue, expense, or capital impacts of $25,000 or more either in the current budget or within the following few years budgets. Key elements of a fiscal are: a description of the activity to be undertaken; its impact on the NAIC s business, operations, and finances; the benefits to key stakeholders; alternatives considered; and an assessment of risks. The 2017 proposed budget includes six fiscals as follows: 1. Regulatory Data Collection Phase II This fiscal requests funding to set up a business and technology framework at the NAIC with the flexibility to quickly and effectively respond to various data collection needs of the membership. The first initiative for which the framework will be used is Principle-Based Reserving (PBR). The Valuation Manual referenced in the Standard Valuation Law requires a statistical agent to collect detailed experience data from insurers regarding the mortality study, and indicates the need for other studies to be established in the future, such as expenses and lapse studies. This initiative enables the NAIC to quickly respond to regulatory data collection needs, thereby improving state-based regulation and ensuring the data is collected in a consistent manner that allows easy transfer from state to state. It also avoids data collection efforts by private entities that may have conflicted interests or do not consider the goals of improving effectiveness and efficiency of regulatory oversight process a priority. The fiscal includes operating expenses of $137,700 and capital of $74,000. There will also most likely be a reasonable fee charged in the future for the data collection process, which will cover both direct and indirect costs associated with the setup and maintenance of this framework. 2. System for Electronic Rate and Form Filing (SERFF) Integration Expansion Phase II The SERFF team completed Phase I of this project in 2016, which allows industry users to retrieve significant portions of data from SERFF. This request expands SERFF Integration Services (SIS) to allow industry customers to retrieve additional data and attachments from SERFF and to send updates back to SERFF, thereby making two-way integration available. This initiative will improve speed to market for insurance products as the automation provided will reduce errors, eliminate duplicate data entry, and help insurers get timely products into the hands of insurance consumers. Technical work will be done by internal staff, thus no operating expense or capital will be requested. A license fee will be charged to industry users, which will begin in late While revenue for 2017 is fairly small it is expected to increase to $133,400 by Online Content Management System (CMS) Traffic on the NAIC s website and its affiliates websites has grown from 40,000 unique users in 2006 to two million in An approach is needed to streamline the creation and deployment of content, ensure content is approved and secure, improve user experience with regard to navigation through the website, and improve accessibility and usability of content. This fiscal requests tools, processes, and procedures which streamline the development and maintenance of content, ensure accessibility of content, ensure compliance with the Americans with Disabilities Act (ADA), and provide a more consistent look and feel. This fiscal requests funding for expenses of $228,400 for hardware, consulting, and staff training and travel. 4. Information Technology Infrastructure Library (ITIL) Adoption Phase II This is the second phase of an initiative to enhance existing technology with a new tool to improve change and incident management processes. Centralized tracking of changes to the NAIC technology environment benefits cybersecurity efforts and strengthens NAIC s position for audits and certifications. Enhancements in this area will help prevent system outages/issues or provide swifter resolution to system outages/issues when they occur, greatly improving customer experience for 4

10 NAIC membership and industry customers. The new tool will allow NAIC IT resources to consolidate the tracking and coordination of system change requests and incident reporting and resolution, which are currently handled in various systems with varying methods of communicating across teams. The fiscal requests $34,500 in capital for a server and $195,800 in net expense for consulting, training, and depreciation costs. NAIC s affiliate, the National Insurance Producer Registry (NIPR), will fund one-third of this initiative as they will utilize this service in their operations. 5. Job Scheduler This fiscal requests funding for the purchase of an off-the-shelf job scheduler tool to enable NAIC to deploy internally developed systems more quickly. This tool will improve availability, reliability, and performance of NAIC applications and promote greater uniformity across systems. In addition, usage of the tool will enable NAIC to be more proactive in uncovering potential system outages/issues before new applications are deployed and provide for a more rapid response to system outages/issues occurring in a production environment. The fiscal requests $157,500 in consulting expense to assist in tool selection, as well as $180,000 in capital for purchase of the tool. 6. Recalibration of Database Filing Fee Structure The fiscal proposes a simplified database filing fee structure, reducing disparity of fees while retaining the individual company and group cap structure. The recalibration will more equitably distribute funding of major investments in important insurance regulatory initiatives, NAIC systems and technology infrastructure, which benefit state insurance regulators, consumers, and the insurance industry. While the recalibration results in increased revenue of $1,658,428, it will also result in 70% of filers experiencing no change or a reduction in fees paid compared to the current structure. Additional information about the above new initiatives is included in the various Fiscal Impact tabs of the budget proposal. Other 2017 Considerations The budget proposal includes all known activities anticipated to occur in However, situations may occur during 2017 that require additional funding. When such a situation occurs, a funding request is prepared and presented to the Executive (EX) Committee and Internal Administration (EX1) Subcommittee. Funding for any approved project comes from the Regulatory Modernization and Initiatives Fund, which was established in 2005 to manage new budget requests that arise following the adoption and implementation of the annual budget. The Fund is based on 1.5% of the NAIC s projected consolidated net assets as of December 31, 2017, or $1,685,572 with the inclusion of fiscal impacts. NAIC Operating Reserve The NAIC s operating reserve is designed to ensure the financial stability of the NAIC in the event of emerging business risks and uncertainties, and to absorb new priority initiatives pursued by NAIC membership. The Association s reserve status is of paramount consideration in the budgeting process, as is strong and prudent financial management of the NAIC s assets. In early 2015, an independent financial advisory firm with experience supporting nonprofit associations and performing operating reserve analysis conducted a comprehensive review of the NAIC s operating reserve policy. In July 2015, the Executive (EX) Committee and Internal Administration (EX1) Subcommittee approved a report from the advisory firm which revised the NAIC s liquid operating reserve from a target range of 80% to 91% to a target range of 83.4% to 108.2%. This change was the result of a comprehensive review of current and future identified risks and comparisons to comparable organizations. This report recognized the increased level of uncertainty facing the NAIC 5

11 and that future investments will likely be required to enhance the Association s information technology and technical infrastructure. Based upon 2016 projected results the liquid reserve is projected to be 84.8% at December 31, Including the proposed 2017 fiscals, the liquid reserve at the end of December 31, 2017, is projected to be 88.1%. The liquid reserve at the end of 2015 based on audited financial results was 84.7%. Conclusion NAIC management appreciates the opportunity to present this 2017 budget proposal to the NAIC membership, and believes it provides a comprehensive review of the NAIC s business and financial operations for the current and upcoming fiscal year. A summary of key components of the 2017 budget proposal is included in the appendix. Please feel free to contact Jim Woody, Chief Financial Officer, at (816) , or Carol Hartley, Senior Controller, at (816) , should you have any questions or need additional information. 6

12 Appendix

13 Proposed 2017 Budget October

14 Proposed 2017 Budget Compared to 2016 Budget and 2016 Projection Proposed 2017 Budget Highlights Revenue Analysis Expense Analysis Proposed Fiscal Impact Statements Liquid Operating Reserve Ratio 8

15 Proposed 2017 Operating Revenues increase 5.2% compared to 2016 Budget and 4.2% compared to 2016 Projection Proposed 2017 budget reflects changes in a number of areas: Prices of some products and services in Insurance Data Products, SVO, AVS, Structured Securities, and IID have been increased The Recalibration of Database Filing Fee structure moves from a tiered structure to a formulaic approach Proposed 2017 Expenses decrease 0.4% compared to 2016 Budget and increased 1.2% compared to 2016 Projection Salaries, taxes, and benefits compose the largest share of 2017 budget at 60.7% of total operating expense. The 2017 salary budget is only $373K higher than 2016 budget primarily due to the modest salary increases in 2017 and reduction of CEO compensation Professional services is the next largest item at 10.3% but is lower than 2016 budget and 2016 projection due to the completion of several projects in 2016 Travel expense is on par with the 2016 budget at $5.4M but is slightly higher than 2016 projection reflecting increasing travel costs Administration and Operational expense decreased to $3.2M which is $0.2M lower than 2016 budget and $0.4M lower than 2016 projection primarily due to decrease in costs of supplies and other expenses Depreciation and Amortization expenses increased slightly to $5.1M reflecting increased amortization due to the implementation of SBS and VISION in

16 Change Budget vs 2016 Budget Change Budget vs 2016 Projection Operating Revenue $94.0 $95.0 $1.0 $98.9 $4.9 $4.0 Operating Expense (1.7) (0.5) 1.2 Operating Rev Over/(Under) Expenses (8.5) (5.9) 2.6 (3.2) Investment Income (0.7) (1.2) Net Revenues Over/(Under) Expenses ($4.9) ($1.8) $3.1 ($0.2) $4.7 $ Budget/Projection versus Proposed 2017 Budget (dollars in millions) 2016 Budget 2016 Projection Change Budget vs 2016 Projection Proposed 2017 Budget 10

17 Operating Revenues $1.0M higher than budget: Database fees are $0.2M higher than budget due to higher than budgeted insurance premium growth Publications and Insurance Data Products are $0.2M higher than budget primarily due to the timing of shipments Valuation Services revenue is $0.2M higher than budget principally due to revenue generated by 2016 structured securities third-party dataset sales partially offset by an underrun in SVO services (RTAS) and AVS Administrative Services revenues are $0.2M higher than budget principally due to higher than budgeted revenues generated by NIPR National Meetings is $0.1M higher than budget due to higher than budgeted attendance at national meetings and is expected to remain higher than budgeted for the 2016 Fall National Meeting 2016 Projection is Expected to Exceed 2016 Budget by $3.1M: 11

18 Operating Expenses $1.6M less than budget: Salaries and benefits are $1.5M under budget due to open positions including CEO position Professional Services are $0.7M over budget principally due to dataset revenue sharing with the financial modeler and other contractual obligations Computer Services are $0.3M over budget due to the cost of securities data feeds Travel expenses are projected to be under budget by $0.6M due to fewer than budgeted number of trips Occupancy is expected to be $0.3M under budget due to lower than budgeted operating costs Administrative & Operational expense is over budget $0.2M due to the cost of recruiting for several highly qualified candidates, including the Chief Executive Officer, and relocation Equipment Rental and Maintenance is under budget by $0.5M due to delays in the purchase of technology solutions as well as favorable renewal rates on several software maintenance contracts Investment income currently exceeds budget by $0.5M primarily due to unrealized gains in the Investment Portfolio partially offset by underrun in interest and dividend income NAIC does not budget gains or losses as it would be predicting the market; however, actual results could be impacted significantly depending on financial market performance during the last six months of Projection is Expected to Exceed 2016 Budget by $3.1M (cont.): 12

19 Actual 2015 Proposed 2017 Budget Revenue Composition (dollars in millions) 2015 Actual 2015 Composite Mix 2016 Budget 2016 Budget Composite Mix 2016 Projection 2016 Projection Composite Mix 2017 Proposed Budget 2017 Composite Mix Database Fees $ % $ % $ % $ % Valuation Services % % % % Publications & Insurance Data Products % % % % Administrative/License Fees % % % % Transaction Filing Fees % % % % Member Assessments % % % % National Meetings % % % % Education & Training % % % % Other Revenue % % % % TOTAL OPERATING REVENUES $ % $ % $ % $ % 13

20 Revenue Change 2016 Budget/2016 Projection/2017 Proposed Budget (dollars in millions) TOTAL REVENUES $4.2 $2.8 Proposed 2017 Budget to 2016 Budget Proposed 2017 Budget to 2016 Projection Database Fees $2.0 $1.8 Valuation Services Publications & Insurance Data Products Administrative/License Fees Transaction Filing Fees Member Assessments National Meetings Registration Fees (0.1) (0.2) Education & Training (0.1) 0.0 Other Revenue 0.0 (0.0) TOTAL OPERATING REVENUES Investment Income (0.7) (1.2) 14

21 Proposed 2017 Operating Revenue Budget Highlights: 15 Proposed 2017 Operating Revenue budgeted to be $98.9M, $4.9M (5.2%) higher than 2016 budget and $4.0M (4.2%) higher than 2016 projection 2017 Database Filing Fees revenue budget is $2.0M higher than 2016 budget; $1.8M more than 2016 projection revenue growth is due to recalibration of the database filing fee structure and expected increase in premiums Valuation Services are $0.9 higher than 2016 budget: $0.7 higher than 2016 projection due primarily to price increases for security rating services Publications and Insurance Data Products revenues are $0.5M higher than 2016 budget; $0.3M higher than 2016 projection primarily due to contractual price increases, increased product sales to third parties and price increase of the Annual Statement/Risk-Based Capital Filing Support products Administrative revenue is $0.6M higher than 2016 budget and $0.4M higher than 2016 projection principally driven by increased NIPR revenue Transaction Filing Service revenue is $0.9M higher than 2016 budget and 2016 projection growth driven by an increase in OPTins, SBS and a price increase for some SBS transactions Education & Training revenue is consistent with the 2016 budget and 2016 projection 2017 revenues are based on 2016 levels of participation

22 Actual 2015 Proposed 2017 Budget Expense Composition (dollars in millions) 2015 Actual 2015 Composite Mix 2016 Budget 2016 Budget Composite Mix 2016 Projection 2016 Projection Composite Mix 2017 Proposed Budget 2017 Composite Mix Salaries, Taxes, & Benefits $ % $ % $ % $ % Professional Services % % % % Travel % % % % Depreciation & Amortization % % % % Equipment Rental & Maintenance % % % % Occupancy % % % % Administrative & Operational % % % % Computer Services % % % % National and Interim Meetings % % % % Grant and Zone Expenses % % % % Education & Training % % % % TOTAL OPERATING EXPENSES $ % $ % $ % $ % 16

23 Expense Change 2016 Budget/2016 Projection/2017 Proposed Budget (dollars in millions) Proposed 2017 Budget to 2016 Budget Proposed 2017 Budget to 2016 Projection Salaries, Taxes, & Benefits $0.1 $1.6 Professional Services (1.0) (1.7) Travel Depreciation & Amortization Equipment Rental & Maintenance Occupancy (0.2) 0.1 Administrative & Operational (0.2) (0.3) Computer Services National and Interim Meetings Grant and Zone Expenses Education & Training TOTAL OPERATING EXPENSES ($0.5) $1.2 17

24 Proposed merit salary increase of 2.0% in 2017 is lower than budgeted in 2016 No increase in the staffing levels remains Benefits expenses decrease largely due to implementation of a self-funded health plan in 2017 Professional Services budget reflects the completion of several large projects in 2016 as well as a reduction of 50% in the Consumer Outreach budget Computer Services costs increase due to the continuing investment in the NAIC s technical infrastructure and the need for data services for financial analysts National Meetings expense reflects cost based on national meeting location Member Grant Funds remain unchanged at $20K per Member in 2017 Proposed 2017 Operating Expense Budget: 18

25 Total Fiscal Impact Statements 1, Proposed 2017 Fiscal Impact Statements (dollars in thousands) Initiative 2017 Revenue 2017 Expense Net Impact on 2017 Budget 2017 Capital Regulatory Data Collection Phase II System for Electronic Rate and Form Filing (SERFF) Integration Expansion Phase II Online Content Management System (CMS) Information Technology Infrastructure Library (ITIL) Adoption Phase II Job Scheduler Recalibration of Database Filing Fee Structure $137.7 ($137.7) $74.0 $ (228.4) (192.0) (157.5) , ,658.4 Proposed 2017 Budget Before Fiscals Proposed 2017 Budget After Fiscals and Before Investment Income Investment Income 97, ,370.1 (4,111.0) , ,089.5 (3,161.6) , ,942.9 Proposed 2017 Budget After Fiscals and Investment Income $101,870.8 $102,089.5 ($218.7) $

26 Liquid Operating Reserve Ratio (including proposed fiscals): Actual Reserve Ratio at 12/31/11: 65.8% Actual Reserve Ratio at 12/31/12: 82.2% Actual Reserve Ratio at 12/31/13: 106.0% Actual Reserve Ratio at 12/31/14: 100.7% Actual Reserve Ratio at 12/31/15: 84.7% Projected Reserve Ratio at 12/31/16: 84.8% Proposed 2017 Reserve Ratio at 12/31/17: 88.1% 20

27 Revenue and Expense Summaries

28 Operational Revenues $94,585,195 $53,392,920 $94,974,972 $94,022,449 $952,523 $97,259,097 $3,236, % $2,284, % Operational Expenses 95,843,169 46,705, ,878, ,542,088 (1,663,536) 101,370,125 (1,171,963) -1.1% 491, % Fiscal Impact Statement Revenues (1) 1,668,756 1,668,756 1,668,756 Fiscal Impact Statement Expenses (1) 719, , ,350 Investment Income (2,400,639) 2,451,462 4,120,227 3,604, ,726 2,942,923 (661,578) (1,177,304) Total Proposed Revenues After Fiscal Impact Statements 92,184,556 55,844,382 99,095,199 97,626,950 1,468, ,870,776 4,243, % 2,775, % Total Proposed Expenses After Fiscal Impact Statements 95,843,169 46,705, ,878, ,542,088 (1,663,536) 102,089,475 (452,613) -0.4% 1,210, % NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPOSED 2017 BUDGET REVENUE AND EXPENSE SUMMARY Increase Increase 2016 (Decrease) (Decrease) /30/ /31/ Projected 2017 from 2016 from 2016 Description Actual Actual Projected Budget Variance Budget Budget % Projected % Operating Revenues Over/(Under) Expenses Before Fiscal Impact Statements (1,257,974) 6,687,818 (5,903,580) (8,519,639) 2,616,059 (4,111,029) 4,408,611 1,792,552 Fiscal Impact Statement Revenues Over/(Under) Expenses 949, , ,406 Total Revenues Over/(Under) Expenses ($3,658,613) $9,139,280 ($1,783,353) ($4,915,138) $3,131,785 ($218,700) $4,696,439 $1,564,654 (1) See the Fiscal Impact Statement tabs of the budget proposal for details. 21

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30 Member Assessments R1 $2,193,791 $1,055,264 $2,109,914 $2,109,911 $3 $2,110,636 $ % $ % Database Fees R2 26,344,370 26,711,081 26,711,081 26,540, ,744 28,550,925 2,010, % 1,839, % Publications and Insurance Data Products R3 14,549,758 4,601,368 15,023,296 14,748, ,620 15,289, , % 266, % Valuation Services R4 26,625,927 7,548,760 24,968,433 24,824, ,295 25,683, , % 715, % Transaction Filing Fees R5 9,058,068 5,190,356 9,315,822 9,265,234 50,589 10,258, , % 942, % National Meeting Registration Fees R6 2,095, ,977 2,160,977 2,116,435 44,542 1,998,149 (118,286) -5.6% (162,828) -7.5% Education and Training R7 687, , , ,544 (73,739) 682,843 (50,701) -6.9% 23, % Administrative Services/License Fees R8 12,984,007 7,173,726 13,931,068 13,647, ,644 14,299, , % 368, % Other Revenue R9 45,810 22,075 94,575 36,750 57,825 53,567 16, % (41,008) -43.4% Total Operating Revenues 94,585,195 53,392,920 94,974,972 94,022, ,523 98,927,853 4,905, % 3,952, % Salaries E1 45,482,441 22,788,721 46,343,305 48,017,177 (1,673,872) 48,389, , % 2,046, % Temporary Personnel E2 443, , , ,375 6, ,064 (16,311) -3.6% (22,671) -5.0% Payroll Taxes E3 3,050,100 1,858,718 3,257,117 3,254,067 3,050 3,327,557 73, % 70, % Employee Benefits E4 8,106,262 4,466,284 9,402,489 9,093, ,348 8,791,768 (301,373) -3.3% (610,721) -6.5% Employee Development E5 800, , ,860 1,048,669 (83,809) 1,051,817 3, % 86, % Professional Services E6 13,037,083 3,581,774 12,161,065 11,541, ,041 10,522,539 (1,018,485) -8.8% (1,638,526) -13.5% Computer Services E7 2,132,205 1,572,899 3,216,441 2,927, ,866 3,309, , % 92, % Travel E8 4,450,152 2,040,649 4,822,033 5,362,365 (540,332) 5,408,131 45, % 586, % Occupancy E9 3,339,578 1,801,363 3,603,412 3,928,470 (325,058) 3,664,518 (263,951) -6.7% 61, % Equipment Rental and Maintenance E10 3,287,686 1,757,621 3,632,570 4,048,277 (415,707) 4,077,591 29, % 445, % Depreciation and Amortization E11 3,870,014 2,460,842 5,123,247 5,042,926 80,321 5,150, , % 27, % Insurance E12 510, , , ,700 (29,419) 509,860 (14,840) -2.8% 14, % Telephone E13 491, , , ,264 17, ,924 39, % 22, % Supplies E14 793, , , ,548 44, ,796 (81,752) -9.6% (126,037) -14.1% Mail Services E15 235, , , ,339 (20,035) 210,150 (27,189) -11.5% (7,154) -3.3% Reference Materials E16 538, , , ,857 3, ,556 12, % 9, % Printing and Production E17 127,833 45,496 92, ,733 (11,477) 104, % 12, % National and Interim Meetings E18 2,421,101 1,347,045 2,695,019 2,777,918 (82,899) 2,905, , % 210, % Education and Training E19 499,839 59, , ,051 (26,477) 269,004 64, % 91, % Grant and Zone Expenses E20 1,369, ,697 1,465,704 1,441,000 24,704 1,562, , % 96, % Other Expense E21 856, , , , , ,212 (110,400) -13.8% (258,084) -27.3% Total Operating Expenses 95,843,169 46,705, ,878, ,542,088 (1,663,536) 102,089,475 (452,613) -0.4% 1,210, % Revenues Over/(Under) Expenses before Investment Income (1,257,974) 6,687,818 (5,903,580) (8,519,639) 2,616,059 (3,161,623) 5,358,017 2,741,958 Investment Income II1 (2,400,639) 2,451,462 4,120,227 3,604, ,726 2,942,923 (661,578) (1,177,304) Revenues Over/(Under) Expenses ($3,658,613) $9,139,280 ($1,783,353) ($4,915,138) $3,131,785 ($218,700) $4,696,439 $1,564,654 NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPOSED 2017 BUDGET WITH FISCAL IMPACT STATEMENTS REVENUE AND EXPENSE BY LINE Increase Increase 2016 (Decrease) (Decrease) /30/ /31/ Projected 2017 from 2016 from 2016 Description Reference Actual Actual Projected Budget Variance Budget Budget % Projected % A detailed analysis of each line item is included in the "Revenue Detail", "Expense Detail", and "Investment Income Detail" tabs of the budget proposal. 23

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32 Technology Services Financial Market Products Systems and Business to Regulatory Regulatory and Description Reference Support Operations Members Affairs Services Services Total Salaries E1 $11,541,554 $9,643,185 $3,695,773 $14,693,616 $2,975,987 $5,839,860 $48,389,975 Temporary Personnel E2 373,517 60, ,064 Payroll Taxes E3 884, , , , , ,061 3,327,557 Employee Benefits E4 8,782,168 9,600 8,791,768 Employee Development E5 214,319 66,644 25, ,322 74,375 70,812 1,051,817 Professional Services E6 1,033,103 1,819,417 1,158,276 6,178,300 45, ,539 10,522,539 Computer Services E7 497, , ,652 2,179,596 9, ,031 3,309,390 Travel E8 122,489 1,541,929 1,682,311 1,322, , ,574 5,408,131 Occupancy E9 25,815 3,559,764 31,114 47, ,664,518 Equipment Rental/Maintenance E10 3,812, ,218 31,492 2,796 4,077,591 Depreciation and Amortization E11 5,150,540 5,150,540 Insurance E12 509, ,860 Telephone E13 92,875 22, ,009 64,700 72,025 8, ,924 Supplies E14 546, ,962 41,078 16,950 3, ,796 Mail Services E15 2, ,659 89,696 8,730 2, ,150 Reference Materials E16 3,852 30, ,076 48, ,556 Printing and Production E17 98,475 6, ,595 National and Interim Meetings E18 84,200 2,537, ,110 39,800 11,966 2,905,989 Education and Training E19 18,023 48, ,308 79, ,004 Grant and Zone Expenses E20 1,562,500 1,562,500 Other Expense E21 676,712 9,500 2, ,212 Total Operating Expenses $18,795,514 $35,197,600 $10,618,274 $26,449,080 $3,816,279 $7,212,728 $102,089,475 The categories presented above are for expense consolidation and reporting purposes only. They merely represent the grouping of like departments within the NAIC financial reporting structure and the manner in which these expenses are actively managed by Division Directors. No cost allocations or distribution of expenses are included herein. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPOSED 2017 BUDGET WITH FISCAL IMPACT STATEMENTS EXPENSE BUDGET BY AREA Components: Information Technology Group Central Office Member Services Financial Regulation Market Regulation Insurance Products Technical Services Finance Education & Training SVO Statistical and and Services Office Services Meetings Capital Markets Bureau Actuarial Services SERFF Human Resources National Meetings Structured Securities Group CIPR SBS Legal Interim Meetings Strategic Business Initiatives NAIC Events Communications Executive Office 25

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34 Revenue Detail

35 Item Description: Assessments from all members which are used to fund the activities of the NAIC offices. Members are assessed based upon the relative premium volume of their respective domiciled companies to total premium volume /30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Member Assessments (1) $2,193,791 $1,055,264 $2,109,914 $2,109,911 $2,110,636 $ % The assessment structure is based on each member s share of total insurance premium volume within their jurisdiction. Premium volume is measured as direct written premiums by companies domiciled in each state for the calendar year. The budgeted amount is based on four months of the May April 2017 assessment and eight months of the May April 2018 assessment. The May April 2018 member assessments are illustrated in Exhibit R1-One. Exhibit R1-Two illustrates member assessments and database filing fees as a percentage of total NAIC revenue. BUDGET ITEM: Member Assessments (1) In exchange for annual member assessments, the NAIC delivers a wide array of funding, information, products, and services, generally at no charge to state insurance regulators, as a benefit of NAIC membership. R1: Member Assessments 27

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37 Exhibit R1-One NAIC MEMBER ASSESSMENTS $7,339 Minimum $7,339 Minimum Percent $125,000 Cap $125,000 Cap $7,725 Minimum State Total Premiums To Total Assessment 2017/18 Amount 2016/17 Amount 2015/16 Amount Alabama $22,641,732, % $25,652 $25,652 $26,418 $26,302 Alaska 3,959,686, % 4,487 7,339 7,339 7,339 Arizona 30,544,211, % 34,603 34,603 34,908 33,400 Arkansas 13,031,078, % 14,762 14,762 14,984 14,502 California 143,328,902, % 162, , , ,000 Colorado 32,061,498, % 36,322 36,322 36,232 36,376 Connecticut 33,379,140, % 37,815 37,815 39,135 41,620 Delaware 65,588,993, % 74,307 74,307 64,728 58,218 District of Columbia 9,693,147, % 10,982 10,982 10,946 10,636 Florida 140,917,371, % 159, , , ,000 Georgia 52,895,462, % 59,925 59,925 60,035 58,563 Hawaii 11,583,740, % 13,124 13,124 13,503 13,552 Idaho 7,695,477, % 8,718 8,718 8,554 8,637 Illinois 78,885,262, % 89,369 89,369 86,044 86,187 Indiana 33,556,794, % 38,016 38,016 37,044 37,400 Iowa 26,521,474, % 30,047 30,047 32,216 34,168 Kansas 20,883,712, % 23,660 23,660 22,781 23,597 Kentucky 26,496,960, % 30,018 30,018 30,226 27,978 Louisiana 30,270,822, % 34,294 34,294 32,897 33,263 Maine 7,213,788, % 8,173 8,173 8,122 8,330 Maryland 33,841,982, % 38,339 38,339 40,186 41,335 Massachusetts 52,787,629, % 59,804 59,804 61,111 63,787 Michigan 65,063,529, % 73,711 73,711 75,203 73,930 Minnesota 40,592,752, % 45,988 45,988 46,342 47,241 Mississippi 13,854,556, % 15,697 15,697 15,618 15,482 Missouri 35,254,898, % 39,941 39,941 42,151 42,736 Montana 4,851,257, % 5,495 7,339 7,339 7,339 Nebraska 12,378,104, % 14,023 14,023 14,440 14,623 Nevada 14,995,905, % 16,990 16,990 16,246 15,309 New Hampshire 8,542,714, % 9,677 9,677 9,491 9,404 New Jersey 71,155,021, % 80,613 80,613 81,317 81,801 New Mexico 12,496,634, % 14,157 14,157 13,953 13,005 New York 160,417,049, % 181, , , ,000 North Carolina 47,880,056, % 54,244 54,244 54,215 53,534 North Dakota 6,247,293, % 7,077 7,339 7,339 7,339 Ohio 76,442,107, % 86,602 86,602 85,082 82,823 Oklahoma 18,551,173, % 21,017 21,017 21,264 21,517 Oregon 22,225,220, % 25,179 25,179 25,255 25,847 Pennsylvania 99,201,280, % 112, , , ,826 Rhode Island 8,486,527, % 9,614 9,614 10,020 9,404 South Carolina 25,161,301, % 28,505 28,505 28,610 27,658 South Dakota 5,933,316, % 6,721 7,339 7,339 7,339 Tennessee 39,385,322, % 44,621 44,621 43,922 44,343 Texas 147,741,996, % 167, , , ,000 Utah 14,425,000, % 16,342 16,342 16,374 16,170 Vermont 3,540,181, % 4,012 7,339 7,339 7,339 Virginia 45,073,533, % 51,064 51,064 51,015 51,826 Washington 38,380,868, % 43,482 43,482 45,654 44,159 West Virginia 9,170,923, % 10,390 10,390 10,533 10,504 Wisconsin 37,055,684, % 41,981 41,981 41,878 43,240 Wyoming 2,774,001, % 3,142 7,339 7,339 7,339 American Samoa 3,473, % 4 7,339 7,339 7,339 Guam 525,918, % 596 7,339 7,339 7,339 Puerto Rico 12,142,811, % 13,756 13,756 12,095 13,521 U.S. Virgin Islands 439,927, % 498 7,339 7,339 7,339 Northern Mariana Islands 34,772, % 40 7,339 7,339 7,339 Total State Assessments $1,978,203,989, % $2,241,123 $2,111,300 $2,109,294 $2,111,144 Four months of the May 2016-April 2017 assessment $703,103 Eight months of the May 2017-April 2018 assessment 1,407,533 Total calendar year 2017 assessment $2,110,636 29

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39 2.4% 2.5% 2.3% 2.2% 2.1% 69.0% Exhibit R1-Two Member Assessments as Compared to Database Fees and All Other NAIC Revenue $70,000, % 69.1% 69.8% 69.5% $60,000,000 $50,000,000 $40,000,000 $30,000, % 28.4% 27.9% 28.2% 28.9% $20,000,000 $10,000,000 $ Actual Actual Actual Budget Budget Member Assessments $2,300,773 $2,344,464 $2,193,791 $2,109,911 $2,110,636 Database Fees $26,363,745 $26,901,198 $26,344,370 $26,540,337 $28,550,925 Other Operating Revenue $68,131,245 $65,482,436 $66,047,034 $65,372,201 $68,266,292 31

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41 Item Description: Fees from all insurance companies filing with the NAIC s Financial Data Repository (FDR). Fees are based on each filer s premium volume, which is measured as the greater of direct written premium or reinsurance assumed from non-affiliates /30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Database Fees (1) $26,344,370 $26,711,081 $26,711,081 $26,540,337 $28,550,925 $2,010, % A major initiative approved with the 2015 budget restructured database filing fees resulting in a $1,354,416 reduction in 2015 database fee revenue. This initiative lowered database filing fees, including the filing fee caps, by five (5) percent. The database filing fee structure has 33 tiers for various levels of premium volume which is measured as the greater of direct written premium or reinsurance assumed from non-affiliates. The rate structure ranges from a tier of up to $100,000 in premiums with a filing fee of $235 to a tier of more than $2.7 billion in premiums with a filing fee of $65,957. Combined filings have a combined filing fee of $651 and insurance group total filing fees are capped at $197,870. The tiered filing fee structure is illustrated as Exhibit R2- One. Database filing fees projected for 2016 are based on actual 2015 data year filings received through June 30, The projected over budget variance reflects premium growth within the industry greater than the anticipated average of 1.0%. With the filing of 2015 data during the 2016 calendar year, groups hitting the group filing fee cap of $197,870 had a reduction in fees of more than $7.1 million. The 33 groups hitting the group filing fee cap reported over $1 trillion in premiums, a growth of 6.4% over the prior year. The $7.1 million group filing fee savings in 2016 represents a 52% reduction in database filing fees for the filing companies and 21% reduction in database filing fee revenue for the NAIC. The 2017 budget was initially calculated using the tiered structure with an assumed growth in industry premiums of 1.0%, resulting in an increase in filing fee revenue of $181,416 (0.7%) over projected actual for Using the expected premium increase of 1.0% for the 2016 data year filings in 2017, group filing savings is expected to increase to just over $7.3 million, a 52% savings. The 2017 budget includes a recalibration initiative (See Fiscal Impact 6) to simplify the complex, multi-tier system with significant disparity in the amount small individual companies pay in relation to their premiums, as compared to the larger companies within groups, particularly those within groups that exceed the group cap. In addition, the size of these tiers is not consistent. The first six tiers have relatively small premium ranges as compared to the remaining tiers, resulting in companies with significantly different annual premiums paying the same database filing fee. The proposed recalibration of filing fees reduces the disparity of the fees while retaining the individual company and group cap structure albeit at a higher level than Although the implementation of the new structure is anticipated to increase database filing fee revenue in 2017, 70% of the companies are expected to pay the same or a lower database filing fee than they paid in The recalibration will more evenly distribute the funding of major investments in important regulatory initiatives, including NAIC systems and technology infrastructure, all of which benefit state insurance regulators, consumers, and the insurance industry. The current tiered structure will be replaced with a formulaic approach which charges the same fee per million in insurance premiums with a floor of $235 (the same floor as 2016), an individual cap of $82,746, and group cap of $248,238. The caps increased to reflect the cumulative impact of CPI-U on the caps since the current tiered approach was last changed in Additional information regarding this fiscal can be found in Fiscal Impact 6. BUDGET ITEM: Database Fees (1) The NAIC uses annual database filing fee revenues to support its financial solvency program, including a number of solvency monitoring tools provided to state insurance regulators. Company financial information is generally available to state insurance regulators within 24 hours of receipt of the electronic filing. In addition, the insurance industry benefits from the ability to electronically file their quarterly and annual statements with the NAIC s central data collection system rather than submitting separate filings to each jurisdiction in which they conduct business. R2: Database Fees 33

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43 Exhibit R2-One Tiered NAIC Filing Fee Structure Used for 2015 Data Year Filings-Submitted in 2016 Formulaic Approach Proposed for NAIC Database Filing Fees for 2016 Data Year Filings-Submitted in 2017 Premium Base Levels: 2016 Fee Premium Base Level x $0 to $100,000 $235 $100,001 to $1,000,000 $460 $1,000,001 to $2,500,000 $686 $2,500,001 to $7,500,000 $1,372 $7,500,001 to $25,000,000 $2,283 $25,000,001 to $100,000,000 $3,420 $100,000,001 to $200,000,000 $4,783 $200,000,001 to $300,000,000 $5,975 $300,000,001 to $400,000,000 $7,337 $400,000,001 to $500,000,000 $8,709 $500,000,001 to $600,000,000 $10,487 $600,000,001 to $700,000,000 $12,310 $700,000,001 to $800,000,000 $14,133 $800,000,001 to $900,000,000 $16,407 $900,000,001 to $1,000,000,000 $18,690 $1,000,000,001 to $1,100,000,000 $20,965 $1,100,000,001 to $1,200,000,000 $23,248 $1,200,000,001 to $1,300,000,000 $25,523 $1,300,000,001 to $1,400,000,000 $27,806 $1,400,000,001 to $1,500,000,000 $30,080 $1,500,000,001 to $1,600,000,000 $32,364 $1,600,000,001 to $1,700,000,000 $34,638 $1,700,000,001 to $1,800,000,000 $37,372 $1,800,000,001 to $1,900,000,000 $40,107 $1,900,000,001 to $2,000,000,000 $42,841 $2,000,000,001 to $2,100,000,000 $45,576 $2,100,000,001 to $2,200,000,000 $48,310 $2,200,000,001 to $2,300,000,000 $51,045 $2,300,000,001 to $2,400,000,000 $53,780 $2,400,000,001 to $2,500,000,000 $56,515 $2,500,000,001 to $2,600,000,000 $59,249 $2,600,000,001 to $2,700,000,000 $61,984 $2,700,000,001 or greater $65,957 Combined Filing Fee $651 Individual Filing Fee Cap $65,957 Group Filing Fee Cap $197,870 Minimum Fee = $235 Individual Cap = $82,746 Group Cap = $248,238 35

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45 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Publications (1) $2,702,037 $1,476,461 $2,726,717 $2,552,653 $2,484,775 ($67,878) -2.7% Insurance Data Products (2) 11,847,721 3,124,907 12,296,579 12,196,024 12,805, , % Total $14,549,758 $4,601,368 $15,023,296 $14,748,677 $15,289,987 $541, % As part of the 2015 budget, fees for consumer guides ($650,000) and low volume publications ($303,264) were eliminated. Beginning January 1, 2015, all low volume publications (excludes Top Ten publications) were provided by the NAIC free of charge in an on-demand electronic format and hard copies of consumer guides were no longer available. The Top Ten publications continued to be published in the same format (print, CD, Excel) as offered in The over budget variance in 2016 is related to the timing of publication shipments for 2015 products. These shipments were made in early 2016 rather than late 2015 causing expected revenue for 2015 to be recognized in A continued decline in sales of Top Ten publications is reflected in the 2017 budget. BUDGET ITEM: Publications and Insurance Data Products Item Description: Revenues generated from the sale of various reference materials, handbooks, subscriptions, and information stored within the NAIC's financial database. (1) Publications revenue is generated from the sale of hard copy, electronic downloadable and CD publications, reference materials, and royalties from the sale of these products by third party vendors. The NAIC produces approximately 150 publications, which are designed to: (1) provide state insurance regulators with handbooks, statistical reports, and white papers, in an effort to offer best-practices and coordinated regulatory approaches to the state-based system of insurance regulation and (2) provide the insurance industry with a variety of handbooks, tools, and electronic applications to facilitate industry compliance with state insurance regulatory requirements. (2) Revenues generated from the sale of insurance data products include contracts with third party vendors who use, market, and sometimes redistribute NAIC data ($9,318,937). Also included are royalties from six business partners who license the NAIC's Annual Statement Filing Support Product (ASFSP) ($1,742,850) and Risk-Based Capital Filing Support Product (RBCFSP) ($1,642,925). Customers leverage NAIC insurance data products and/or the tools made available by the NAIC s redistribution business partners in order to ensure accurate submissions of quarterly and annual filings to the NAIC, conduct research, and to benchmark specific company data and performance to various industry aggregates, among other activities. The 2017 budget incorporates annual contractual increases in royalty fees, the addition of new contracts, and a $25 increase in the price of ASFSP and RBCFSP products. R3: Publications and Insurance Data Products 37

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47 Item Description: Fees related to the designation of securities, including the Securities Valuation Office (SVO), Capital Markets Bureau (CMB), and Structured Securities Group (SSG). This category also includes revenues generated by the NAIC's Automated Valuation Service (AVS+) /30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Capital Markets and Investment Analysis Fees (1) $10,067,410 $4,095,767 $9,604,567 $9,939,452 $10,090,125 $150, % Structured Securities (2) 11,329, ,237 9,900,718 9,325,167 9,960, , % Automated Valuation Service (3) 5,228,917 2,734,756 5,463,148 5,559,518 5,632,946 73, % Total $26,625,927 $7,548,760 $24,968,433 $24,824,137 $25,683,870 $859, % Capital Markets and Investment Analysis revenues include: (1) $8,862,625 for non-rated security filings (non-rated security filing revenues are illustrated in Exhibit R4-One); (2) $393,500 for the processing of subsidiary valuation filings; (3) $345,000 for advance rating services; (4) $88,000 in services provided to banks that wish to be placed on the Approved Bank List maintained by the SVO; (5) $92,400 in service fees for the review of money market funds; (6) $108,000 in service fees for the review of exchange traded funds; (7) $32,000 in service fees for the review of working capital financial investments; (8) $83,100 in SVO sovereign fees, representing an offset to the cost of the SVO s requirement to conduct a Sovereign analysis on the initial submission of issuing debt in a foreign country; (9) $5,500 in services fees for the review of counterparty derivatives; and (10) $30,000 in appeals fees. Investment Analyst Report fees of $50,000, generated through the work of the Capital Markets Bureau in the Capital Markets and Investment Analysis Office, are also included in this revenue category. The increase in 2017 over 2016 projections is related to pricing adjustments ($332,000) and an increase in subsidiary valuation filings ($135,600). BUDGET ITEM: Valuation Services (1) The NAIC s Capital Markets and Investment Analysis Office in New York provides state regulators with enhanced security data, capital markets analysis, research, and evaluations of insurer investment portfolio risks. The 2016 projection will fall short of budget by $335,000. Corporate advanced rating requests have experienced a decline in the past several years with 2016 projected to be below budget by $740,000. This decline is partially offset by greater than expected corporate ($235,000) and structured security ($77,000) annual requests. The 2017 budget reflects the continuation of these trends, as well as an increase in municipal annual rating service requests. Additionally, as illustrated in Exhibit R4-One, the SVO will implement price increases for several product lines. These pricing adjustments represent a continued effort to align fees with the effort expended to perform ratings analysis. The majority of price increases are $75, increasing the price of annual ratings from $175 to $250. Additionally, there are four significant price decreases in the annual rating category, one at $600, two at $750, and one at $1,125, but these categories have relatively low volume. (2) (3) Structured Securities revenues are generated from the sale of modeled residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) CUSIPs held by insurance companies at the end of each year. Revenue is based on per CUSIP sales to insurers based on their year-end holdings as well as the sale of complete RMBS, CMBS, or RMBS/CMBS datasets to third party financial institutions. The projected over performance for 2016 is based on an increase in the volume of CMBS CUSIP ratings for insurers. The 2016 RMBS price per CUSIP of $61.60 and CMBS price per CUSIP of $88.00 have remained unchanged since The 2017 budget includes an increase in the price per CUSIP, reinstating the per CUSIP pricing in place prior to $70 per RMBS CUSIP and $100 per CMBS CUSIP. The Automated Valuation Service (AVS+) is the NAIC s electronic system for the delivery of security designations assigned by the SVO. The AVS+ system is utilized by companies when preparing their Schedule D filings. The under budget variance in 2016 is related to a reduction in new subscription agreements signed in late 2015, following the submission of the 2016 budget. The majority of the 2017 budget increase over 2016 projections ($134,000), is the result of an 11% increase in the pricing structure for AVS+ Tiers 1 through 4; an increase in the fee to add users from $50 to $100; an 8% increase in the TPA Tiers; and a $250 increase in the fee to add an account. The structure for the eight tiers with the lowest Schedule D holdings was adjusted in the 2016 budget. R4: Valuation Services 39

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49 Exhibit R4-One Securities Valuation Office Non-Rated Securities Revenues Budgeted Budgeted Product Description Filing Fee Filing Fee Volumes Revenue Corporates Corporate Initial Rated $175 $ $4,750 Corporate Initial Common Stock $175 $ ,750 Corporate Initial Foreign Stock $175 $ ,500 Corporate Annual Update Rated $175 $ ,250 Corporate Annual Update Common Stock $175 $ ,250 Corporate Annual Update Foreign Stock $175 $ ,750 Structured Credit Tenant Lease Annual Update Rated $175 $ ,250 Schedule BA Initial Surplus Note $250 $ Schedule BA Annual Surplus Note $125 $ ,500 Corporate Initial VOS 5*/6* $ ,500 Corporate Initial Issuer Not in VOS $5,000 $5, ,650,000 Corporate Initial Not Rated $1,500 $1, ,456,500 Corporate Annual Update Not Rated $1,500 $1,500 1,960 2,940,000 Structured Credit Tenant Lease Annual Update Not Rated $1,500 $1, ,500 Schedule BA Initial Not Rated $1,500 $1, ,500 Schedule BA Initial Not in VOS $5,000 $5, ,000 Schedule BA Annual Not Rated $1,500 $1, ,500 Municipals Municipal Initial Rated $175 $ ,500 Municipal Annual Update Rated $ Municipal Initial Issuer Not in VOS $5,000 $5, ,000 Municipal Initial Not Rated $1,500 $1, ,500 Municipal Annual Update Not Rated $1,500 $1, ,500 Structured Structured Initial Rated $250 $ ,000 Structured Replication Annual Update $175 $ ,250 Structured CMBS Annual Update $175 $ ,000 Structured Equity Linked Initial Rated $250 $ Structured Equity Linked Annual Update Rated $175 $ ,750 Structured RMBS Annual Update Guaranteed $175 $ ,750 Structured RMBS Initial Guaranteed $250 $ ,000 Military Housing Bonds Initial $5,000 $5, ,000 Military Housing Bonds Annual $1,500 $1, ,000 Structured Initial Filing Not Rated Not in VOS $1,500 $1, ,500 Structured Credit Tenant Lease Bond Initial $1,500 $1, ,500 Structured Credit Tenant Lease Initial $2,300 $2, ,000 Structured Annual Update Not Rated $1,500 $1, ,000 Structured Replication Initial $1,500 $1, ,500 Structured Equity Linked Initial Not Rated $1,500 $1, ,500 Structured Equity Linked Annual Update Not Rated $1,500 $1, ,000 Canadian Canadian Annual Update Not Rated $1,500 $1, ,500 Governments Government Annual Update Rated $175 $ Government Annual Update Not Rated $1, ,000 Government Initial Issuer Not in VOS $5,000 $5, ,000 Government Initial Not Rated $1,500 $1, ,000 6,801 $8,862,625 41

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51 Item Description: Transaction fees to assist state departments of insurance with regulatory filings, including System for Electronic Rate and Form Filings (SERFF), Online Premium Tax for Insurance (OPTins ), State Based Systems (SBS), and the International Insurers Department (IID) /30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage SERFF Fees (1) $4,846,973 $2,366,275 $4,578,607 $4,967,985 $4,734,863 ($233,122) -4.7% OPTins Fees (2) 353, , , , , , % SBS Fees (3) 3,114,853 1,826,097 3,555,604 3,217,944 4,230,215 1,012, % IID Fees (4) 742, , , , ,600 65, % Total $9,058,068 $5,190,356 $9,315,822 $9,265,234 $10,258,483 $993, % Also included in the SERFF revenue line is a $25,000 annual license fee from the Interstate Insurance Product Regulation Commission (IIPRC). Under this services agreement, the IIPRC is granted 250 SERFF development hours each year to make modifications to SERFF in order to accommodate IIPRC filings and the overall expansion/enhancements of IIPRC product filing operations. The over budget variance in 2016 is related to the continued utilization of the Continuing Education (CE) service. The 2017 budgeted increase for CE revenue is related to several factors - increase in volumes ($278,600); impact of a two-year filing cycle for a key state ($192,000); and an increase in the course roster upload fee from 50 cents to $1 for one state to match existing fees in all other states ($402,000). Additionally, Producer Information Report pricing will increase from 1 cent to 2 cents, with an increase in the minimum fee per report from $5 to $10 ($136,400). BUDGET ITEM: Transaction Filing Fees (1) SERFF is licensed and used by 52 jurisdictions and over 4,000 insurance companies, third-party filers, rating organizations, and other companies. SERFF represents a key NAIC product in the modernization and efficiency of the state-based insurance regulatory system. Most jurisdictions receive more than 90% of their filings in an electronic format via SERFF, allowing faster turnaround, more consistent review, and better reporting. Companies experience significant cost savings and efficiency through the electronic submission of product filings to multiple jurisdictions, saving personnel and mailing costs by streamlining the submission process. Companies using SERFF also benefit from reduced regulatory review periods. Revenue for 2016 is expected to fall short of budget based on filing trends in both Qualified Health Plan and property/casualty submissions. The 2017 budget is consistent with these projections. (2) (3) The NAIC's online premium tax submission and payment system (OPTins ) automates and simplifies premium tax and surplus lines tax return submissions by filing companies, brokers, and individuals and the receipt of filings and collection of premium taxes by states, in exchange for a transaction fee on a sliding scale of $1 to $10 per transaction. OPTins, with 27 participating jurisdictions, represents another NAIC initiative to modernize and improve the efficiency of the state-based insurance regulatory system. Companies experience cost savings and efficiency through electronic submission of premium tax and surplus lines returns and electronic payment of quarterly and annual premium taxes. Projections for 2016 show continued growth in the use of these services. The 2017 budget reflects continued growth in the use of this product line and a full year of state implementations completed during SBS provides a comprehensive web-based application for use by state regulators in support of all state-based insurance regulatory functions. SBS is currently in service in 26 jurisdictions with three more jurisdictions in various stages of implementation. SBS enables state insurance regulators to more efficiently and effectively process license applications, license renewals, consumer inquiries, consumer complaints, enforcement actions, among other regulatory applications; and remain compliant with national insurance regulation uniformity initiatives. Through SBS both regulated entities and state insurance regulators experience significant cost savings and efficiency by the automation of state insurance regulatory processes and transactions. The value of SBS services to the industry is significant in terms of cost savings to insurers, producers, and providers managing the cost of compliance, and far exceeds the insignificant processing fees charged by the NAIC in facilitating electronic transactions. Further, SBS generates voluntary transaction fees from users who leverage the SBS system to complete regulatory transactions, which further illustrates the benefit of value-added services to both state insurance regulators and the insurance industry. (4) International Insurers Department (IID) revenues are generated from processing initial applications and annual update financial filings from companies listed in the Quarterly Listing of Alien Insurers. Companies benefit from this listing in their ability to conduct business in jurisdictions relying on the IID and Quarterly Listing of Alien Insurers. The budget is based on 143 filings from companies and Lloyd s Syndicates, five new applications, and two late fees. The projected variance in 2016 results from an increase in the number of applications received through mid The 2017 budget includes a $300 increase in the filing fee, to $4,800 and a $600 increase in the application fee, to $9,600. Fees were last increased in R5: Transaction Filing Fees 43

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53 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage National Meeting Registration Fees (1) $2,095,850 $720,977 $2,160,977 $2,116,435 $1,998,149 ($118,286) -5.6% $2,095,850 $720,977 $2,160,977 $2,116,435 $1,998,149 ($118,286) -5.6% Item Description: Fees received from attendees at NAIC National Meetings. BUDGET ITEM: National Meeting Registration Fees (1) National meeting registration fees are projected based on Exhibit R6-One, and are charged on a multi-tier basis such that early registrations receive a discount and certain incentives are offered to first-time and local attendees. The overage in 2016 is the result of increased registrations for the NAIC 2016 Summer National Meeting. Registrations budgeted for NAIC 2017 Spring and Summer National Meetings are consistent with 2016 projected levels; however, a reduced number of participants is expected for the NAIC 2017 Fall National Meeting. R6: National Meeting Registration Fees 45

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55 Registration after 30 Days Prior $ , , , ,875 First Time, Local Registrants $ , , , ,759 Subtotal ,570 1, , ,306 2,765 2,014,709 Cancellations $360 (12) (4,320) (14) (5,040) (20) (7,200) (46) (16,560) Total Projected Paid Attendance and Revenues 978 $717,250 1,011 $741, $539,106 2,719 $1,998,149 Total Projected Registrations (Paid and Unpaid) 2,050 2,040 1,500 5,590 National Meeting Registrations Denver, CO Total Philadelphia, PA Honolulu, HI Fee Registrants Total Registrants Total Registrants Total Registrants Total Advance Registration $ $645, $668, $489,375 2,487 $1,803, attendance projections were determined by taking into consideration location and past attendance. Prior Year Paid Attendance Statistics: Spring Summer Fall New Orleans 964 San Diego Miami Beach ,027 Phoenix 1,094 Chicago 1,070 Washington, D.C Orlando 926 Louisville 1,072 Washington, D.C Houston 944 Indianapoils 1,027 Washington, D.C New Orleans 918 Atlanta 1,007 Washington, D.C Austin (cxl'd) Philadelphia 1,051 Washington, D.C Denver 871 Seattle 914 Orlando San Diego 787 Minneapolis 883 Washington, D.C. 7,447 6,504 7,024 Average attendance - prior four years ,044 Exhibit R6-One 47

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57 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Education Programs-Online (1) $466,558 $141,276 $431,768 $414,619 $421,543 $6, % International Insurance Forum (2) 67,183 67,150 67,150 90,100 75,050 (15,050) -16.7% CIPR Events (3) 4,011 6,125 (6,125) % Insurance Summit Week (4) 160, , , ,250 (36,450) -16.4% E-Reg Conference (5) 55,862 Financial Summit (5) 94,000 Total $687,614 $369,313 $659,805 $733,544 $682,843 ($50,701) -6.9% The purpose of the Education & Training function within the NAIC is to manage the NAIC s regulatory curriculum. The core focus is on identifying and seizing opportunities to develop just-intime, on-demand, and/or unmanned training and development of products, while assuring the integrity and comprehensiveness of the curriculum as a whole. In the examination of education opportunities, the goal is to achieve a balance between meeting the regulatory training needs of Department of Insurance employees and assisting industry clients through a broader range of compliance training topics. The NAIC educational curriculum is offered to Department of Insurance employees and Consumer Advocates at no charge. Item Description: Revenue from NAIC education and training programs and events. BUDGET ITEM: Education and Training (1) (2) (3) (4) The number of revenue generating courses will remain relatively the same between 2016 and However, educational programs are being re-conceptualized into much shorter courses with highly targeted curriculum. The resulting modules can be combined and reconfigured in various ways to meet the needs of learners. Paid registrations for the 2016 International Insurance Forum fell below expectations as funding for one regulator per state was approved following the adoption of the 2016 budget. The 2017 budget anticipates higher industry attendance than The 2016 budget anticipated a nominal fee for industry attendees at CIPR National Meeting Events to help defray the cost of providing a meal. However, the scheduled time for these events was changed such that it no longer spanned the lunch hour, eliminating the need to charge a fee to cover meal service. In 2016 the NAIC combined several stand alone events, (1) E-Reg Conference; (2) Financial Summit; (3) PIO Forum; (4) Market Regulation Summit; and (5) CIPR Symposium, to establish the NAIC Insurance Summit. This week of educational opportunities for regulators, consumers, industry, and others provides a more effective learning platform, is more cost effective, and delivers a more collaborative environment for participants. Registrations for the Insurance Summit did not meet expectations in the first year but success of the 2016 program is expected to generate additional participation in (5) The NAIC E-Reg Conference and Financial Summit were combined with other NAIC programs to provide the Insurance Summit Week. See item (4). R7: Education and Training 49

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59 Item Description: Revenues received from the license and services agreements with the National Insurance Producer Registry (NIPR) and Interstate Insurance Product Regulation Commission (IIPRC) /30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage License Fees (1) $11,503,594 $6,412,737 $12,330,654 $12,024,757 $12,730,124 $705, % Administrative Service Fees (2) 1,289, ,500 1,376,792 1,374,000 1,322,344 (51,656) -3.8% System Usage Fees (3) 191,400 98, , , ,924 (1,743) -0.7% Total $12,984,007 $7,173,726 $13,931,068 $13,647,424 $14,299,392 $651, % Administrative services and licenses fees are derived from services agreements between the NAIC and NIPR and the NAIC and IIPRC. The license and services agreement between NAIC and NIPR, including licenses fees, administrative service fees, and system usage fees began on January 1, 2012 and expires on December 31, This agreement has been extended by mutual agreement through the end of The services agreement between the NAIC and IIPRC began June 1, 2007 and expired December 31, This agreement continues to be renewed for one-year periods, currently expiring December 31, It is NAIC's intention to continue renewing the existing agreement until IIPRC becomes self sustainable. The value of NAIC/NIPR services to the industry are significant. By licensing the NAIC's State Producer Licensing Database, NIPR is able to deliver a national, aggregated database of producer information. Insurance companies are able to leverage NIPR's Producer Database (PDB) as a centralized, one-stop shop to perform research of all licensed producer records, which is critical in saving them time and money in ensuring the appropriate licensing and appointment of producers selling business on their behalf, and critical to the companies' compliance with state insurance laws. Without the centralized database, this research would have to occur on a state by state basis, significantly increasing the amount of time and cost of compliance. The NAIC believes this illustrates tremendous value and cost savings to insurers managing the cost of compliance. Further, NIPR's products and services have been embedded into the automated workflow processes of many insurance carriers. The PDB is now the data source for companies to synchronize their producer data systems, which automates data entry and gets the carrier closer to the producer's real time expectations. Use of the data supports compliance management and eliminates costly errors. Specific to the individual producer licensing transactions offered by NIPR, a non-resident producer wishing to be licensed in a large number of non-resident states (e.g., 50 states) is able to leverage NIPR's non-resident licensing (NRL) transaction functionality to submit one electronic, uniform application at a current maximum price of $6.18 for each of the 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands, and receive the approval or declination of the application generally within 48 hours. Absent NIPR's web-based option, the producer would have been required to submit paper applications via U.S. Mail (perhaps by fax in some states) to each of the 50 states and territories. Value propositions include: (1) lower cost to the producer to submit the uniform application through NIPR's system compared to the cost of (i) hard copy mailings and (ii) the potential cost of preparing multiple required forms in cases where the uniform application is not accepted manually; and (2) reduced administrative cost to the producer in monitoring the status of the hard copy applications versus receiving the electronic notification of approval in 48 hours. BUDGET ITEM: Administrative Services/License Fees (1) Pursuant to the 2012 license and services agreement, the NAIC receives 38% of certain NIPR revenues, which represents a license for NIPR to use the NAIC's producer data. The 2016 projection and 2017 budget are based on revenue projections provided by NIPR. The projected increase over the 2016 budget is attributable to an increase in Producer Database Detail Report, Appointment Renewal, and Termination fees. The 2017 budget is consistent with these expectations. (2) (3) Administrative service fees includes the actual cost of services provided to NIPR and $125,000 for services provided to IIPRC. These services include administrative support services, facilities, and equipment provided by the NAIC to these entities. The increase in 2016 reflects NIPR's assumption of additional square footage in the NAIC Central Office. The slight decrease in 2017 relates to NIPR's continued focus on managing their use of NAIC provided services. System usage fees represent NIPR's reimbursement for their proportional share of NAIC's ongoing investment in the infrastructure of the State Producer Licensing (SPL) database. These fees include storage, software licenses, servers, and their maintenance costs. The increase in 2016 is directly related to cybersecurity initiatives, which will stabilize in R8: Administrative Services/License Fees 51

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61 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Other Revenue (1) $45,810 $22,075 $94,575 $36,750 $53,567 $16, % Item Description: Revenues received from business operations not otherwise classified. BUDGET ITEM: Other Revenue (1) The 2017 budget consists of (1) $32,567 for a tax rebate related to the Kansas City leasehold; (2) $12,000 for a service level agreement with the New York State Insurance Department to accept supplemental filings to the Annual Statement submitted to the Department by New York licensed insurers through the NAIC s internet filing application; (3) $4,500 for maintenance of SBS modifications to facilitate processing of transactions in a third party product; and (4) $4,500 for software maintenance fees. The 2016 projection includes $32,000 for a unbudgeted, onetime data inclusion request, $15,800 in additional 2015 leasehold tax rebates, and the adjustment of anticipated 2016 rebate to actuals received for The increase in the 2017 budget is related to the increased level of tax rebates related to the Kansas City leasehold. R9: Other Revenue 53

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63 Expense Detail

64 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Salaries - Existing Employees (1) $45,374,603 $22,737,683 $46,255,866 $48,607,495 $48,653,407 $45, % Turnover Factor (2) (670,893) (823,706) (152,813) 22.8% Salaries - New Employees (3) 100.0% Salaries - Promotions and Adjustments (4) 486, , % Overtime (5) 107,838 51,038 87,439 80,575 73,737 (6,837) -8.5% Total $45,482,441 $22,788,721 $46,343,305 $48,017,177 $48,389,975 $372, % In addition to the 2.0% increase for existing staff salaries, the salary line also includes increases to include budgeted funding for positions approved during the prior budget cycle with various hire dates throughout BUDGET ITEM: Salaries Item Description: Includes salary, a turnover factor, a budget for promotions and adjustments, and overtime for all NAIC employees. (1) The NAIC generally bases its annual budgeted salary increase on local and national salary surveys such as the William Mercer Compensation Planning Survey, the Hay Group Survey, and the World at Work Salary Budget Survey. While these surveys show increases on the local and national level to be in the 3.0% range, the NAIC continues to be mindful of continuing state budget challenges, and budgeted a 2.0% overall increase in This is a 0.7% reduction from the past five years, reducing the 2017 budget by nearly $334,000. The NAIC will generate salary savings in fiscal year 2016 as a result of open positions from January 1 through June 30 and those expected to be open for the remainder of the year, some of which have remained open for longer than usual due to management's priority-based review of open NAIC positions in an effort to thoroughly assess the needs of each position without impacting critical membership services. (2) (3) The 2017 budget includes no new employee requests. (4) (5) As of June 30, 2016, the NAIC has approved full-time equivalent (FTE) positions. The turnover factor anticipates a turnover percentage of 10% with an average vacancy duration of 9.1 weeks. These factors have been changed from 9.1% and 9.2 weeks in the 2016 budget. While the average vacancy duration is relatively unchanged from the prior year it varies significantly by area of expertise. A position within one of the NAIC's more specialized areas, such as technical, financial, actuarial, etc., can remain open as long as 18 weeks. Therefore, the actual turnover percentage and vacancy duration is applied by department, giving a more valid projection than the application of the same average percent and duration to each department. The increase in budgeted turnover savings is related to the increase in the turnover percent from 9.1% to 10.0%, the increase in the 2017 salary base discussed above, and the inclusion of headcount added during the 2016 budget process to the turnover calculation. The NAIC uses a promotions and adjustments line for the purpose of retaining and attracting qualified individuals for employment with the NAIC. Given the unique qualifications required by the NAIC for many positions, it is sometimes difficult to retain or fill valuable resources at NAIC salary rates. The promotions and adjustments budget provides the NAIC an opportunity to remain competitive in the market place and retain valuable resources. The budget remains consistent with the prior year at 1.0% of budgeted salaries. The overtime budget reflects the amount of overtime required to support NAIC functions during the year. Examples include (1) additional hours worked by desktop computer technicians during software rollouts, outages, and unexpected absences by team members; (2) travel time and additional hours for administrative staff who support the three NAIC National Meetings and other NAIC events during the year; (3) additional hours worked by Help Desk staff to address backlogs; and (4) additional hours worked by staff during state implementations. The over budget variance in 2016 reflects the unexpected need for overtime hours in the Legal and Financial Regulatory Services Divisions, as well as staff incurring unbudgeted overtime in support of Insurance Summit Week, a new program in The reduction in 2017 reflects the elimination of overtime for SBS implementations and NAIC's desire to evenly distribute responsibilities, eliminating the need for overtime. 55 E1a: Salaries

65 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Salaries - Existing Employees (1) $11,650,063 $9,212,953 $3,723,437 $14,967,412 $3,008,329 $6,091,213 $48,653,407 Turnover Factor (2) (140,193) (64,945) (57,357) (274,516) (32,342) (254,353) (823,706) Salaries - New Employees (3) Salaries - Promotions and Adjustments (4) 486, ,537 Overtime (5) 31,684 8,640 29, ,000 73,737 Total $11,541,554 $9,643,185 $3,695,773 $14,693,616 $2,975,987 $5,839,860 $48,389,975 BUDGET ITEM: Salaries (continued from E1a) E1b: Salaries 56

66 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage National Meetings (1) $44,584 $13,804 $45,804 $46,037 $58,609 $12, % Interns (2) 358, , , , ,517 (28,421) -7.1% Other (3) 40,513 36,894 55,794 6,400 5,938 (462) -7.2% Total $443,379 $210,436 $456,735 $450,375 $434,064 ($16,311) -3.6% 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total National Meetings (1) $58,609 $58,609 Interns (2) $369, ,517 Other (3) 4,000 1,938 5,938 Total $373,517 $60,547 $434,064 BUDGET ITEM: Temporary Personnel Item Description: Fees paid to outside agencies and wages paid to interns for additional personnel during peak work periods. (1) Temporary resources for national meetings are used for security and door monitoring purposes. Hotel configurations and meeting schedules dictate the amount of temporary services required at each national meeting. (2) (3) The NAIC internship program is designed to complement resource needs in various high priority areas. Some of the projects slated for intern assignment include SBS systems testing; SERFF product support; NAIC Help Desk customer service support; support for the Human Resources Division; support for the NAIC's digital library collection; and legal research. The use of interns allows the NAIC to find and attract temporary resources, in a competitive marketplace, resulting in a very successful program for the NAIC with respect to identifying and retaining qualified candidates for full-time positions. The below budget performance in this line projected for 2016 is related to difficulty in finding qualified resources for specialized areas. The reduction in requested resources in 2017 is generated by synergies gained through the consolidation of two technology areas within the NAIC. Other temporary personnel are budgeted to provide additional resources during brief periods of increased demand or unusual vacancies. Actual expenses incurred in 2015 and 2016 represent the engagement of temporary staff to assist during unexpected medical leaves of absence and long-term vacancies in positions with full-time daily responsibilities in departments with only a few staff members, such as Human Resources and Finance. The 2017 budget does not anticipate the need for these resources. 57 E2: Temporary Personnel

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68 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage FICA (1) $2,954,184 $1,774,804 $3,166,701 $3,206,448 $3,292,766 $86, % FICA Turnover (1) (48,534) (57,534) (9,000) 18.5% Unemployment Compensation (2) 95,916 83,914 90,416 96,153 92,325 (3,828) -4.0% Total $3,050,100 $1,858,718 $3,257,117 $3,254,067 $3,327,557 $73, % The turnover factor applied to annual salaries is also applied to the payroll taxes related to those salaries, using turnover and vacancy rates consistent with those described in the salary section of this budget proposal. Actual and projected turnover is reflected in the salary line. The increase in this budget line is to reflect an increase in the turnover factor, as discussed in the salary section Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description and Support Operations Members Affairs Services Services Total FICA (1) $881,902 $541,199 $281,794 $930,454 $203,833 $453,584 $3,292,766 FICA Turnover (1) (10,745) (3,212) (4,334) (17,396) (2,390) (19,457) (57,534) Unemployment Compensation (2) 13,234 13,815 4,605 51,621 4,116 4,934 92,325 Total $884,391 $551,802 $282,065 $964,679 $205,559 $439,061 $3,327,557 Item Description: FICA and unemployment compensation costs incurred for all NAIC employees and interns. BUDGET ITEM: Payroll Taxes (1) FICA expense is on budget in 2016 after inclusion of FICA turnover. The increase in budgeted FICA for 2017 is related to the increase in the 2017 salary budget as described in the salary section of this budget proposal and annualizing employees added as part of the 2016 budget process. (2) Unemployment compensation has been budgeted on the first $13,000 of each individual salary in Missouri, the first $9,000 in Washington, D.C., and the first $10,500 in New York. The decrease in 2016 projected spending reflects savings from employee turnover. 59 E3: Payroll Taxes

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70 Item Description: Includes all pension, health insurance, life, and disability insurance paid by the NAIC for its employees, as well as programs designed to reduce health insurance costs and retain NAIC employees /30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Pension (1) $2,311,806 $1,382,131 $3,224,472 $3,169,443 $3,330,084 $160, % Health Benefits (2) 4,727,239 2,562,122 5,209,427 5,140,771 4,494,321 (646,450) -12.6% Group Life and Disability (3) 321, , , , ,387 (82,830) -22.7% Employee Relations (4) 745, , , , , , % Total $8,106,262 $4,466,284 $9,402,489 $9,093,141 $8,791,768 ($301,373) -3.3% Also included in this line is the NAIC s defined benefit plan (DBP) with a 2017 budget of $300,000 for estimated settlement accounting for this plan, which represents the best available measurement of additional costs to be incurred if several of the long-term employees in this plan choose to retire during The 2017 budget for this plan is consistent with the 2016 and 2015 budgets. NAIC management works closely with the plan s actuary and the NAIC Internal Administration (EX1) Subcommittee to carefully review plan performance in relation to underlying plan assumptions Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Pension (1) $3,330,084 $3,330,084 Health Benefits (2) 4,494,321 4,494,321 Group Life and Disability (3) 282, ,387 Employee Relations (4) 675,376 $9, ,976 Total $8,782,168 $9,600 $8,791,768 BUDGET ITEM: Employee Benefits (1) Pension includes the defined contribution plan (DCP) to which the NAIC makes a 3% discretionary contribution of each employee s annual salary and matches an employee s contribution up to 5.5%, for an estimated $3.0 million in This expense is budgeted to increase $160,641 from the 2016 budget based on (1) increased salary base in 2017 and (2) current staff contribution rates. (2) (3) (4) Employee health benefits are based upon the number of current employees and their benefit selections. The decrease in 2017 is due to a change in NAIC health care coverage to a self-insured plan. This change will generate several hundred thousand dollars in savings annually. As with any self-insured plan actual cost will vary annually based on employee claims. The NAIC currently has several programs in place to assist in reducing the number and severity of health care claims. Examples of these programs are employee biometric health screenings, Wellness Days (Yoga, 5k Walk/Run, Bike Rides), and Corporate Challenge participation. If the NAIC had chosen to remain with the existing health care plan the cost in 2017 would have exceeded the $5.2 million expected expense in Going to a self-insured plan is expected to decrease 2017 health care coverage by more than $600,000. Group life and disability benefits are based on the number of employees, salaries, and employee demographics. The decrease in spending in 2016 and reduced 2017 budget is related to a change in employee demographics, partially offset by the budgeted increase in salaries. Employee relations includes (1) service awards; (2) performance recognition programs; (3) incidental employee functions such as Employee Appreciation Day, NAIC Wellness Day, and Corporate Challenge participation; and (4) annual holiday luncheons for each of the three NAIC offices. The 2017 budget has been increased to reflect actual spending in this area and management's continued confidence in the benefit of these programs in creating a positive work environment and the success of these events in keeping the NAIC turnover rate below the market. 61 E4: Employee Benefits

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72 Item Description: Includes fees for seminars, professional training courses, and professional association memberships paid by the NAIC, including dues for the NAIC's membership in the International Association of Insurance Supervisors (IAIS) /30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Education Reimbursements (1) $37,270 $16,591 $36,237 $43,670 $54,406 $10, % Professional Training (2) 326, , , , ,468 (62,021) -12.4% Professional Association Dues-Staff (3) 66,941 45,404 70,542 84,510 79,443 (5,067) -6.0% Professional Association Dues-NAIC (4) 369, , , , ,500 59, % Total $800,392 $686,369 $964,860 $1,048,669 $1,051,817 $3, % 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Education Reimbursements (1) $19,010 $3,097 $1,250 $15,261 $12,463 $3,325 $54,406 Professional Training (2) 189,814 32,644 $16,989 82,435 52,935 64, ,468 Professional Association Dues-Staff (3) 5,495 26,903 7,106 28,126 8,977 2,836 79,443 Professional Association Dues-NAIC (4) 4, , ,500 Total $214,319 $66,644 $25,345 $600,322 $74,375 $70,812 $1,051,817 BUDGET ITEM: Employee Development and Association Dues (1) (2) (3) (4) Educational reimbursements carry an annual cap per employee, are only available to those employees who are actively pursuing college degrees or professional designations, and only apply toward tuition for courses that specifically relate to and enhance the employee s job knowledge and/or skills for the benefit of the NAIC. The 2016 variance from budget reflects fewer reimbursements than anticipated in the 2016 budget due to employee workloads and departures. The 2017 budget demonstrates the NAIC's continued commitment to the development of employee skills to further the work of state regulation and the NAIC. Professional training represents registration fees for professional seminars, trade workshops, and education programs attended by NAIC employees who require specialized training or are required to receive continuing education to maintain professional licenses or designations. The 2016 budget included an increase in training required to keep pace with new technology deployments, including those related to cybersecurity; new systems currently under development, such as State Based Systems (SBS) rewrite and VISION; and training for new employees added as part of the 2016 budget process. The under budget variance in 2016 is primarily related to changes in staff responsibilities due to significant reorganizations within an NAIC division and volume discounts negotiated during The continuation of these savings and the completion of several major projects during 2016 account for the reduction in the 2017 budget. The 2017 budget includes employee memberships in various professional associations, such as the American Society of Association Executives, American Bar Association, local and state bar associations, the American Institute of Certified Public Accountants, and state CPA associations, among others. Professional Association dues includes $474,500 for the NAIC s annual membership in the International Association of Insurance Supervisors (IAIS), an increase of $58,700 over the dues paid in Additionally, this line includes Association participation in local business organizations. 63 E5: Employee Development and Association Dues

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74 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Legal (1) $548,122 $148,979 $401,015 $500,000 $500, % Accreditation Team (2) 782, , , ,487 1,141,400 $213, % Royalties (3) 5,479, ,500 2,245,000 2,120,000 2,062,500 (57,500) 100.0% Benefits (4) 182, , , , ,090 9, % Investment/Banking (5) 655, , , , ,521 (24,671) -3.5% Audit (6) 412,540 89, , , ,240 (78,063) -22.9% Consumer Awareness (7) 1,104, ,439 1,328,737 1,323,000 1,098,000 (225,000) -17.0% Implementation/Upgrade (8) 2,258, ,846 1,443,529 1,349, ,014 (731,013) -54.2% Other Professional Services (9) 1,613,183 1,038,820 4,630,898 4,022,503 3,896,774 (125,729) -3.1% Total $13,037,083 $3,581,774 $12,161,065 $11,541,024 $10,522,539 ($1,018,485) -8.8% BUDGET ITEM: Professional Services Item Description: Fees paid to outside consultants for legal, actuarial, information technology, and other consulting services. (1) (2) (3) Royalties are paid to financial modelers based on CMBS and/or RMBS dataset sales to third party financial institutions. The 2016 projection will exceed budget due to an unexpected dataset sale in March. (4) (5) (6) (7) (8) The outside legal counsel budget reflects anticipated legal expenses to assist the Legal Division in: (1) needed expertise to assist in complex and specialized regulatory issues and projects; (2) labor and employment issues; (3) corporate matters relating to contracts, tax, and benefits; and (4) amicus briefs filed at the request of NAIC members. The NAIC contracts with independent teams to conduct reviews of insurance departments seeking accreditation under the NAIC Financial Regulation Standards and Accreditation program. The budget is based on the number of examinations to be conducted, which fluctuates from year to year. The 2017 budget assumes 12 states undergoing full reviews, three more than 2016; 15 states undergoing pre-reviews, an increase of three over 2016; and one re-review, a decrease of one from This line also includes training for the independent team members to discuss program guidelines, standards, review team practices, changes to the program, and NAIC tools used by members to comply with the program. The increase in the 2017 budget is primarily related to an increased number of full and pre-reviews. Consulting and support services in the benefits category include assistance with (1) administration of the Defined Contribution Retirement Plan, (2) actuarial services for the Defined Benefit Retirement Plan, (3) benefit renewals, and (4) employee wellness plans. Investment management fees of $588,084 to the NAIC's investment managers and adviser and $101,437 in banking fees are included in this expense line. The decrease in fees for 2016 is primarily related to decreases to the investment portfolio due to market value adjustments. These decreases are extrapolated through the end of There are no planned infusions of cash into the investment portfolio in 2017 as a result of expenditures for major system rewrites through the end of Audit fees includes amounts paid to independent accounting, accrediting, and information technology firms for (1) annual financial examination ($43,240); (2) accreditation of the NAIC Insurance Regulator Professional Designation Program ($10,000); (3) Statement on Standards for Attestation Engagements (SSAE) No. 16, Reporting on Controls at a Service Organization (SOC) engagements, including a SOC 1 audit and SOC 2 readiness assessment ($75,000); (4) systems security audits ($110,000); and (5) other systems examinations ($24,000). The 2016 budget included a SOC 2 readiness assessment that has been delayed to allow for a competitive bid process to select a new firm to perform SOC 1 examinations for a three year period beginning with the 2016 examination. This firm will also perform the SOC 2 readiness review in the first quarter of The reduction in the 2017 budget is the result of a more competitive price on cybersecurity audits. The 2017 budget for consumer awareness contains $898,000 in public relations consulting services to support the NAIC's core consumer awareness and education media campaign. It also includes $200,000 for the NAIC Educational Outreach Program, a continuation of the 2014 program designed to educate domestic and international policymakers about the actual workings of the state-based regulatory system in the U.S. The 2017 budget for this program was reduced by half, to $200,000. The Implementation/Upgrade category contains amounts budgeted for consulting and other professional services related to the upgrade of software ($147,550) and State Based Systems (SBS) state implementations ($287,120). Additionally, this category includes $183,300 in consulting dollars for the implementation of the IT Service Management Tool (See Fiscal Impact 4). Actual spending for 2016 is projected to exceed budget by nearly $173,000. The over budget variance is driven by SBS implementation costs ($275,000) for post implementation support and additional costs for a state implementation that began in This over budget variance is partially offset by cost savings on the implementation of two projects-specification Generator ($97,300) and File Repository Rewrite ($122,850). The Specification Generator project was redefined in mid and the File Repository Rewrite has been delayed given this systems reliance on other systems, which are currently under consideration for upgrade. The reduction in the 2017 budget is the result of the completion of the Specification Generator and SERFF Rewrite Evaluation projects. 65 E6a: Professional Services

75 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Legal (1) $500,000 $500,000 Accreditation Team (2) $1,141,400 1,141,400 Royalties (3) 2,062,500 2,062,500 Benefits (4) 254, ,090 Investment/Banking (5) 689, ,521 Audit (6) $209,000 43,240 $10, ,240 Consumer Awareness (7) 200, ,000 1,098,000 Implementation/Upgrade (8) 330,894 $287, ,014 Other Professional Services (9) 493, , ,276 2,974,400 $45, ,896,774 Total $1,033,103 $1,819,417 $1,158,276 $6,178,300 $45,904 $287,539 $10,522,539 BUDGET ITEM: Professional Services (continued from E6a) (9) Other professional services includes (1) $66,800 for the NAIC s commercial insurance brokerage fees; (2) $162,100 for expenses related to registration software license fees, transportation, facilities, speakers, and photographers for NAIC National Meetings, 2017 Commissioners Conference, NAIC All Commissioner DC Fly-In, Executive (EX) Committee Interim and Mid-Year Roundtable Meeting, Insurance Summit, and International Insurance Forum; (3) $143,600 in fees for the administration, lease, and oversight of the co-location facility and services; (4) $2,950,000 in data modeling service fees for the modeling of CMBS and RMBS CUSIPs owned by insurers; and (5) $87,900 in news and video production services. The 2016 over budget projection in other professional services is due primarily to over budget expenditures on the Variable Annuity and Principle-Based Reserving (PBR) project, the timing of the actuarial credentialing project, and executive consulting services. The decrease in this expense line in 2017 is related to the completion of several major projects in E6b: Professional Services 66

76 Item Description: Fees paid to outside providers for computer processing, payroll processing, credit card processing, registrations for national meetings, education programs and other NAIC events, and security data feeds from rating agencies /30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Database Network (1) $423,026 $222,790 $457,951 $535,589 $514,513 ($21,076) -3.9% Securities Data Fees (2) 925, ,350 1,206,251 1,102,285 1,175,729 73, % Credit Card Fees (3) 304, , , , ,071 40, % Other (4) 479, ,920 1,219, ,602 1,252, , % Total $2,132,205 $1,572,899 $3,216,441 $2,927,575 $3,309,390 $381, % Technology 2017 Budget by Area Systems and Financial Market Products Support Business Services to Regulatory Regulatory and Description Operations Members Affairs Services Services Total Database Network (1) $497,878 $15,015 $1,620 $514,513 Securities Data Fees (2) $1,168,229 7,500 1,175,729 Credit Card Fees (3) 55,797 $60,430 51,813 $199, ,071 Other (4) 106, , ,555 1,252,078 Total $497,878 $177,113 $246,652 $2,179,596 $9,120 $199,031 $3,309,390 BUDGET ITEM: Computer Services (1) (2) (3) (4) Database Network expenses include (1) Internet connectivity ($119,556); (2) New York and Washington, D.C. office circuits and backups to the Kansas City office ($114,600); (3) wireless devices ($135,600); and (4) data line circuits for data replication and network synchronization between the NAIC s co-location site and all three NAIC offices ($128,100). The under budget variance in 2016 is related to the timing of security related initiatives. Securities data fees represent the purchase of NRSRO ratings and security data feeds used to produce SVO designations for NRSRO-rated securities, including municipal bond pricing, corporate bond pricing, Bloomberg, and Moody s. These data feeds are also used to populate the AVS database with NRSRO ratings for use by AVS customers in preparing certain investment schedules. Credit card fees include charges from vendors and banks to settle NAIC customer credit card transactions and deposit funds in the NAIC bank account. The over budget performance in 2016 relates to an increase in the payment of invoices via credit card. The 2017 budget recognizes the continuation of this trend. Other computer services included in the 2017 budget represent: (1) access to credit reports, industry/sector analysis, peer searches, and analysis methodologies for credit analysts ($857,320); (2) fees for use of an online learning platform ($80,500); (3) the cost of outsourcing the preparation of NAIC s payroll ($72,300); (4) fees for processing online registrations for national meetings and other NAIC events ($18,900) and education programs ($31,000); (5) fees for powering the national meeting mobile agenda application ($19,000); (6) fees for the use of a library cataloging service ($16,860); (7) Committee on Uniform Securities Identification Procedures (CUSIP) and International Securities Identification Directory (ISID) royalty payments ($102,200); (8) FOLIO royalty payments ($16,750); (9) webinar connectivity for education programs ($20,000); and (10) employee based services ($17,300). The ISID and FOLIO royalties are paid as a result of NAIC sales of products that leverage CUSIP, ISID, and FOLIO data and/or technology. The increase in 2017 is related to the addition of two employee based services and the addition of the national meeting mobile application. The significant increase in the 2016 projection and 2017 budget are related to the need for additional data services for financial analysts. 67 E7: Computer Services

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78 Item Description: Includes airfare, lodging, meals, and incidental travel expenses incurred by the NAIC staff, commissioners and their representatives, funded consumer representatives, and Analyst/Exam Teams. The sales and marketing expense line includes registration and incidental fees charged by organizations for participation in their trade show as well as travel cost for NAIC staff members to the selected trade show sites /30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Staff Travel (1) $1,316,840 $491,185 $1,344,063 $1,593,274 $1,665,051 $71, % Non-Staff Travel (2) 369,484 32, , , ,480 (14,669) -5.4% Sales and Marketing Travel (3) 72,183 18,460 74, , ,119 (964) -1.0% Commissioner/Regulator Travel (4) 1,558,452 1,028,615 1,825,451 1,983,712 1,950,755 (32,957) -1.7% International Travel (5) 921, ,400 1,045,839 1,095,202 1,128,669 33, % Regulatory Disaster Assistance Travel (6) 50,000 50,000 50, % Consumer Funding (7) 102,928 38, , , ,017 (154) -0.1% Analyst/Exam Teams (8) 109,245 77, , , ,039 (10,735) -7.6% Total $4,450,152 $2,040,649 $4,822,033 $5,362,365 $5,408,131 $45, % Note: Reclassifications have been made in travel and interim meetings categories to provide additional transparency in financial reporting for these services. Any miscellaneous meals, room rental, or beverage charges for small interim meetings (e.g., Valuation of Securities Task Force) are now coded to interim meetings included in the national meetings, interim meetings, and NAIC events category, leaving the non-staff travel line to represent only travel and transportation costs for regulators attending those events. Actuals, projections and budgets for 2016 have been restated for comparison purposes. (6) Projected expense represents NAIC's commitment to fund travel for volunteer regulators to support disaster relief efforts that may occur in the latter half of The 2017 budget of $50,000 is to ensure needs of this nature will be met, should they arise, in the coming year. BUDGET ITEM: Travel (1) (2) (3) (4) (5) Staff travel includes: (1) travel to NAIC national meetings for committee staff support; (2) interim committee meetings; (3) state visits; and (4) travel to professional seminars and training programs. The under budget variance for 2016 is due to positions with budgeted travel being open, including the Chief Executive Officer, and an increase in staff workloads given the numerous high profile projects underway. Additions to the budget in 2017 include SBS state implementation for two new states ($31,100) and training on the new SBS system ($89,700). In 2016 the SBS systems training was conducted by funding regulator travel to the Kansas City office. Changing the training approach to send NAIC staff to states being trained will save approximately $40,000 in The 2017 budget for travel that is not related to NAIC staff includes: (1) $168,000 for travel expenses for state legislators to attend a 2017 NAIC National Meeting and (2) $80,600 for travel expenses for international regulators sponsored as part of the NAIC international fellows program. Sales and marketing travel represents travel and trade show expenses related to the marketing of NAIC publications, insurance data products, SERFF, SBS, and NAIC education and training programs. The under budget variance in 2016 is related to reduced participation at trade shows and conferences for the purpose of marketing by SBS staff who were heavily involved in the implementation of states to the new SBS platform. The 2017 budget for this line anticipates a return to the 2016 budgeted level of participation in these events by SBS staff. Commissioner travel includes: (1) $295,000 in domestic travel for Commissioners and senior regulators to participate in such events as Congressional testimony, NAIC interim meetings, trade association meetings, speaking engagements and conferences, all for the purpose of conducting NAIC business; (2) $600,000 to sponsor Commissioner and senior regulator travel to all 2017 NAIC national meetings; (3) $145,700 to fund Commissioner travel to the annual Commissioners Conference held for strategic planning purposes at the beginning of each year; (4) $76,000 for Commissioner travel to two interim meetings of the membership in 2017; (5) $58,300 to host travel to Valuation of Securities (VOS) Task Force meetings with the Capital Markets and Investments Analysis Office; (6) $24,700 for travel associated with support of the Financial Analysis Working Group (FAWG); (7) $24,500 for the U.S.-Asia Pacific International Forum; (8) $490,600 to fund regulator travel to the NAIC Insurance Summit; (9) $30,600 for Commissioner travel to the annual Committee Assignment Meeting; and (10) $135,900 to fund Commissioner travel to the Commissioners Fly-In, Executive (EX) Committee Interim Meeting and All Commissioner Roundtable, and International Insurance Forum. Expenses for this category of travel will be under budget in 2016 as a result of less than budgeted travel reimbursement requests for the NAIC Insurance Summit. The 2017 budget anticipates participant funding at the budgeted level for 2016, partially offset by a $135,738 reduction in funding travel to bring regulators to KC for a train the trainer event on the new SBS system. This approach has been replaced by staff travel of $89,700 to conduct training in each state being trained, saving over $40,000 in travel funding for 2017 for this project. International travel includes $520,000 for regulator travel and participation in meetings such as the International Association of Insurance Supervisors (IAIS), the Organization for Economic Cooperation and Development (OECD), and the International Accounting Standards Board (IASB), among many others. The remainder is for NAIC staff travel to support regulators during certain international regulatory meetings. The projected under budget variance for 2016 demonstrates the NAIC's concerted effort to keep tight control on spending in this area while continuing its leadership role in the IAIS and other international forums. NAIC members are committed to ensuring U.S. regulatory processes and practices are aligned with international standard development and coordinated with activities of the Federal Insurance Office. The slight increase in the 2017 is a reflection of the increasing cost of international travel. 69 E8a: Travel

79 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Staff Travel (1) $122,189 $272,429 $294,460 $487,711 $234,078 $254,184 $1,665,051 Non-Staff Travel (2) ,400 2,250 80, , ,480 Sales and Marketing Travel (3) 3,209 96, ,119 Commissioner/Regulator Travel (4) 449,100 1,372, ,004 15,392 1,950,755 International Travel (5) 600,000 10, ,645 8,892 1,128,669 Regulatory Disaster Assistance Travel (6) 50,000 50,000 Consumer Funding (7) 126, ,017 Analyst/Exam Teams (8) 131, ,039 Total $122,489 $1,541,929 $1,682,311 $1,322,999 $384,829 $353,574 $5,408,131 BUDGET ITEM: Travel (continued from E8a) (7) The consumer funding budget is allocated for the NAIC's funded consumer representatives to attend national meetings, participate in NAIC conference calls, and pay for the NAIC Consumer Board of Trustees luncheon. The 2016 projection is nearly $18,100 under budget due to schedule conflicts, proximity of participants to national meeting sites, and limited use of international travel funding. Consistent with prior years, the budget for consumer funding includes approximately $6,200 to cover international travel. (8) Analyst Team expenses represent: (1) travel and transportation expenses for up to 15 state regulators to participate in two sessions of the Analyst Team project ($54,560) and (2) salaries paid for regulators from those states that require salary reimbursement for analyst participation in the program ($11,100). Participating regulator salaries are reimbursed at a rate not to exceed the Senior Insurance Examiner CFE rate. Exam Team expenses of $65,370 represent travel and transportation expenses for up to 14 state regulators to participate in four sessions of the Exam Team project. The variance in 2016 is related to the ability to reduce the number of analysts during the final week of the project, lack of salary reimbursement necessity from participating states, and a slower than expected start to the Exam Team project. The 2017 budget includes a portion of the savings generated from the 2016 Analyst Team project but includes full participation in the Exam Team project. E8b: Travel 70

80 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Rent (1) $2,537,650 $1,373,360 $2,742,558 $2,868,568 $2,768,110 ($100,458) -3.5% Utilities & Parking (2) 778, , ,512 1,028, ,868 (156,829) -15.2% Warehouse (3) 23,773 10,406 23,342 31,205 24,540 (6,665) -21.4% Total $3,339,578 $1,801,363 $3,603,412 $3,928,470 $3,664,518 ($263,951) -6.7% Rent expense for the Executive Office in Washington, D.C. in the Hall of the States is $63,764 monthly for 11,512 rentable square feet ($67.47 per square foot), with a lease expiration of January 31, Rent expense for Capital Markets and Investment Analysis Office in New York City, NY at One New York Plaza is $55,747 monthly for 18,844 rentable square feet ($35.50 per square foot average), with a lease expiration of June 30, In accordance with Generally Accepted Accounting Principles (GAAP), the total cost of each lease is recorded as expense evenly throughout the life of the lease. The annual budget for rent expense is derived by calculating the total cost of the lease, including scheduled increases in rental payments and incentive allowances, and dividing by the number of years covered by the lease Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Rent (1) $5,475 $2,702,260 $12,550 $47,300 $525 $2,768,110 Utilities & Parking (2) 853,304 18, ,868 Warehouse (3) 20,340 4,200 24,540 Total $25,815 $3,559,764 $31,114 $47,300 $525 $3,664,518 BUDGET ITEM: Occupancy Item Description: Includes all rent, building operating expenses, maintenance fees, cleaning, and warehouse storage fees incurred by all NAIC offices. (1) Rent expense for the Central Office in Kansas City, MO at Town Pavilion is $201,906 monthly for 146,283 rentable square feet ($16.56 per square foot), with a lease expiration of January 31, The lease at Town Pavilion also includes incentive allowances reimbursed to the NAIC for leasehold improvements, furniture and equipment, and base rent differential. Generally Accepted Accounting Principles (GAAP) requires leasehold incentive allowances to be recorded on the balance sheet and amortized against rent expense over the life of the lease (12 years). This incentive allowance reduces base rent by $100,114 per month. (2) The variance in 2016 is related to less than expected Kansas City leasehold common area maintenance expenses partially due to a credit for 2015 charges and anticipated repairs to the building which were not required. The 2017 budget is based on projections for 2016 with a slight increase to accommodate planned building improvements. (3) The budgeting decrease in warehouse expenses for 2016 and 2017 is related to less than anticipated records management storage needs and a reduction in warehouse storage needs for hardcopy publications. 71 E9: Occupancy

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82 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Equipment Rental (1) $132,158 $76,749 $164,905 $214,181 $192,545 ($21,636) -10.1% National Meeting Equipment Rental (2) 9,054 3,173 13,163 13,636 29,492 15, % Equipment, Hardware, & Software Maintenance (3) 3,146,474 1,677,699 3,454,502 3,820,460 3,855,554 35, % Total $3,287,686 $1,757,621 $3,632,570 $4,048,277 $4,077,591 $29, % 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Equipment Rental (1) $131,675 $56,074 $2,000 $2,796 $192,545 National Meeting Equipment Rental (2) 29,492 29,492 Equipment, Hardware, & Software Maintenance (3) 3,680, ,144 3,855,554 Total $3,812,085 $231,218 $31,492 $2,796 $4,077,591 BUDGET ITEM: Equipment Rental and Maintenance Item Description: Rental and maintenance fees for office equipment, hardware, and software, including personal computers, printers, copiers, etc. (1) (2) The increase in national meeting equipment rental costs in 2017 relates to the use of a convention center for the Spring and Fall National Meetings. (3) Equipment rental includes the cost to rent copiers for the NAIC copy centers, certain computer equipment, leased software, and other rentals where a capital purchase is not as cost effective. The reduction in 2016 is directly related to decreased reliance on production of hard copy materials for national meetings and other NAIC events. Equipment, hardware, and software maintenance includes maintenance on hardware, software, and other equipment owned or rented by the NAIC. The NAIC generally secures maintenance and service agreements on office equipment, hardware, and software that have exceeded the initial warranty period when the cost and risk of equipment failures exceeds the cost of the service agreement. Examples of such include printers, computer hardware (e.g., routers, switches, servers, etc.), and support agreements for heavily used software products, among others. A top down cybersecurity assessment of the NAIC performed in early 2015 resulted in several security recommendations and an increase in cost in this category going forward. The under budget variance in 2016 is the result of delays in projects while research is conducted to find the best technology solutions, timing of implementation of 2016 budgeted replacement hardware assets, and favorable renewal rates on several major software maintenance contract renewals. The 2017 budget reflects (1) a full year of maintenance for capital assets placed in service in mid-2016; (2) the addition of service agreements on new hardware and software purchases in 2017; and (3) hardware and software maintenance included in new projects slated for 2017 (See Fiscal Impacts 1, 4, and 5). 73 E10: Equipment Rental and Maintenance

83 74

84 Item Description: Includes depreciation for all furniture and equipment owned as of June 30, 2016, with projected purchases through December 31, 2016, and depreciation for budgeted 2017 capital outlays /30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Depreciation (1) $2,269,549 $1,237,604 $2,523,432 $2,418,913 $2,347,768 ($71,145) -2.9% Amortization (2) 1,600,465 1,223,238 2,599,815 2,624,013 2,802, , % Total $3,870,014 $2,460,842 $5,123,247 $5,042,926 $5,150,540 $107, % BUDGET ITEM: Depreciation and Amortization (1) (2) Depreciation is calculated on a straight-line basis over the useful life of capital assets owned by the NAIC, which is five years for furniture and equipment and three years for computer hardware and software. The amount of depreciation expense in a given year is related to the purchase of capital assets in the current and preceding years. The decrease in projected depreciation expense in 2017 is directly attributed to the amount of capital purchases over the past three years. Capital purchases budgeted for 2017 are $823,600 (46%) lower than 2016, $3.1 million (76%) lower than the 2015 budget, and $2.4 million (72%) lower than the 2014 budget. As the larger dollar volume of assets becomes fully depreciated, current year purchases are not enough to replace the decline in depreciation expense. The decrease in capital purchasing is the result of several factors: (1) leveraging a highly virtualized infrastructure; (2) repurposing hardware; (3) increased useful lives of hardware due to technological advancements; and (4) implementation of hardware and software solutions over the past few years that result in lower technology operational costs going forward. The 2017 budget includes approximately $288,500 in capital request hardware and software requests (See Fiscal Impacts 1, 4, and 5). Amortization is computed on a straight-line basis for capitalized assets such as leasehold improvements and consulting services on major computer application projects and system upgrades. The useful lives of these assets are approximately ten years, but are assigned to specific assets based on each asset s useful life. The increase in 2016 is directly attributable to a full year of amortization expense on a long-term project to rewrite the SBS product, which was placed into service in January 2016, as well as the completion of VISION, which was placed in service in September The increase in 2017 is the result of a full year of amortization on VISION. See Exhibit E11-One for a list of proposed capital purchases and Exhibit E11-Two for detailed information on purchases with a unit cost of $25,000 or greater. 75 E11a: Depreciation and Amortization

85 Capital Depreciation Capital Capital Budget Expense Budget Projection Capital Requests: Furniture and Equipment Computer Hardware $523,445 $733,911 $722,044 Computer Software 441,251 1,054,414 1,073,969 Total Capital Requests $964,696 $462,519 $1,788,325 $1,796,013 Depreciation on Prior Year Purchases 1,885, Amortization Budget Requests: Budget Expense Budget Projection Leasehold Improvements Consulting $1,805,872 $1,880,857 Total Requests $0 $42,971 $1,805,872 $1,880,857 Amortization on Prior Year Expenditures 2,759, Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Depreciation (1) $2,347,768 $2,347,768 Amortization (2) 2,802,772 2,802,772 Total $5,150,540 $5,150,540 BUDGET ITEM: Depreciation and Amortization (continued) Total Depreciation $2,347,768 Total Amortization $2,802,772 E11b: Depreciation and Amortization 76

86 Computer Hardware Computer Software Description Qty Cost Total Qty Cost Total Total Cost Enterprise Storage 2 $86,212 $172,424 $172,424 5K Line Cards 8 $2,631 21,048 21,048 Density Increase 1 $98,200 98,200 98,200 USC IOM Refresh 6 $6,231 37,386 37,386 Backup Appliances 2 $38,000 76,000 76,000 Multi-Function Printer 1 $6,200 6,200 6,200 Color Printer 4 $6,200 24,800 24,800 Smart Boards 2 $9,000 18,000 18,000 Cooling Units 2 $7,445 14,890 14,890 Virtual Environment Hardware (Fiscal Impact 1) 1 $20,000 20,000 20,000 Server Hardware (Fiscal Impact 4) 1 $34,497 34,497 34,497 Panorama Co-Location 1 $9,000 $9,000 9,000 Security Infrastructure Expansion 1 $124, , ,500 Server-Single Seat 1 $17,751 17,751 17,751 Backup Appliances Software License 4 $8,000 32,000 32,000 Security Manager 1 $9,000 9,000 9,000 Polling Engine 1 $15,000 15,000 15,000 Power Exchange (Fiscal Impact 1) 1 $54,000 54,000 54,000 Job Scheduling (Fiscal Impact 5) 1 $180, , ,000 $523,445 $441,251 $964,696 Exhibit E11-One 2017 Capital Expenditures 77

87 78

88 Exhibit E11-Two 2017 Proposed Capital Expenditures Unit Cost $25,000 or Greater Capital requests for NAIC technology infrastructure fall into four primary categories (1) cost or labor saving; (2) high availability or disaster recovery; (3) useful life; and (4) technology trend. A technology trend is a project that would better utilize an existing resource or address a current issue. Consulting costs may be incurred in the development of software code for major systems with a life greater than one year. Cost or Labor Saving Unified Computing System (UCS) Density ($98,200) The UCS infrastructure hosts virtualized servers for NAIC and NIPR. This request for additional memory resources, a onetime cost that does not incur additional maintenance or licensing costs, will allow for continued growth of the virtualized environment without adding physical servers. High Availability or Disaster Recovery Enterprise Storage ($172,424) This request provides for the continuing growth of NAIC, NIPR, and IIPRC databases and applications. Based on trends collected across the enterprise over multiple years, NAIC is projecting a combined increase in data storage of 8.19TB, including storage for replicating enterprise production environments for disaster recovery. Useful Life Backup Appliances ($76,000) Requested funding provides for an upgrade of NAIC enterprise backup hardware appliances with a disk-based solution. These devices, last updated in 2011, replicate for disaster recovery and eliminate off-site tape storage. The purchase will increase capacity to accommodate an expected 24% increase in data and virtualization storage in 2016 and 2017, and allow for required enterprise data retention. Technology Trend Security Infrastructure Expansion ($124,500) NAIC utilizes a common security infrastructure to achieve single sign-on across the enterprise. Continuing application migrations require additional user licensing. This purchase is necessary to bring the total license count to 100,000 and allow for the final migration of SBS and SERFF applications to the common security infrastructure. Power Exchange ($54,000) (See Fiscal Impact 1) This request supports the Regulatory Data Collection initiative, which incorporates the request for the NAIC to become the statistical agent for Principle-Based Reserving (PBR), and broadens the scope beyond PBR to establish the foundation for data collection in general. This implementation will benefit many other NAIC initiatives, such as TRIA, and builds on the NAIC s existing purpose to serve as a centralized data collector for state insurance regulators. Content Management Database Server ($34,497) (See Fiscal Impact 3) This request provides the hardware foundation for implementing the Information Technology Infrastructure Library (ITIL) industry standard. ITIL will bring enterprise-wide consistency of technology changes (change management) and response to events that impact service delivery (incident management). Centralized change management benefits cybersecurity 79

89 Exhibit E11-Two efforts and strengthens the NAIC infrastructure for audits and certifications while enhanced incident management provides an improved customer experience for NAIC membership and industry with swift resolution to system outages or issues. Job Scheduling Software ($180,000) (See Fiscal Impact 5) NAIC enterprise applications require jobs to run at a scheduled time and in a prescribed order. As NAIC application architecture has evolved over the years, the ability of the current job scheduling system to handle workloads efficiently is compromised and no longer meets the growing needs of the Association. An updated tool will promote uniformity across the NAIC enterprise and enable deployment of internally developed systems more quickly. In addition, this software will enable NAIC to be proactive in uncovering potential system outages or issues before new applications are deployed to production environments. 80

90 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Insurance (1) $510,496 $248,483 $495,281 $524,700 $509,860 ($14,840) -2.8% 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Insurance (1) $509,860 $509,860 Item Description: Includes expenses for all general business and liability insurance policies owned by the NAIC. BUDGET ITEM: Insurance (1) The negotiation of premiums at the May 2016 renewal date, while maintaining consistent coverage, resulted in significant savings. The 2017 budget assumes an increase of 6% over existing premiums at the May 2017 renewal. 81 E12: Insurance

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92 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Telephone (1) $491,131 $280,787 $540,569 $523,264 $562,924 $39, % 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Telephone (1) $92,875 $22,715 $302,009 $64,700 $72,025 $8,600 $562,924 BUDGET ITEM: Telephone Item Description: Includes conference calls, local, and long-distance charges for all NAIC offices, and phone service at national meetings. (1) The increase in projected telephone expense for 2016 is related to increased conference call activity by NAIC committees and working groups as well as Wi-Fi access at NAIC National Meetings and other events ($29,700). These increased costs are anticipated to continue into E13: Telephone

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94 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Copier Supplies $50,609 $23,343 $50,793 $57,600 $52,800 ($4,800) -8.3% Other Supplies (1) 267, , , , ,704 (23,590) -8.5% Non-Capital Equipment (2) 475, , , , ,292 (53,362) -10.3% Total $793,648 $556,172 $895,833 $851,548 $769,796 ($81,752) -9.6% 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Copier Supplies $52,800 $52,800 Other Supplies (1) $106,716 94,162 $33,801 $15,500 $3, ,704 Non-Capital Equipment (2) 439,580 14,000 7,277 1,450 $ ,292 Total $546,296 $160,962 $41,078 $16,950 $3,525 $985 $769,796 BUDGET ITEM: Supplies Item Description: Includes computer supplies, copy paper, stationery, computer hardware and software, other supplies, and furniture and equipment purchases under $2,000. (1) (2) Other supplies includes purchases of miscellaneous office supplies for staff, interns, consultants, and temporaries at all NAIC offices. The reduction in spending in 2016 and 2017 is related to a decreased need for cabling and other supplies needed for the NAIC Data Center, common office areas, and staff workstations in the coming year as several large projects were completed in Non-capital equipment purchases include minor software upgrades and purchases as well as minor office equipment and computer supplies needed to furnish staff members with the tools necessary to complete their assigned tasks. Projected expense for 2016 will exceed budget due to the purchase of ergonomic attachments to staff work stations; additional purchases related to the 2016 expansion of the NAIC leasehold in Kansas City; and cybersecurity related purchases. The purchase of major software package upgrades budgeted in 2016 will not recur in Some of this savings is offset by the purchase of minor computer hardware and software related to new projects in 2017 (See Fiscal Impacts 1, 3, and 4). 85 E14: Supplies

95 86

96 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Mail Services (1) $235,056 $112,506 $217,304 $237,339 $210,150 ($27,189) -11.5% 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Mail Services (1) $2,835 $105,659 $89,696 $8,730 $2,430 $800 $210,150 Item Description: Includes USPS, express mail, and other carrier charges. BUDGET ITEM: Mail Services (1) Mail services includes the cost of shipping hard copy publications and shipping equipment and materials to three national meetings and three major interim meetings. 87 E15: Mail Services

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98 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Reference Materials (1) $285,673 $63,699 $124,448 $130,494 $135,777 $5, % Periodicals 46,975 20,916 45,436 47,543 42,820 (4,723) -9.9% Online Researching (2) 205, , , , ,959 12, % Total $538,521 $186,398 $369,443 $365,857 $378,556 $12, % 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Reference Materials (1) $3,852 $30,900 $55,797 $44,529 $200 $500 $135,777 Periodicals 39,320 3,500 42,820 Online Researching (2) 199, ,959 Total $3,852 $30,900 $295,076 $48,029 $200 $500 $378,556 Item Description: Includes costs for books, periodicals, and online reference services. BUDGET ITEM: Reference Materials (1) (2) Statistical reference materials include reference sources on CD-ROM and subscription services for resources used in performing research in the NAIC Research Library and Capital Markets and Investment Analysis Office. The reference collection is a vital source of up-to-date information on insurance, business, finance, and technology-related issues and supports the NAIC's fulfillment of research questions from NAIC members, NAIC staff, and interested parties. Online researching includes services such as Westlaw and Lexis/Nexis, which are used extensively by the Legal Division and several other areas within the NAIC. Use of electronic research tools has outpaced budget in 2016 as a result of additional services becoming available on topics such as financial risk management, cybersecurity, and coverage of Washington politics and policies. The use of the additional online services added in 2016 is expected to continue in E16: Reference Materials

99 90

100 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Publications (1) $120,272 $41,838 $83,938 $96,488 $94,800 ($1,688) -1.7% Outside Printing 7,561 3,658 8,318 7,245 9,795 2, % Total $127,833 $45,496 $92,256 $103,733 $104,595 $ % 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Publications (1) $94,800 $94,800 Outside Printing 3,675 $6,120 9,795 Total $98,475 $6,120 $104,595 Item Description: Costs incurred for printing books, subscription updates, marketing materials, and other publications. BUDGET ITEM: Printing and Production (1) Publications printing expense represents the cost of all publication inventory items sold, including the cost of special paper and other supplies used to produce a publication and the cost of external printing and binding services. A business initiative approved with the 2015 budget included a reduction in publications printing by moving to an electronic on-demand model to allow downloading of selected publications. The under budget variance in 2016 and reduction in the 2017 budget indicate a continued movement toward electronic delivery. 91 E17: Printing and Production

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102 Item Description: Outside costs that are directly related to conducting the Commissioners Conference; All Commissioner DC Fly-In; Executive (EX) Committee Interim Meeting and All Commissioner Roundtable; national, interim, and committee meetings; Insurance Summit; and International Insurance Forum that cannot be classified within other budget item categories /30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Receptions (1) $139,356 $126,551 $231,051 $231,883 $243,263 $11, % Hotel Services (2) 1,242, ,916 1,322,616 1,348,088 1,279,826 (68,262) -5.1% Reproductions 97,180 31, , , ,046 (626) -0.6% Audio-Visual Services (3) 708, , , , , , % Interim Meetings (4) 233, , , , ,326 22, % Total $2,421,101 $1,347,045 $2,695,019 $2,777,918 $2,905,989 $128, % Note: Reclassifications have been made in travel and interim meetings categories to provide additional transparency in financial reporting for these services. Any miscellaneous meals, room rental, or beverage charges for small interim meetings (e.g., Valuation of Securities Task Force) are now coded to interim meetings included in the national meetings, interim meetings, and NAIC events category, leaving the non-staff travel line to represent only travel and transportation costs for regulators attending those events. Actuals, projections and budgets for 2016 have been restated for comparison purposes Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Receptions (1) $243,263 $243,263 Hotel Services (2) 1,279,826 1,279,826 Reproductions 107, ,046 Audio-Visual Services (3) 848, ,528 Interim Meetings (4) $84,200 59,250 $232,110 $39,800 $11, ,326 Total $84,200 $2,537,913 $232,110 $39,800 $11,966 $2,905,989 BUDGET ITEM: National Meetings, Interim Meetings, and NAIC Events (1) (2) (3) (4) Reception expenses reflect the cost of food and beverage services and service charges for the NAIC s welcome reception at (1) national meetings; (2) Commissioners Conference; (3) All Commissioner DC Fly-In; (4) Executive (EX) Committee Interim Meeting and All Commissioner Roundtable; and (5) Insurance Summit. The 2017 budget is based on quotes for food and beverage costs for selected meeting sites. Hotel services includes the cost of (1) technology support; (2) electrical support; (3) regulator and staff breakfasts, lunches, and breaks; (4) transportation; and (5) other hotel charges. The majority of the decrease in the 2017 budget is related to an expected decrease in attendance at the NAIC Fall National Meeting, translating to a decrease in meal and hotel labor costs. Audio visual services include microphones, video equipment, electronic presentations, etc. and labor costs associated with setup and performance of these services. The use of additional equipment for large sessions and additional meetings resulted in additional cost for the 2016 Insurance Summit. The 2017 budget for these services is based on price quotes from services providers at 2017 meeting and event locations. The increase in the 2017 budget is related to increased need for audio visual services at the Insurance Summit and labor costs at selected national meeting locations. Reclassifications have been made in travel and interim meetings categories to provide additional transparency in financial reporting for these services. Any miscellaneous meals, room rental, or beverage charges for small interim meetings (e.g., Valuation of Securities Task Force ) are now coded to interim meetings included in the national meetings, interim meetings, and NAIC events category, leaving the non-staff travel line to represent only travel and transportation costs for regulators attending those events and better present the cost of NAIC meetings and events. Actuals, projections and budgets for 2016 have been restated for comparison purposes. The interim meeting budget represents cost associated with face-to-face meetings on key initiatives where conference calls are not sufficient. A large interim meeting on international matters scheduled for early 2016 was not held resulting in a variance from budget. The 2017 budget includes additional meeting costs related to expansion of Valuation of Securities Task Force education sessions. Year Spring Summer Fall 2017 Denver Philadelphia Honolulu 2016 New Orleans San Diego Miami 2015 Phoenix Chicago Washington, D.C. 93 E18: National Meetings, Interim Meetings, and NAIC Events

103 94

104 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Education Programs-Online (1) $68,201 $18,285 $49,475 $62,522 $122,403 $59, % Risk Assessment Training 2) 46,730 20,551 83, ,304 79,353 (22,951) -22.4% E-Reg Conference (3) 111,422 Financial Summit (3) 144,357 Market Regulation Summit (3) 24,217 General Training (4) 104,912 21,075 44,840 39,225 67,248 28, % Total $499,839 $59,911 $177,574 $204,051 $269,004 $64, % The purpose of the Education & Training function within the NAIC is to manage the NAIC s regulatory curriculum. The core focus is on identifying and seizing opportunities to develop just-in-time, on-demand, and/or unmanned training and development of products, while assuring the integrity and comprehensiveness of the curriculum as a whole. In the examination of education opportunities, the goal is to achieve a balance between meeting the regulatory training needs of Department of Insurance employees and assisting industry clients through a broader range of compliance training topics. The NAIC educational curriculum is offered to Department of Insurance employees and Consumer Advocates at no charge Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Education Programs-Online (1) $122,403 $122,403 Risk Assessment Training 2) $79,353 79,353 E-Reg Conference (3) Financial Summit (3) Market Regulation Summit (3) General Training (4) $18,023 $48, ,248 Total $18,023 $48,320 $123,308 $79,353 $269,004 Item Description: Expenses incurred by the NAIC for education programs and general Association training expenses. BUDGET ITEM: Education and Training (1) (2) (3) (4) The total number of courses offered in 2017 will remain relatively consistent with the prior year. However, total cost will increase due to the addition of three classroom sessions. Two of these training sessions will be on Market Conduct/Market Conduct Annual Statement (MCAS) training opportunities, one on the east coast and one in the west. These sessions will increase costs with the addition of meeting rooms, beverage services, and trainer travel. Risk Assessment Training expenses represents a national training program for regulators in states that have adopted the Risk Management and Own Risk and Solvency Assessment (RMORSA) Model Act. Reduced spending in 2016 and 2017 indicate a better estimate for the cost of this program as it matures. In 2016 the NAIC combined several stand alone events, (1) E-Reg Conference; (2) Financial Summit; (3) PIO Forum; (4) Market Regulation Summit; and (5) CIPR Symposium, to establish the NAIC Insurance Summit. This week of educational opportunities for regulators, consumers, industry, and others provides a more effective learning platform, is more cost effective, and delivers a more collaborative environment for participants. Costs related to the Insurance Summit are included in E18: National Meetings, Interim Meetings, and NAIC Events. General training expense includes the costs of nationally produced training programs and instructional videos used by the Human Resources Division for Association staff training needs. NAIC is increasing focus for staff training in these areas (1) cybersecurity, (2) management, and (3) leadership. The under budget variance in 2016 and a portion of the increase in the 2017 budget is a result of the timing of these training sessions. The remaining increase in 2017 is due to the addition of training topics. 95 E19: Education and Training

105 96

106 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Grant Funds (1) $1,046,954 $316,093 $1,170,000 $1,170,000 $1,170, % Zone Funds (2) 25,993 2,695 21,295 32,000 22,000 ($10,000) -31.3% Zone Technical Training (3) 15,838 44,995 47,495 9, , , % Zone Expenses (4) 280,806 56, , , ,000 8, % Total $1,369,591 $420,697 $1,465,704 $1,441,000 $1,562,500 $121, % 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Grant Funds (1) $1,170,000 $1,170,000 Zone Funds (2) 22,000 22,000 Zone Technical Training (3) 132, ,500 Zone Expenses (4) 238, ,000 Total $1,562,500 $1,562,500 Item Description: Utilization of grant and zone funds and expenses for zone sponsored events. BUDGET ITEM: Grant and Zone Expenses (1) (2) (3) (4) Grant funding of $1,120,000 ($20,000 per member) remains consistent with budgets since An additional $50,000 is budgeted to assist members with special funding needs during The 2016 project assumes full utilization of available funding. Zone funds represent the utilization of the training dollars allocated to each member by the four Zones. The decrease in utilization of zone funding in 2016 and 2017 is related to additional allocations of grant funding during the 2014 budget process. Grant funding balances are used by members first as they do not carry forward to the following year. Zone fund balances are available until used by the member. Zone Technical Training funds are used by NAIC Zones to fund technical training for the Zone as a whole. Funding is derived from the allocation of unused Grant funding for members within a particular Zone. The increase in 2016 and 2017 is related to planned utilization of these funds in late 2016 and early NAIC allocates funding to NAIC Zones annually to fund activities of the Zones. These activities include zone conferences, Zone meetings at NAIC National Meetings, and funding of member training allocations (Zone Funds) in addition to NAIC Grant funds. NAIC funding includes: (1) $147,500 - $2,500 per Zone member, with a minimum of $35,000 per Zone, approved - June 2010; (2) $140,000 - $2,500 per Zone members to be used by the Zones to provide additional training opportunities for their members, approved - December The increase in 2017 is related to increased costs associated with Zone Conferences. 97 E20: Grant and Zone Expenses

107 98

108 2015 6/30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Recruiting and Relocation (1) $552,579 $228,165 $666,001 $366,712 $351,712 ($15,000) -4.1% Bad Debt Expense (2) 286,590 (8,734) 266, , ,000 (100,000) -23.5% Research Grants 2,000 2,000 2,000 2, % Member Relations (3) 15,530 2,500 12,029 4,900 9,500 4, % Total $856,699 $221,931 $946,296 $798,612 $688,212 ($110,400) -13.8% 2017 Budget by Area Technology Financial Market Products Systems and Business Services to Regulatory Regulatory and Description Support Operations Members Affairs Services Services Total Recruiting and Relocation (1) $351,712 $351,712 Bad Debt Expense (2) 325, ,000 Research Grants $2,000 2,000 Member Relations (3) $9,500 9,500 Total $676,712 $9,500 $2,000 $688,212 BUDGET ITEM: Other Expense Item Description: Costs incurred for recruiting employees, bad debt allowances, JIR research grants, and member relations. (1) (2) Recruiting agencies are used to fill open positions with qualified individuals with a unique/specific skill set and those at higher levels of management within the association when standard methods of recruitment prove unsuccessful. The over budget variance in 2016 is directly related to the search for several highly qualified candidates, including the Chief Executive Officer (CEO); continued struggles to fill technical positions; and tight Kansas City employment market. The 2017 budget assumes a continued need for the use of recruiting agencies to identify individuals with the unique skill sets used by the NAIC in its many specialized areas. Bad debt expense is a provision for future uncollectible customer accounts receivable. The 2016 projection reflects a trend toward fewer uncollectible accounts. The reduction in the budget for 2017 assumes this trend will continue. (3) The member relations account includes expenses associated with the Dineen Award recipient and recognition of NAIC members and the NAIC Officers. 99 E21: Other Expense

109 100

110 Investment Income Detail

111 Item Description: Interest, dividends, and realized and unrealized gains/losses on the NAIC investment portfolio and cash equivalents. Also included is interest earned on the note payable from the Interstate Insurance Product Regulation Commission (IIPRC) /30/16 12/31/ Increase Description Actual Actual Projected Budget Budget (Decrease) Percentage Interest Income (1) $534,535 $260,957 $506,537 $529,689 $468,960 ($60,729) -11.5% Dividend Income (2) 2,421, ,969 2,356,154 3,074,812 2,473,963 (600,849) -19.5% Realized Gain/(Loss) (3) 2,966,552 3,046,933 3,046,933 Unrealized Gain/(Loss) (3) (8,323,651) (1,789,397) (1,789,397) Total ($2,400,639) $2,451,462 $4,120,227 $3,604,501 $2,942,923 ($661,578) -18.4% The investment income budget is based on (1) projected interest income on the long-term fixed income portfolio and short-term investments, (2) interest on the note payable from IIPRC for lines of credit granted from to fund their operational needs, and (3) dividend income from the equity portfolio. NAIC uses actual results through June to project year-end results for the current year. These projections are monitored closely throughout the year. Realized and unrealized gains or losses are not budgeted due to the volatility of the market. The investment policy of the NAIC, included as Exhibit II1-One, was affirmed by the Internal Administration (EX1) Subcommittee on November 6, Revisions to this policy are made as necessary based on recommendations from the NAIC's investment adviser. There were no infusions of cash into the investment portfolio in 2016 as a result of expenditures for continuing major initiatives, including system rewrites and funding the on-going opeartions of the NAIC. No cash infusions are expected to be made to the Investment portfolio during BUDGET ITEM: Investment Income (1) (2) (3) The under budget performance in 2016 and the reduction of the budget for 2017 are based on the maturity of existing bonds at higher rates than those available in the current market environment. The 2017 budget reflects the anticipated continuation of this market trend. Additionally, the use of NAIC reserves to fund major initiatives over the past several years have reduced the amount of funds available for investment in interest bearing vehicles. Dividend income is projected based on current and historical dividend receipts. The 2016 projection is expected to fall just short of budget based on the current volatility of financial markets and a reduction in Master Limited Partnership (MLP) holdings. Additionally, less funds are available for investment as a result of purchases of capital equipment and software tools to address current and future operational and security needs. These purchases will provide long term performance benefits to the organization and those that interface with it. Realized and unrealized gains or losses are not budgeted due to the volatility of the market. Volatility experienced in the financial market place in 2014 has continued through the first eight months of As of the budget measurement date of June 30, realized and unrealized market adjustments resulted in an increase in investment income of $1.3 million. Through August 31, realized gains have remained flat at $3.1 million, while unrealized loss improved slightly to a loss of only $40,000. Unrealized gain and loss adjustments to market value are required by Generally Accepted Accounting Principles (GAAP). While market gains and losses remained relatively stable through August, further fluctuations, both positive and negative, are expected through While the NAIC s investment strategy is to perform well in an up-market, it is specifically designed for increased protection in down-markets rather than larger gains in up-markets. 101 II1: Investment Income

112 102

113 Exhibit II1-One STATEMENT OF INVESTMENT POLICY, OBJECTIVES AND GUIDELINES FOR THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LONG-TERM FUNDS November 6,

114 Exhibit II1-One NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS STATEMENT OF INVESTMENT POLICY & OBJECTIVES I. MISSION The mission of the National Association of Insurance Commissioners (NAIC) is to assist state insurance regulators, individually and collectively, in serving the public interest and achieving the following fundamental insurance regulatory goals in a responsive, efficient and cost effective manner, consistent with the wishes of its members: Protect the public interest; Promote competitive markets; Facilitate the fair and equitable treatment of insurance consumers; Promote the reliability, solvency and financial solidity of insurance institutions; and Support and improve state regulation of insurance. To accomplish these objectives, the NAIC is required to maintain and support a full-time staff and fund a number of different activities (such as data processing collection and analysis; coordinate national, international, and ad hoc meetings; and the coordination of state insurance department accreditation). The funding for these activities is received from a variety of sources and any funds generated not required for supporting current projects and activities is available for investment in the NAIC s investment portfolio. The primary objective of the NAIC investment portfolio is preservation of capital adjusted for inflation with an emphasis on the long-term growth of principal, with a risk profile generally deemed to be prudent by institutional fiduciaries. II. PURPOSE OF THIS INVESTMENT POLICY STATEMENT The Executive (EX) Committee of the NAIC sets forth this Investment Policy Statement in order to: Define and assign the responsibilities of all parties involved in the oversight, management and control of the investment portfolio. Establish investment goals and objectives for the investment portfolio that are clear, concise and understood by all parties. Manage fund assets according to prudent standards. Offer guidance and limitations to all Investment Managers regarding the investment of the assets. Establish a basis for evaluating investment results. Establish a relevant investment time horizon for which the assets will be managed. In general, the purpose of this policy statement is to outline a philosophy and framework that will guide the investment management of the assets toward the desired results. It is intended to be sufficiently specific to be meaningful, yet flexible. III. DELEGATION OF AUTHORITY A. RESPONSIBILITIES OF THE NAIC INTERNAL ADMINISTRATION (EX1) SUBCOMMITTEE The NAIC Executive (EX) Committee has assigned responsibility for the oversight of the NAIC investment portfolio to the Internal Administration (EX1) Subcommittee (referred to hereafter as the Subcommittee ). The Subcommittee is charged with responsibility for managing the assets of the 104

115 Exhibit II1-One NAIC investment portfolio. The members of the Subcommittee shall discharge their duties solely in the interests of the NAIC, with the care, skill, prudence and diligence under the circumstances then prevailing, that a prudent person, acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims. The specific responsibilities of the Subcommittee include: 1. Establishing reasonable and consistent investment objectives, policies and guidelines that will direct the investment of the NAIC investment portfolio. 2. Determining the appropriate risk tolerance and investment time horizon for the NAIC investment portfolio and communicating these decisions to the appropriate parties. 3. The Subcommittee is authorized to delegate certain responsibilities to professional experts in various fields, including an Investment Advisor, an Investment Manager, a Custodian, and a Co- Trustee. 4. Evaluating on a regular basis the performance of any Investment Manager(s) to assure adherence to policy guidelines and monitor progress towards achieving investment objectives. 5. Developing and enacting proper control procedures. For example, replacing Investment Managers due to a fundamental change in the firm s investment management process, or a failure to comply with established guidelines or significant changes in the firm s personnel. 6. Evaluating the performance of the Investment Advisor on a regular basis. Other than as stated in Paragraph 3 above, the Subcommittee will not reserve any control over direct investment decisions, with the exception of specific limitations described in these statements. Investment Managers will be held responsible and accountable to achieve the investment objectives herein stated. While it is not believed that the limitations will hamper Investment Managers, each Manager should request from the Subcommittee any modifications deemed appropriate. B. RESPONSIBILITIES OF THE INVESTMENT ADVISOR The Investment Advisor role is that of a non-discretionary advisor to the Executive (EX) Committee and the Subcommittee of the NAIC. Investment advice concerning the investment management of the assets will be offered by the Investment Advisor, and will be consistent with the investment objectives, policies, guidelines and constraints as established in this statement. Specific responsibilities of the Investment Advisor include: 1. Assisting in the development and annual review of the investment policy. 2. Conducting investment manager searches when requested by the Subcommittee. 3. Providing research on the Investment Managers on an ongoing basis. 4. Monitoring the performance of the Investment Managers quarterly and reporting to the Subcommittee on the progress of the Managers relative to the investment objectives. 5. Communicating matters of policy, manager research, relevant organizational changes at the manager, and manager performance to the Subcommittee. 6. Reviewing the NAIC s investment history, capital market performance and the contents of this investment policy statement with any newly appointed Trustee(s). 7. Assisting the Subcommittee in the development of a strategic asset allocation plan and its implementation. 8. Negotiation of fees with the Investment Managers on behalf of the Subcommittee and communicate annually that the fee being charged for the management of the NAIC portfolio(s) is the lowest fee in place for any account at a manager of similar size using a similar investment strategy. 9. Establishing customized investment performance benchmarks for the overall NAIC portfolio and for each component (Investment Manager) and monitoring the portfolio on an ongoing basis. 105

116 Exhibit II1-One 10. Recommending the termination and/or change of any Investment Manager(s). 11. Periodic rebalancing of the NAIC portfolio to be approved by the Subcommittee. In addition, the Investment Advisor s role will include the following administrative responsibilities: 1. Overseeing the day-to-day operational investment activities of the NAIC subject to the policies established by the Subcommittee. 2. Implementing the allocation and reallocation of NAIC investments among asset classes, investment styles and investment management firms in accordance with the decisions of the Subcommittee and within the guidelines of allocation targets set forth in this policy statement. 3. Receive, review and distribute reports from outside professionals regarding the status of the NAIC portfolios. 4. Interface with Investment Managers, the custodian and other outside professionals and communicate with the Subcommittee. 5. Periodically issue status reports to the Subcommittee. 6. Quarterly confirmation managers are in compliance with the NAIC Statement of Investment Policy/Objectives and Guidelines for the most recent quarter. If not in compliance, provide a list of out of compliance item and steps that will be taken to bring into compliance. 7. Timely communication of any major changes to economic outlook, investment strategy, or any other factors affecting the implementation of the investment process or the progress toward meeting performance objectives. C. RESPONSIBILITIES OF THE INVESTMENT MANAGER(S) Each Investment Manager managing an individually managed account for the NAIC will have full discretion to make all investment decisions for the assets placed under its jurisdiction, while observing and operating within all policies, guidelines, constraints and philosophies as outlined in this statement. Specific responsibilities of the Investment Manager(s) shall include: 1. Discretionary investment management, including decisions to buy, sell or hold individual securities and to alter asset allocation within the asset classes selected by the Managers in order to generate favorable returns given the level of risk employed by the Manager. 2. Reporting, on a timely basis, quarterly investment performance results. 3. Informing the Subcommittee and the Investment Advisors of any qualitative changes to the investment management organization. Examples include changes in portfolio management personnel, ownership structure, and investment philosophy or investment discipline. 4. Voting proxies, if requested by the Subcommittee, on behalf of the NAIC and communicating such voting records to the Subcommittee when requested. 5. Timely communication of trading information to the Subcommittee and the Investment Advisors. IV. GENERAL INVESTMENT PRINCIPLES Management of the NAIC financial assets will follow the general investment guidelines set forth below: 1. Investments shall be made solely in the interests of the NAIC. 2. The NAIC financial assets shall be invested with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in managing the investments of an institution of like character and with like aims. 3. Investment of the financial assets shall be so diversified as to minimize the risk of large losses. 106

117 Exhibit II1-One 4. The Subcommittee may employ one or more Investment Managers of varying styles and philosophies to attain the NAIC s objectives. V. INVESTMENT STRATEGY & OBJECTIVES In order to achieve its goals in perpetuity, the investment strategy for the Executive (EX) Committee of the NAIC will emphasize total return; that is, the aggregate return from capital appreciation and dividend and interest income. Specifically, the primary objective in the investment management for the NAIC financial assets shall be: To maximize long-term total returns consistent with prudent levels of risk. Returns are expected to preserve and/or enhance the real value of the NAIC after funds are distributed for current use. In order to accomplish its objectives, the NAIC may invest primarily in (1) domestic and international equities, (2) domestic and global bonds and (3) alternative investments (see Section VI Investment Guidelines). Any investment which is not easily marketable will require written Subcommittee approval. Investment risks will be considered within the context of the entire investment portfolio. Understanding that differing economic conditions may produce periods of relative underperformance and outperformance, there will be an attempt to diversify the NAIC by both asset class (e.g. stocks, bonds, cash, alternative investments) and investment style (e.g. growth versus value). A. SPECIFIC INVESTMENT GOALS The goal of the NAIC investment portfolio is: Generate a long-term (Three-year running time period) target rate of return of the Consumer Price Index plus at least five percent. This goal is for the entire NAIC investment portfolio it is not intended to be imposed on each individual Investment Manager. The goal of each Investment Manager, over the investment horizon, shall be to: 1. Exceed the market index, or blended market index, selected and agreed upon by the Subcommittee that most closely corresponds to the manager s style of investment management net of fees over a full market cycle. In addition, the Manager should perform in the top half of an appropriate peer group over the past three and five year annualized periods. 2. Display an overall level of risk in the portfolio, which is consistent with the risk associated with the benchmark specified above. Risk will be measured by the standard deviation of quarterly returns. B. VOLATILITY OF RETURNS The Subcommittee, with the assistance of the Investment Advisor selected by the Subcommittee, will structure a diversified portfolio that is designed to consistently achieve the return target over an investment horizon defined as a three year period. The return target and the portfolio structure are based on certain assumptions and expectations deemed reasonable by the Subcommittee and the Investment Advisors. The Subcommittee has given consideration to the risk associated with the NAIC s investments. The Subcommittee understands that in order to achieve its investment objectives over a full market cycle, the NAIC investment portfolio will experience volatility of returns and fluctuations of market value. 107

118 Exhibit II1-One VI. INVESTMENT GUIDELINES A. POLICIES AND RESTRICTIONS The Subcommittee intends to use the investment policies and restrictions presented in this Statement as a framework to help achieve the investment objectives at a level of risk deemed acceptable. These policies and restrictions are designed to minimize interfering with efforts to attain overall objectives and to minimize excluding any appropriate investment opportunities. The policy allows the Investment Advisor discretion within specified parameters in the asset allocation and diversification of the assets for the purposes of increasing investment returns and/or reducing risk exposure. The Investment Managers will not purchase assets other than those approved herein without the written consent of the Subcommittee. It is important for the Investment Managers hired to be sensitive to the objectives and goals of the Subcommittee. B. ASSET ALLOCATION The Subcommittee expects the asset allocation policies to reflect, and be consistent with, the investment objectives and risk tolerances expressed throughout this Statement. These policies, developed after examining the historical and possible future relationships of risk and return among asset classes, are designed to provide the highest probability of meeting or exceeding the return objectives at the lowest possible risk. The target equity asset allocation set forth in the following chart was developed through consultation between the Investment Advisor and the Subcommittee. The following chart represents the asset allocation targets, with minimum and maximum allocations applicable to each asset class. Also, the comparative indices with which the results of the portfolio and the various Managers will be compared are defined. ASSET CLASS TARGET MINIMUM MAXIMUM COMPARATIVE INDEX ALLOCATION ALLOCATION ALLOCATION U.S. EQUITIES 32.50% 23.00% 63.00% All Cap 4.25% 0.00% 8.00% Russell 3000 Yield Focused Equity 4.25% 3.00% 12.00% Russell 1000 Value Large Cap Growth 8.25% 6.00% 16.00% Russell 1000 Growth Large Cap Value 8.25% 6.00% 16.00% Russell 1000 Value Small Cap Value 7.50% 5.00% 15.00% Russell 2000 Value FOREIGN EQUITIES 5.00% 3.00% 10.00% MSCI EAFE LONG/SHORT EQUITY 7.50% 0.00% 10.00% HFRI Composite Fund of Funds LONG/SHORT INTERNATIONAL EQUITY 5.00% 0.00% 7.50% HFRX Global Hedge Fund INCOME/ALTERNATIVES 50.00% 37.00% 67.00% Core Plus Bond 10.50% 7.50% 25.00% Barclays Aggregate Bond Intermediate Fixed Income Securities 20.00% 16.00% 38.00% Barclays Intermediate Government/Credit Core Bond 4.50% 0.00% 7.00% Barclays Aggregate Bond Short Duration Income 5.00% 0.00% 10.00% Barclays Aggregate Short Duration Gov t/credit International Fixed Income 5.00% 0.00% 10.00% Citigroup World Government Master Limited Partnerships 5.00% 0.00% 10.00% Alerian MLP Index 108

119 Exhibit II1-One Although dynamic capital markets may cause fluctuating risk/return opportunities over a market cycle, the comparative indices set forth in the prior chart will be used to evaluate the asset allocation (as measured at market value) over a three-year moving time period. C. GENERAL ASSET ALLOCATION RESTRICTIONS 1. The investment returns of the asset allocation will be measured against those of both a target portfolio consisting of 7.50% long/short equity fund of funds, 5.00% long/short international equity, 4.25% all cap equities, 4.25% yield focused equities, 8.25% large cap growth equities, 8.25% large cap value equities, 7.50% small cap value equities, 5.00% international equities, and 50.00% income/income alternative securities, including 5.00% master limited partnerships, and an actual weighted portfolio index blend. Equity and income market performance will be compared to the returns of the indices specified above. Other more appropriate indices may be used at the discretion of the Investment Advisor after consulting with the Subcommittee. 2. U.S. publicly traded equities will be represented in the portfolio up to 63.00% with a minimum requirement of 23.00%. 3. Foreign equities will not exceed 10.00% of the account s market value, with a minimum requirement of 3.00%. 4. Long/Short Equity will be represented in the portfolio up to 10.00% with no minimum requirement. 5. Long/Short International Equity will be represented in the portfolio up to 7.50% with no minimum requirement. 6. Income/income alternative securities will not exceed 67.00% of the account s market value with a minimum requirement of 37.00%. The principal subcomponent of income securities, U.S. publicly traded domestic fixed income securities will not exceed 38.00% of the account s market value, with a minimum requirement of 16.00%. 7. Financial Sector allocation may be based on an individual Investment Manager s discretionary allocation to sector, rather than pursuant to the stated target allocation. 8. The Subcommittee foresees the possibility of using limited partnerships and/or mutual funds and understands that it would not have any control over the management of such funds with regard to guidelines and restrictions, and would be subject to the investment provisions set forth in the respective investment vehicle prospectus. Because securities market conditions can vary greatly throughout a market cycle, it is expected that the Investment Advisor shall from time to time recommend that the Subcommittee change the asset mix within the above ranges or make asset allocations outside the limits prescribed above, for the purpose of increasing investment returns and/or reducing risk. However, the written consent of the Subcommittee is required to change the asset mix through reallocation beyond the minimum and maximum parameters set forth herein. D. U.S. PUBLICLY TRADED EQUITIES In keeping with the general investment philosophy, the Subcommittee expects the Investment Advisor to monitor the U.S. equity Managers to see that they maintain the publicly traded equity portfolio at a risk level similar to that of the benchmark equity indices as a whole, with the objective of meeting or exceeding its results as represented by the relevant equity indices over a three-year moving time period. Equity holdings in individually managed accounts may be selected from the New York, American and Regional Stock Exchanges, or the NASDAQ markets. U.S. equity Managers are generally prohibited from investing in private placements, letter stock, and options; or from engaging in short sales, margin transactions or other specialized investment activities unless the Subcommittee agrees in writing under the terms of the Equity Managers investment management agreements. In addition, Investment 109

120 Exhibit II1-One Managers are prohibited from investing in derivatives. Within the above guidelines, the Subcommittee gives the Investment Managers full responsibility for security selection and diversification. However, Investment Managers should carefully review any position exceeding a 10% commitment of the account s market value for an individual security and the lesser of a 50% commitment or three times the normal sector weighting for a particular economic sector. Such limits should not be exceeded on an ongoing basis, but may, from time to time be exceeded on a short-term basis. Investment Managers also will have full discretion over turnover and allocation of equity holdings among selected securities and industry groups, within the limits described above. While it is understood that Investment Managers will deviate from the representative indices, the Subcommittee wishes to limit the extent of potential underperformance. Because of the inherent difficulty in defining specific restrictions, which would cover all possibilities, the Subcommittee instructs Investment Managers to invest the equity component of the account to attempt to prevent the returns for that component from underperforming the relevant equity indices by more than 15% in any three consecutive quarters. All equity securities and cash held in individually managed equity accounts will be held in custody at a fully disclosed clearing broker-dealer. Alternatively, the Subcommittee may custody securities at a bank or other financial institution, although the Subcommittee will bear the additional costs of any such arrangements. All Investment Managers of individually managed accounts will be instructed to trade equity securities, whenever possible, through the designated custodians. The parties realize that this may not be possible in certain circumstances, for example when the designated custodian does not inventory an over the counter security. Securities in the designated custodians accounts will be protected up to the full value of the account for RMA and BSA accounts ($500,000 provided by SIPC, not in excess of $100,000 for claims relating to cash, and the remainder provided by a leading U.S. insurance carrier). E. FOREIGN EQUITIES In keeping with the general investment philosophy, the Subcommittee expects the Investment Advisor to monitor the foreign equity Managers/Mutual Funds to see that they maintain the equity portfolio at a risk level similar to that of the benchmark equity indices as a whole, with the objective of meeting or exceeding its results as represented by the relevant equity indices over a three-year moving time period. Foreign equity Managers are generally prohibited from investing in private placements, letter stock, and options; or from engaging in short sales, margin transactions or other specialized investment activities unless the Subcommittee agrees in writing under the terms of the equity Managers or Mutual Fund investment management agreements. In addition, Investment Managers are prohibited from investing in derivatives. Notwithstanding the foregoing, Mutual Funds may buy or sell option contracts and may hedge currencies. Within the above guidelines, the Subcommittee gives the Investment Managers full responsibility for security selection and diversification. However, an individual security should not have a position exceeding a 10% commitment of the account s market value for an individual security. Such limits should not be exceeded on an ongoing basis, but may, from time to time be exceeded on a short-term basis. Managers/Mutual Funds also will have full discretion over turnover and allocation of equity holdings among selected securities and countries, within the limits described above. While it is understood that Managers/Mutual Funds will deviate from the representative indices, the Subcommittee wishes to limit the extent of potential underperformance. Because of the inherent difficulty in defining specific restrictions, which would cover all possibilities, the Subcommittee instructs 110

121 Exhibit II1-One Manager/Mutual Funds to invest the equity component of the account to attempt to prevent the returns for that component from underperforming the relevant equity indices by more than 15% in any three consecutive quarters. F. FIXED INCOME Investments in fixed income securities will be managed actively by the Investment Managers to pursue opportunities presented by changes in interest rates, credit ratings and maturity premiums. Investment Managers may select from appropriately liquid, corporate debt securities and obligations of the U.S. Government and its agencies, foreign governments and their agencies, and securities convertible to equities. Investments in municipal or other federal tax-exempt securities are prohibited. The Subcommittee gives the Investment Managers full responsibility for security selection and diversification. Notwithstanding the foregoing, the Subcommittee desires to create a portfolio that is consistent with the duration of the Barclays Government/Corporate Intermediate Bond Index. The Investment Managers shall follow the following guidelines. 1. The Investment Managers shall invest in fixed-income obligations with maturities or expected life from zero to 20 years. The portfolio duration shall be no longer than that of the Barclays Government/Corporate Intermediate Bond Index plus six months. 2. Securities of a single issuer, the security for which is the same source (with the exception of the U.S. Government and its agencies) should not exceed 5% of the market value of the fixed income portfolio. 3. Corporate debt issues that are not investment grade quality (that do not have a credit rating of at least BBB or Baa or better from Standard & Poor s or Moody s, respectively); corporate debt issues with a BBB or Baa credit rating from Standard & Poor s or Moody s, respectively, should not constitute more than 5% of the income portfolio. In the event of a split between Standard & Poor s and Moody s, the higher shall be the qualified determinant. Investment Managers are specifically prohibited from investing in private placements, from speculating in fixed income or interest rate futures, and interest rate options. In addition, the Managers will not engage in investment transactions involving stock options, short sales, purchases on margin, letter stocks, private placement securities or commodities. While it is understood that the Investment Managers will deviate from the representative indices, the Subcommittee wishes to limit the extent of potential underperformance. Because of the inherent difficulty in defining specific restrictions, which would cover all possibilities, the Subcommittee instructs the Investment Managers to invest the domestic fixed income component of the account so as to attempt to prevent the returns for that component from underperforming the relevant fixed income indices by more than 15% in any three consecutive quarters. Within the above restrictions, the Investment Managers have complete discretion over timing and selection of fixed income securities. G. ALTERNATIVE INVESTMENTS Alternative investments should be selected to provide the Subcommittee with diversification through less correlated asset classes. The Subcommittee foresees the possibility of using mutual funds/collective trust funds/limited partnerships that may serve as alternatives to either equity or income investments, and understands that the Subcommittee would not have any control over the management of such funds with regard to specific guidelines and restrictions. Specifically, Subcommittee anticipates utilizing hedge fund of funds to allocate assets across long/short equity and 111

122 Exhibit II1-One multi-strategy hedge fund strategies. Underlying managers within alternative investment strategies may invest in private placements, letter stock and options, short sales, margin transactions, derivative contracts and any other strategy permitted within the offering documents of the investment vehicle. The Subcommittee and the Investment Advisor shall review the permitted investment strategies of such vehicles prior to investing in such vehicles. The performance of alternative investments will be expected to meet or exceed the performance of the benchmark determined by the Investment Advisor, over a full market cycle. H. CASH AND EQUIVALENTS The Investment Managers may invest in commercial paper, repurchase agreements, Treasury Bills, certificates of deposit, and money market funds to provide income, liquidity for expense payments, and preservation of the account s principal value. Commercial paper assets must be rated A-1 or P-1 by Standard & Poor s or Moody s, respectively. The Investment Managers may not purchase short-term financial instruments considered to contain speculative characteristics (uncertainty of principal and/or interest). Uninvested cash reserves should be kept to minimum levels. Within the limitations mentioned above, the Investment Managers have complete discretion to allocate and select short-term cash and equivalent securities. I. OTHER ASSETS Investment Managers will not purchase assets other than those mentioned above without the written consent of the Subcommittee. Investments not specifically addressed by this Statement are prohibited without the Subcommittee s written consent. J. COMMUNICATIONS The Investment Advisor and Investment Managers shall provide a regular account review detailing investment performance, strategy, and account value, with the following provision to ensure management of the financial and health care sectors of the portfolio is performed with limited knowledge of the Subcommittee and NAIC senior management. The only employees authorized to receive investment reports, purchase or sale confirmations, or brokerage statements shall be the Assistant Controller, Accounting Manager, and other Senior Finance Department staff members. No information regarding individual holdings in the financial and health care sectors shall be communicated to any member of the Subcommittee or any member of NAIC or their staff. Sale and purchase strategies with respect to the financial and health care sectors shall not be discussed with or otherwise communicated. Investment reports provided to personnel other than the Assistant Controller, Accounting Manager, or other Senior Finance Department staff member, and to the Subcommittee and NAIC members shall not include information regarding any of the individual holdings in the financial and health care sectors. The above restrictions shall only be waived or modified in writing by the Chief Financial Officer. VII. INVESTMENT MANAGER SELECTION AND EVALUATION A. INVESTMENT MANAGER SELECTION The Subcommittee will rely on the Investment Advisor to select/recommend, and monitor the Investment Managers according to the stated policy guidelines and objectives contained within this document. Investment Managers will be screened for superiority of qualitative characteristics such as 112

123 Exhibit II1-One investment process and discipline, personnel and ownership structure. Quantitative characteristics such as absolute returns and risk-adjusted performance, consistency of returns and performance in both up and down markets will also be analyzed. The following chart sets forth the allocation to the selected Investment Managers in all equity and income asset classes. Note that specific descriptions of the styles of U.S. equity managers are provided herein. Managers may be changed from time to time without any amendment of this document, with notice to an agreement of the Subcommittee. ASSET CLASS TARGET MANAGER COMPARATIVE INDEX ALLOCATION EQUITY/ALTERNATIVES U.S. EQUITIES All Cap 4.25% Russell 3000 Yield Focused Equity 4.25% London Company Income Russell 1000 Value Equity Large Cap Growth 8.25% Mitchell Capital Russell 1000 Growth Management Large Cap Value 8.25% Eagle Capital Management Russell 1000 Value Small Cap Value 7.50% Cardinal Capital Management Russell 2000 Value FOREIGN EQUITIES 5.00% Tweedy Browne Global Value Fund MSCI EAFE LONG/SHORT EQUITY 7.50% Protégé Partners QP Ltd. HFRI Composite Fund of Funds LONG/SHORT INTERNATIONAL EQUITY 5.00% HFRX Global Hedge Fund INCOME/ALTERNATIVES Core Bond 10.50% Metropolitan West Total Return Intermediate Fixed Income 20.00% Mitchell Capital Securities Management Core Bond 4.50% Loomis Sayles Investment Grade Bond Short Duration Income 5.00% Lord Abbett Short Duration Income Barclays Aggregate Bond Barclays Intermediate Government/Credit Barclays Aggregate Bond Barclays Aggregate Short Duration Gov t/credit International Fixed Income 2.50% Templeton Global Bond Citigroup World Government International Fixed Income 2.50% Oppenheimer International Bond Master Limited Partnerships 5.00% Tortoise Capital Advisors/Kayne Anderson Past performance is no guarantee of future results Citigroup World Government Alerian MLP Index B. INVESTMENT MANAGER PERFORMANCE REVIEW AND EVALUATION Performance reports generated by the Investment Advisor shall be compiled at least quarterly and communicated to the Subcommittee for review. The investment performance of the total NAIC portfolio, as well as individual Investment Managers, will be measured against commonly accepted performance benchmarks. Consideration shall be given to the extent to which the investment results are consistent with the investment objectives set forth in this statement. The Subcommittee intends to evaluate the NAIC portfolio over at least a three-year period, but will closely monitor performance throughout the year. The Subcommittee reserves the right to terminate an Investment Manager for 113

124 Exhibit II1-One any reason including but not limited to the following: 1. Investment performance significantly less than anticipated given the discipline employed and the risk parameters established or unacceptable justification of poor results. 2. Failure to adhere to any aspect of this statement of investment policy, including communication and reporting requirements. 3. Significant qualitative changes to the Investment Management organization. Investment Managers shall be reviewed regularly regarding performance, personnel, strategy, research capabilities, organizational and business matters and other qualitative factors that may impact their ability to achieve the desired investment results. VIII. CONCLUSION This Policy will become effective upon adoption by the Executive (EX) Committee and will be adhered to by the Subcommittee, Investment Advisors and Investment Managers. Any proposed revisions must be approved by the Subcommittee before they are presented to the Executive (EX) Committee for final approval. 114

125 Fiscal Impact Statement Summary

126 2016 Projection 2017 Budget Fiscal Impact Capital Net Impact Capital Net Impact Number Description Expenditure Revenues Expenses 2016 Budget Expenditure Revenues Expenses 2017 Budget Total Revenues Over/(Under) Expenses Before Fiscal Impact Statements $94,974,972 $100,878,552 ($5,903,580) $676,199 $97,259,097 $101,370,125 ($4,111,029) 1 Regulatory Data Collection - Phase II 74, ,653 (137,653) 2 System for Electronic Rate and Form Filing (SERFF) Integration Expansion - Phase II 6,533 6,533 3 Online Content Management System (CMS) 228,400 (228,400) 4 Information Technology Infrastructure Library (ITIL) Adoption - Phase II 34,497 3, ,797 (192,002) 5 Job Scheduler 180, ,500 (157,500) 6 Recalibration of Database Filing Fee Structure 1,658,428 1,658,428 Total Fiscal Impact Statements Revenues Over/(Under) Expenses 288,497 1,668, , ,406 Investment Income 4,120,227 4,120,227 2,942,923 2,942,923 Total Revenues Over/(Under) Expenses $0 $99,095,199 $100,878,552 ($1,783,353) $964,696 $101,870,776 $102,089,475 ($218,700) NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 2016 PROJECTIONS/2017 BUDGET FISCAL IMPACT STATEMENTS 115

127 116

128 Fiscal Impact 1

129 FISCAL IMPACT STATEMENT DATE SUBMITTED: SEPTEMBER 15, 2016 NAME OF PROJECT/INITIATIVE: REGULATORY DATA COLLECTION PHASE II REGULATOR/BUSINESS SPONSOR: EXECUTIVE (EX) COMMITTEE NAIC STAFF SUPPORT: ANDY BEAL, CHIEF OPERATING OFFICER/CLO JEFF JOHNSTON, SR. DIRECTOR, FINANCIAL REGULATORY AFFAIRS DOMESTIC POLICY & IMPLEMENTATION ERIC NORDMAN, DIRECTOR, REGULATORY SERVICES & CIPR REQUESTED PROJECT START DATE: OCTOBER 1, 2016 ANTICIPATED COMPLETION DATE: DECEMBER 31, 2017 TOTAL REVENUE EXPECTED (2017): TBD TOTAL EXPENSE REQUESTED (2017): $137,653 TOTAL CAPITAL REQUESTED (2017): $74,000 I. Executive Summary The objective of this project is to establish ability for the NAIC to quickly respond to state insurance department data collection needs. The current data collection functions at the NAIC utilize applications and systems developed in-house, which take significant resources to utilize for new data collection projects. As a result, the NAIC cannot effectively respond to all new data collection requests in a timely manner. Implementing a developed business and technology framework would allow the NAIC to better serve the state insurance regulators. The NAIC has proven capabilities as a centralized facility that can provide consistency and efficiency in support of existing regulatory functions nationwide. Regulators have many different data collection needs. The NAIC currently serves as the data collector in several areas such as the collection and validation of statutory financial statements and market conduct annual statements. This initiative will allow the NAIC the capability to quickly set up data collection processes for a broader range of state insurance regulatory data needs. Two such data collection projects are Principle-Based Reserving (PBR) (effective January 1, 2017) and Terrorism Risk Insurance Act (TRIA). 117

130 The Valuation Manual (VM) referenced in the Standard Valuation Law (SVL) identifies the need for a statistical agent to collect detailed experience data from insurers regarding the mortality study, as well as the need for other studies to be established in the future, such as expenses and lapse studies. This project proposes the NAIC serve as the PBR statistical agent for one or more states by collecting the 2017 mortality study experience data from insurance companies as well as all future mortality data studies and any additional studies to be adopted by the NAIC Life Actuarial (A) Task Force. State insurance regulators also need to collect data related to terrorism risk insurance to serve important regulatory objectives, such as monitoring the affordability and availability of insurance coverage for acts of terrorism and assessing insurers financial exposure to terrorism risk. Eleven states initially collected workers compensation data in May and June Subsequently all states are requesting terrorism risk insurance data for workers compensation and other commercial lines of business to be filed in September The current process requires companies to submit data to a lead state. The data is then transmitted by the lead state to the NAIC. It is expected this data call will be conducted annually. The current process requires additional resources from the lead state, involving a coordination effort that significantly delays the project prior to the submission of the data and does not allow for the data to be run through initial validation checks. A process by which the NAIC would serve as the direct collector of the data from insurers would reduce state resources necessary to support the process and allow for initial data validation checks, leading to efficiencies and improvements in the data collection as well as more timely quality data. NAIC staff were directed by the NAIC Executive (EX) Committee to investigate the feasibility of the NAIC serving as the PBR mortality experience data collection statistical agent. This project responds to this directive, but does so in a manner that would allow the NAIC to apply the solution to other state insurance regulatory data collection efforts as well. II. Benefits of Project/Initiative to NAIC Members: Given the importance of data control and integrity, the NAIC needs to be able to provide a quick, efficient, and cost-effective method to accomplish various data collection projects needed by state insurance regulators. When the NAIC does not serve this role, either the regulatory need remains unmet or others must fill the void, such as each state insurance department or private companies, often with industry ties. The NAIC s centralized services would avoid compatibility issues that might exist if each insurance department developed separate solutions for the same data. As the regulators support office, the NAIC would provide significant benefits to regulators compared to private companies in regard to prioritization, direction, and focus. For example, for the PBR mortality experience data collection project, the NAIC would work closely with the NAIC Life Actuarial (A) Task Force to update requirements in VM-51, keep domiciliary regulators apprised of any data issues with their companies, and at the direction of the PBR Implementation (EX) Task Force, proactively develop regulatory tools to enhance the efficiency and effectiveness of PBR analysis and examination oversight functions. III. Stakeholders: The primary stakeholders for this project are insurance regulators, though insurance companies will be submitting the data and consumers will benefit from improved regulation. NAIC staff could be considered stakeholders to the degree the regulators decide to use them as the centralized database provider. 118

131 IV. Business and Operational Impact: This initiative will not create any ongoing business or operational impacts to the NAIC. Typical release support will be needed from the Technical Services Division and the ITG Enterprise Team during the project. The Financial Regulatory Services Department in the Financial Regulatory Affairs Division will be involved as the business owner of the process. The Market, Financial, and Licensing Systems Department in the ITG Division will have development, testing, and deployment responsibilities. V. Financial Impact: In addition to the internal staff (information technology, technical services, and financial regulatory support) hours necessary for development and support of this process, costs will be incurred to purchase hardware and software, licenses, and maintenance on these purchases. Total capital costs are expected to be $74,000 while cash expenses are expected to be $115,600 depreciation and amortization on capital purchases is $22,000 in Fees may be assessed for various submissions of data to cover direct and indirect costs associated with the setup of the data collection infrastructure and ongoing maintenance and support. See Attachment I for the financial impact details. VI. Alternatives or Partnerships: Alternatives to this proposal will differ by specific project: some regulatory data collections will simply not move forward while others might be developed on a state-by-state basis, most likely in different formats and technologies. Regulators and/or industry could contract with private firms to perform the data collection work. For PBR, the status quo would likely continue with the current industry-affiliated private entity collecting the mortality experience data, thus avoiding all of the proactive benefits that would occur if the NAIC performed this task for state insurance regulators. For other data collection projects, lead states would continue to be utilized for data collection, significantly extending lead times and the quality review process as staff work through the lead state and an inefficient validation process to cleanse the data prior to it being available for analysis. VII. Risk Management: Risks would be specific to each particular state insurance regulatory data collection project. Primarily, standard for any technology project would be the amount of resources required, timing of the project, and the level to which the project meets user needs. However, the software selected for this project explicitly allows for quick and easy customization for various data collection needs with minimal dollar and resource costs. The primary risk of not approving this project is the impact on state insurance regulation. The NAIC is the centralized support center for state insurance regulators, and much of the NAIC s function involves electronic data and tools. The NAIC s current inability to quickly ramp up for regulatory data collection needs results in less effective regulation either from the data not being collected, not being collected in a consistent manner that allows easy transfer from state to state, or being collected by a private entity that may have conflicted interests. Private entities 119

132 may not be proactive or consider the development of tools and changes that would enhance the effectiveness and efficiency of regulatory oversight process a priority. 120

133 Revenues: Industry usage fees based on the goal of cost / revenue neutrality TBD - TBD TBD Total Revenues Expenses: Maintenance-Computer Hardware $11,880 $11,880 $11,880 $11,880 Non-Capital Equipment 79,720 $23, , , ,380 Depreciation (recognition of capital hardware) 1,500 2,056 $2,056 $2,056 $2,056 $2,056 $2,056 $2,056 $2,056 $2,056 $2,056 22,060 24,667 24,667 Total Expenses - 93,100 26,049 2,056 2,056 2,056 2,056 2,056 2,056 2,056 2,056 2, , , ,927 Revenues Over (Under) Expenses $0 ($93,100) ($26,049) ($2,056) ($2,056) ($2,056) ($2,056) ($2,056) ($2,056) ($2,056) ($2,056) ($2,056) ($137,653) ($140,260) ($164,927) Capital Purchases: Computer Hardware-virtual environment $20,000 $20,000 Computer Software-Power Exchange $54,000 54,000 Total Capital Purchases $0 $54,000 $20,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $74,000 $0 $0 Recognized over the useful life of the asset acquired 2017 Budget Fiscal Impact Statement Project Cost Analysis Project/Initiative: Regulatory Data Collection - Phase II 2017 Budget Spread Description January February March April May June July August September October November December Total Budget Budget Attachment I 121

134 122

135 Fiscal Impact 2

136 FISCAL IMPACT STATEMENT DATE SUBMITTED: SEPTEMBER 15, 2016 NAME OF PROJECT/INITIATIVE: REGULATOR/BUSINESS SPONSOR: NAIC STAFF SUPPORT: SYSTEM FOR ELECTRONIC RATE AND FORM FILING (SERFF) INTEGRATION EXPANSION PHASE II SPEED TO MARKET (EX) TASK FORCE SCOTT MORRIS, CHIEF TECHNOLOGY OFFICER REQUESTED PROJECT START DATE: OCTOBER 1, 2016 ANTICIPATED COMPLETION DATE: DECEMBER 1, 2017 TOTAL REVENUE EXPECTED (2017): $6,533 TOTAL EXPENSE REQUESTED (2017): $0* TOTAL CAPITAL REQUESTED (2017): $0 *Project will use internal IT staff resources I. Executive Summary The first phase of the System for Electronic Rate and Form Filing (SERFF) Integration Services (SIS) project was completed in 2016 and allows the industry to use web services to retrieve significant portions of the data available in SERFF. Several vendors are interested in the expansion of these services to allow them to deliver a complete solution to their customers, including the SERFF submission and review. The proposed expansion of SIS functionality will make two-way integration available by allowing industry customers to retrieve additional data and attachments and to send updates back to SERFF. The expansion of this service would also allow states and the current SERFF web services vendor to move to SIS from existing outdated and inflexible web services. This initiative supports the NAIC s mission and strategic objectives as it improves speed to market for insurance products. The automation provided by this project will reduce errors, eliminate duplicate data entry, and help insurers provide timely products to insurance consumers. The project is expected to begin in late 2016 and finish by the end of II. Benefits of Project/Initiative to NAIC Members: NAIC members will benefit from the new web services through the ability to pull data from SERFF to populate reports or a legacy system and push data into SERFF if a filing review is completed in a legacy system. States should realize faster turnaround from industry users 123

137 employing the web services. The new model will be easier to use, scalable, and more flexible than the current process, and will easily accommodate future development. While these services are targeted for industry use by the end of 2017, the ultimate goal is to convert these services for use by states, at no charge, in III. Stakeholders: The primary stakeholders are vendors and insurance companies with systems for managing rate and form filing information, as these are the most likely parties to be interested in using the new web services. Insurance companies may build or modify existing systems to integrate with the new services. Several insurance companies will be invited to collaborate with the NAIC, in order to determine how best to design and implement the services in an effort to provide a better product. States using current web services will have the opportunity to move to the new services and may co-develop if desired. IV. Business and Operational Impact: Typical system release support will be required from the Technical Services Division and the Enterprise team within the Information Technology Group (ITG) through deployment in December The Executive Division s Finance Department will need to support the implementation of the new revenue stream. Service desk analysts will require training in order to support users. Once in production, ongoing support from the NAIC Service Desk and other ITG staff will be necessary. V. Financial Impact: There is no budgetary expense associated with this project as no consulting or capital costs are anticipated and existing ITG staff will be used to design, develop, and implement the module. Revenue is anticipated to begin in December 2017 following deployment of the expanded functionality. License fees will be assessed on an annual basis starting January 1 of each year and prorated if purchased after the first of the year. The revenue projection assumes four users will be assessed prorated fees in 2017 ($6,533) and full fees in 2018 ($82,900). See Attachment I for the financial impact details. VI. Alternatives or Partnerships: One alternative to this project would be to do nothing. This would result in an inability to provide the speed-to-market improvements this functionality affords the industry and the states. Another alternative would have been to use the existing SERFF Programming Interface (SPI) services currently used by one vendor. However, the NAIC membership voted at the NAIC 2016 Summer National Meeting to discontinue the provision of the SERFF SPI to all non-regulatory entities. This decision was based on SPI s lack of flexibility and scalability. Written 10 years ago in an outdated platform, SPI is not intuitive or easy to learn and cannot support multiple users. This service also lacks the functionality provided in the new services. 124

138 VII. Risk Management: The risks of this project are low. The project will be monitored through the NAIC Enterprise Project Management Office and reported to the NAIC membership as needed. The project team will partner with interested users to develop and test the new services. 125

139 126

140 Total Expenses Revenues Over (Under) Expenses $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $6,533 $6,533 $82,900 $133,400 Total Capital Purchases $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Attachment I 2017 Budget Fiscal Impact Statement Project Cost Analysis Project/Initiative: System for Electronic Rate and Form Filing (SERFF) Integration Expansion - Phase II 2017 Budget Spread Description January February March April May June July August September October November December Total Budget Budget Revenues: Licenses for SERFF Expansion module (phase II) $6,533 $6,533 $82,900 $133,400 Total Revenues $6,533 $6,533 $82,900 $133,400 Expenses: Capital Purchases: 127

141 128

142 Fiscal Impact 3

143 FISCAL IMPACT STATEMENT DATE SUBMITTED: SEPTEMBER 15, 2016 NAME OF PROJECT/INITIATIVE: ONLINE CONTENT MANAGEMENT SYSTEM (CMS) REGULATOR/BUSINESS SPONSOR: INTERNAL ADMINISTRATION (EX1) SUBCOMMITTEE NAIC STAFF SUPPORT: SCOTT MORRIS, CHIEF TECHNOLOGY OFFICER SCOTT HOLEMAN, DIRECTOR, COMMUNICATIONS REQUESTED PROJECT START DATE: JANUARY 1, 2017 ANTICIPATED COMPLETION DATE: DECEMBER 1, 2017 TOTAL REVENUE EXPECTED (2017): $0 TOTAL EXPENSE REQUESTED (2017): $228,400 TOTAL CAPITAL REQUESTED (2017): $0 I. Executive Summary This proposal outlines new tools, processes, and procedures to enhance the NAIC s Web presence. It seeks to align online NAIC properties with a more consistent look and feel, regardless of the group maintaining the application or content. NAIC teams will work together to understand and implement best practices, address training needs, enhance content contribution and management process, and implement security best practices. The initiative will allow for public and private content consumption, streamlining the experience for the NAIC s customers. The platform will also address user experience by enhancing mobile and tablet display and meeting accessibility standards in line with the Americans with Disabilities Act (ADA). Upon completing this project the NAIC will be on a modern extensible content management platform capable of addressing future needs in a flexible, cost-effective manner. This proposal has three objectives: Streamline development and maintenance of online content during the last 10 years NAIC online content has experienced an enormous increase in traffic and use. To illustrate: in 2006, the naic.org website had approximately 40,000 annual unique users. In 2016, that number has grown to two million. This growth has dramatically increased the day-to-day workload executed by NAIC staff. In addition to naic.org, staff maintains additional domains: nipr.com, insurancecompact.org, insureuonline.org, and several others. NAIC staff executes more than 7,000 edits per year to ensure NAIC members receive information about each model amendment, travel event, or conference call. Historically, website workload has increased by approximately 15% each year. This 129

144 request facilitates employment of available software in concert with requisite hardware, support, and training to develop a content management system (CMS) best suited for the security and workload. It also provides for an external review or post site audit to assure implementation meets accepted industry system performance and integrity benchmarks. Improve user experience over the years, NAIC Web properties have grown significantly with the addition and expansion of websites, applications, and content. These properties serve a variety of audiences: regulators, consumers, industry, and other partners. This growth and user-diversity have led to an often complex and challenging user experience. To address this, the NAIC will engage an external vendor for a usability study of NAIC sites. NAIC staff will take this feedback and determine what recommendations should be implemented in the scope of this project. This proposal provides for a centralized repository of shared content across NAIC websites and applications. As this repository develops, it will enable a more consistent look and feel throughout various sites and applications as development and update cycles occur. The scope of this proposal includes the capability for websites and applications to consume content from a centralized system. This initiative does not assume or require plans to redesign all online content, nor does it preempt updates or redesigns in progress. It would, however, improve the NAIC's speed and capacity to execute similar efforts in the near future. Assure accessibility of online content and ongoing compliance to the Americans with Disabilities Act (ADA) NAIC staff employs a variety of resources and tools to evaluate online content for ADA-inspired accessibility standards. The Department of Justice has documented its intent to publish ADA accessibility rules to the Federal Registry in This proposal marks the NAIC s intent to measure, document, and formalize ADA-inspired accessibility practices across the organization s content platforms. The NAIC will contract with a vendor to audit NAIC online content for ADA, Section 508 compliance to help guide NAIC staff efforts with standardizing accessibility measures and practices. NAIC will engage a vendor to provide counsel to senior managers and legal staff to educate staff regarding certifications such as Web Content Accessibility Guidelines (WCAG) 2.0 and/or continuing education designations for NAIC staff. Finally, staff training for online content managers will be identified and employed to ensure ongoing ADA compliance, while allowing the NAIC to support similar efforts in states. II. Benefits of Project/Initiative to NAIC Members: Tangible benefits include: Reduced upward pressure on future headcount as usage of NAIC websites continues to increase, a well-executed CMS will lower the impact of resulting workload for online content developers and managers, while improving quality and operational controls. Generally as website use goes up, implementing good operations and a CMS will help reduce the need for additional headcount to manually maintain website content. Improved user experience while long-time users of NAIC websites are familiar with the variety of look and feel, new users may find them challenging to navigate. This initiative seeks to harmonize design, branding, and user experience across NAIC online 130

145 properties by providing teams with new tools, resources, and processes. Users will gain a more cohesive and predictable user experience. ADA Compliance a variety of measures are used to ensure users requiring assistive technology can access NAIC online content. Measuring, standardizing, and documenting these efforts while training NAIC staff to assure long-term compliance will ensure the NAIC is meeting the highest accessibility standards for consumers and industry. In addition, these efforts will ensure the NAIC can reliably support efforts of state insurance departments that may be required to quickly address ADA-related concerns. Intangible benefits include: Improved inter-disciplinary coordination among departments and staff within the NAIC the technology sought in this initiative provides a shared tool and platform for a number of teams and divisions at the NAIC. It presents an opportunity for teams to collaborate and share resources to develop novel solutions and services for internal and external stakeholders. In mature technology environments, hardened cultures develop around specific content groups, applications, or environments. Technologies like CMS are designed to create avenues into these silos, creating windows of sharing and collaboration between teams. Technological innovation a laboratory for states: As the data-technology provider for state insurance departments, the NAIC is best served if it represents state-of-the-art information technology. At the same time, NAIC members supervise industries vulnerable to cyber-threat. Therefore, states and by extension the NAIC must maintain a position of authority with regard to IT security. This dual mission makes it vital the NAIC move in both directions at once, expanding its expertise in the delivery of online content while increasing its knowledge and infrastructure for security. This proposal will facilitate the improved execution of this dual mandate. The collaboration and innovation required to execute this dual mandate represents a tremendous opportunity to improve the NAIC s expertise, making it a more effective laboratory for its members. III. Stakeholders: This proposal represents the opportunity to carefully and transparently improve the NAIC s ability to serve everyone who uses NAIC websites and online applications. Website users All users will benefit from an improved experience featuring cohesion from product to product; greater compatibility across browsers and devices; delivery meeting ADA-accessibility standards; and content enriched through greater collaboration and innovation. Regulators Regulators gain a more integrated experience as they access both public and secure content. NAIC Staff NAIC staff will gain improved technologies and processes for maintaining accurate, current delivery of online content. Staff will be able to respond to the needs of members and leadership, while better absorbing fluctuations in workload. National Insurance Producer Registry (NIPR) and Interstate Insurance Product Regulation Commission (IIPRC) As websites are updated NIPR and IIPRC will be able to leverage the same technology for their web presence. 131

146 IV. Business and Operational Impact: The initiative s objectives will be proven, demonstrated, and implemented under the direction of NAIC management in careful collaboration with the teams impacted. The CMS is new technology with requirements that vary from current NAIC platforms. This will require adverse impacts be identified and minimized. The CMS selected will require staff training which is expected to be done primarily through self-study, potentially some formal training, as well as internal training as in the case of training content contributors on how to submit content to the website. The proposed software is free and open source. There will be a focus on security by implementing security best practices as well as a security review before the system is moved into a production mode. NAIC users who typically submit documents to be posted to the website may be asked to post content directly to the CMS, which will require development of new processes. Workflows will be developed in the CMS to ensure content is approved before being released for viewing by any end user. V. Financial Impact: A majority of the work for this project will be completed by internal NAIC staff. Hard costs include minor infrastructure costs of $4,400 and third-party consulting and training of $224,000. Ongoing support in subsequent years is anticipated to be $15,800 per year for server maintenance and consulting. See Attachment I for the financial impact details. VI. Alternatives or Partnerships: An alternative would be to continue with the current process, which is manually managing the website and content. By implementing this technology the NAIC will improve capacity of maintaining online content while improving management and overall web experience for users. The core CMS application is free and open source and the hardware component is relatively inexpensive. As of the writing of this fiscal, the focus has been narrowed to one of three open source offerings. VII. Risk Management: The risks associated with this project include the following: The size and complexity of the project along with operational requirements of the various teams involved could lengthen the timeline if due dates and deliverables are not well managed. Like any new system, security needs are top priority. CMS distributes content management responsibilities for an online channel to broader communities. This allows for more edits, from more people, more quickly. Without quality control measures, this brings additional risk of errors and omissions, especially through periods of adoption. 132

147 The consolidation and sharing of resources in a centralized location can allow an error in one resource (a line of code, an image, etc.) to impact a large number (if not all) NAIC applications or content channels. CMS implementations can have negative impacts on the performance of websites if not tuned and configured correctly. If not configured correctly, CMS implementations can have negative impacts on a website s performance on search engines, such as Google. More than 70 percent of visits to NAIC public content are generated via search engines. In summary, the following risks exist for not acting on the proposed solution: The current ad-hoc nature of user experience design for NAIC applications for industry and regulators, along with the growing menu of public channels, will only increase, as will the uneven experience met by regulatory clients, industry, public users, and potential employees. ADA-inspired accessibility standards are established by federal regulators. By not harmonizing protocols, the organization will be unable to address any actions by the U.S. Department of Justice, quickly and uniformly. This initiative addresses overlapping concerns held by different divisions and provides an opportunity to share knowledge across divisions. Failure to address them cooperatively will lead to teams addressing them independently. This initiative also addresses issues faced by state insurance departments. It represents an excellent opportunity to gain valuable insights that could be used to inform their own efforts. Not acting on this initiative is to pass on the above opportunities. 133

148 134

149 Revenues Over (Under) Expenses ($194,400) $0 $0 ($17,000) ($17,000) $0 $0 $0 $0 $0 $0 $0 ($228,400) ($15,800) ($15,800) Total Capital Purchases $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $ Budget Fiscal Impact Statement Project Cost Analysis Project/Initiative: Online Content Management System (CMS) 2017 Budget Spread Description January February March April May June July August September October November December Total Budget Budget Revenues: Total Revenues Expenses: Professional Development-Training $12,500 $12,500 Professional Services-Computer 170,000 $17,000 $17, ,000 $15,000 $15,000 Travel-Staff 7,500 7,500 Non-Capital Equipment 4,400 4, Total Expenses 194, ,000 17, ,400 15,800 15,800 Capital Purchases: Attachment I 135

150 136

151 Fiscal Impact 4

152 FISCAL IMPACT STATEMENT DATE SUBMITTED: SEPTEMBER 15, 2016 NAME OF PROJECT/INITIATIVE: INFORMATION TECHNOLOGY INFRASTRUCTURE LIBRARY (ITIL) ADOPTION PHASE II REGULATOR/BUSINESS SPONSOR: INTERNAL ADMINISTRATION (EX1) SUBCOMMITTEE NAIC STAFF SUPPORT: SCOTT MORRIS, CHIEF TECHNOLOGY OFFICER FROSTY MOHN, CHIEF SECURITY AND INFORMATION OFFICER REQUESTED PROJECT START DATE: JANUARY 1, 2017 ANTICIPATED COMPLETION DATE: APRIL 1, 2017 TOTAL REVENUE EXPECTED (2017): $3,795 TOTAL EXPENSE REQUESTED (2017): $195,797 TOTAL CAPITAL REQUESTED (2017): $34,497 I. Executive Summary The NAIC technology teams are adopting processes based on the Information Technology Infrastructure Library (ITIL) industry standard. The goal of implementing ITIL processes is to bring consistency across teams for the implementation of technology changes (change management) and response to events that impact service delivery to customers (incident management). The objective of this project is to enhance an existing system with a new tool that will enable effective use of change and incident management processes. The improved system will allow for better cross-team coordination internally at the NAIC and service delivery metrics. Centralized tracking of changes to the NAIC technology environment benefits cybersecurity efforts and strengthens the NAIC s position for audits and certifications. Ultimately this project will result in an improved customer experience for NAIC membership and industry customers by reducing customer-impacting events and bringing swifter resolution to system outages or issues. II. Benefits of Project/Initiative to NAIC Members: The benefits to implementing ITIL processes include the following: Standardized methods and procedures are used for efficient and prompt handling of all changes to the technical environment, thereby minimizing the number and severity of customer-impacting incidents. 137

153 The level of customer service is improved by measuring and managing to established service level agreements. Audit, security, and compliance requirements are met by having a single record of changes. The speed of issue resolution is enhanced by having a single change audit trail when a system issue occurs. A single point of contact is established for all users communicating with technologyrelated departments and divisions across the NAIC, thereby improving communications between the business owners and technology groups. Technology teams coordinate efforts to focus on restoring services to normal operation levels as quickly as possible. III. Stakeholders: Internal NAIC and NIPR technical staff almost all technologists at the NAIC will be impacted by implementing ITIL processes and the new tool. Some activities include: input of incidents; updating incident tickets; routing tickets; managing and reporting on tickets and service level agreements; input of change requests; review of change requests; and updating change request items. In addition, the NAIC Systems and Packaged Software teams will build and configure the environment, work with the selected vendor to install and configure software, and provide ongoing maintenance and support of the infrastructure and software package. Internal NAIC and NIPR ITIL Process Owners these internal staff members will oversee processes and how they are implemented in the system as well as handle hands-on configuration of workflows in the tool. External Auditors will use outputs of the tool for verification of comprehensive change and incident management processes. NAIC and NIPR customers will experience improved customer service and less system downtime. IV. Business and Operational Impact: The impact to the business will be positive by providing greater visibility into the operations of the NAIC and NIPR technology areas. Users will be able to submit and track progress of incidents and requests online. There will be better notification to business users when changes occur in systems. Establishing service level agreements will help restore service and fulfill requests in a timelier manner. There will be significant impacts to internal IT operational staff. The new process and new tool will change the way incidents are handled and system modifications and enhancements are implemented. However, once workflows are established and training is complete, business processes will be easier to execute and receive faster resolution. Internal training will be needed for IT staff to use the new process and tool. V. Financial Impact: Capital will be requested for $34,497 for server hardware for the Content Management database. Expenses of $275,076 will cover maintenance for the server ($1,428); consulting to implement change management ($48,848); consulting to implement incident management ($180,800); consulting fees for knowledge transfer to staff ($32,000); and consulting travel expenses ($12,000). In addition, there will be depreciation of $11,496 on purchased hardware. 138

154 A third of the expenses, $90,775, will be assumed by NIPR, reducing NAIC s share of the expense to $184,301. A third of the depreciation ($3,795) will be assessed to NIPR each year and realized as revenue by the NAIC. The cost of the system will be partially offset in the future by cost savings from the consolidation of the current Help Desk tool and the elimination of multiple time tracking systems. Although savings from the Help Desk tool consolidation cannot be projected at this time, elimination of a time tracking and project management tool will be realized for $6,208 by September 2018 (a prorated savings for the current tool, which costs $18,625 per year). While the above recognizes costs to be assumed in 2017, some expenditures are proposed for The NAIC 2016 budget included $106,000 in approved funding for a Security Ticketing System. This request proposes redirecting this funding to purchase the ITIL software solution as it would not only serve the needs described above but would also address the much needed security ticketing functionality, further integrating NAIC systems. See Attachment I for the financial impact details. VI. Alternatives or Partnerships: An alternative is to continue the manual tracking of changes and incidents that occur in various systems today. Doing so will continue the cumbersome processes in place for system issue resolution, which ultimately degrades the customer service experience for NAIC s and NIPR s external users. Three different tools were considered; the tool selection was based on price, staff familiarity, and functionality. The selected tool has the lowest implementation and ongoing cost. VII. Risk Management: Some risks include: The timeline for implementation is aggressive and requires full adoption across teams in order to be successful. Internal staff will need to be educated on the new process and tool. Some ways these risks may be mitigated include: To ensure the project stays on track, the NAIC will contract with a partner to help implement the enhanced system. While processes have been defined and some training has occurred on ITIL, the NAIC will dedicate several staff to the implementation of and training on the new processes. Upgrades and standardization will be made to the existing system, regardless of the status of the ITIL initiative. 139

155 140

156 Revenues Over (Under) Expenses ($22,162) ($37,738) ($25,378) ($22,162) ($24,306) ($22,162) ($34,490) ($722) ($722) ($722) ($722) ($722) ($192,002) ($22,553) ($10,136) 2017 Budget Fiscal Impact Statement Project Cost Analysis Project/Initiative: Information Technology Infrastructure Library (ITIL) Adoption - Phase II 2017 Budget Spread Description January February March April May June July August September October November December Total Budget Budget Revenues: System Usage Fee-NIPR $316 $316 $316 $316 $316 $316 $316 $316 $316 $316 $316 $316 $3,795 $3,795 $3,795 Total Revenues ,795 3,795 3,795 Expenses: Computer Hardware-Maintenance ,428 1,428 1,428 Professional Services-Computer 32,000 55,248 36,800 32,000 35,200 32,000 50, ,648 30,000 30,000 NIPR credit for hardware maintenance and consulting expense (10,599) (18,271) (12,183) (10,599) (11,655) (10,599) (16,671) (39) (39) (39) (39) (39) (90,775) (10,371) (10,371) Non-Capital Equipment-software elimination in (6,208) (18,625) Depreciation (recognition of capital hardware) ,496 11,499 11,499 Total Expenses 22,478 38,054 25,694 22,478 24,622 22,478 34,806 1,038 1,038 1,038 1,038 1, ,797 26,348 13,931 Capital Purchases: Server Hardware $34,497 $34,497 Total Capital Purchases $34,497 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $34,497 $0 $0 Recognized over the useful life of the asset acquired Attachment I 141

157 142

158 Fiscal Impact 5

159 FISCAL IMPACT STATEMENT DATE SUBMITTED: SEPTEMBER 15, 2016 NAME OF PROJECT/INITIATIVE: REGULATOR/BUSINESS SPONSOR: NAIC STAFF SUPPORT: JOB SCHEDULER INTERNAL ADMINISTRATION (EX1) SUBCOMMITTEE SCOTT MORRIS, CHIEF TECHNOLOGY OFFICER REQUESTED PROJECT START DATE: JANUARY 1, 2017 ANTICIPATED COMPLETION DATE: SEPTEMBER 1, 2017 TOTAL REVENUE EXPECTED (2017): $0 TOTAL EXPENSE REQUESTED (2017): $157,500* TOTAL CAPITAL REQUESTED (2017): $180,000 I. Executive Summary Most of NAIC s applications require scheduled jobs to run at a certain time and in a certain order to maintain optimum performance. Today there are several mechanisms in place to handle this; however, they no longer meet the growing needs of NAIC customers. This proposal recommends purchasing a job scheduler tool that will better meet business needs. A proven, off-the-shelf job scheduler tool will enable the NAIC to deploy internally developed systems more quickly. As systems are developed, they will interact with the proposed tool to handle job scheduling rather than having internal resources code a solution within each system, reducing coding time and promoting greater uniformity across systems. In addition, usage of the tool s electronic notifications will enable NAIC support staff to proactively uncover potential system outages or issues before they are deployed. It will also allow the NAIC to respond more rapidly to system outages or issues that do occur in a production environment. The proposal contemplates hiring a consultant to assist NAIC staff with selection of the best tool, migration of jobs to the new tool, oversight of the transfer of jobs from the old tool to the new one, and training on the selected tool s features. II. Benefits of Project/Initiative to NAIC Members: All customers (industry, consumer, or state) of NAIC applications will benefit from NAIC staff using this tool. Specific benefits of the new job scheduler tool include the following: 143

160 Integration with other IT tools to allow notification of job completion and failures to the proper business and technical representatives, thereby improving communications regarding job status. Monitoring to manage the number of jobs currently in place and to house them in a single location for easier configuration changes and tracking. Use in semi-annual SOC audits, which documents activity for auditing and compliance purposes. Reduction in the NAIC s internally developed code base, which in turn will improve speed to market with new NAIC applications. III. Stakeholders: NAIC staff are the primary stakeholders. Internal staff will be involved in the installation and infrastructure setup and administration of the tool. External users will benefit from an improved customer experience and speed to market of application deployment: Proactive response to potential issues that have not yet impacted customers Less coding for new products that require job scheduling Quicker reaction to production incidents that have impacted customers IV. Business and Operational Impact: The primary business impact will be improved availability, reliability, and performance of NAIC applications. Two areas that will experience the most operational impact are Technical Services s Computer Operations staff and ITG development staff who will work with the new tool. Formal training will be needed for NAIC staff to support and use the selected tool. Business partners of impacted applications, both internal and external, may be asked to test after initial migration. V. Financial Impact: A consultant will be hired to evaluate the best tool for the NAIC. Expenses are expected to be $157,500, which includes $97,500 for consulting to assist with the identification of the best solution and in integrating the new system into the NAIC s suite of applications. It also includes $10,000 for training and $50,000 in depreciation of the selected tool s capital expense. Preliminary research has narrowed down the tool options to be considered, which range from $125,000 to $180,000. This proposal assumes the most expensive may be selected, at a capitalized cost of $180,000 and an ongoing annual maintenance cost of $36,000, starting in Once the system is implemented, there will be savings of both time and expense. Internal staff supporting major applications such as NIPR, SERFF, and SBS will no longer need to code job scheduling features into applications to meet the needs of the membership. An evaluation of a recent development project indicated 400 hours of coding is needed to meet existing job scheduling business requirements. Using the 400-hour estimate as an average for each of the 20 applications that would leverage the new tool, potential savings over time would be $560,000, assuming an hourly rate of $70. See Attachment I for the financial impact details. 144

161 VI. Alternatives or Partnerships: Two alternatives to the purchase of the proposed tool are: Do nothing, which would prevent the NAIC from realizing the benefits of a single solution. Write an enterprise job scheduler in-house. Due to the lack of expertise, this would be much more expensive and possibly have less functionality and capabilities. In addition, it would increase the NAIC s code base. A reduced code base, on the other hand, lessens the potential for issues and simplifies upgrades to applications and frameworks. VII. Risk Management: The acquisition of off-the-shelf software can pose certain risks, such as expected benefits are not fully realized; the new tools has a negative impact to the customer experience; and the application areas visibility into the job scheduling process may not be realized due to internal policies. However, there are several procedures in place to mitigate those risks. One such procedure is the new enterprise project management office, which requires reporting on the progress of projects as well as the financial impact. In addition, hiring a consultant with the appropriate level of expertise will be critical to ensuring the right tool is selected and the implementation process moves forward smoothly. 145

162 146

163 Revenues Over (Under) Expenses ($20,000) ($20,000) ($25,000) ($35,000) ($22,500) ($5,000) ($5,000) ($5,000) ($5,000) ($5,000) ($5,000) ($5,000) ($157,500) ($96,000) ($96,000) 2017 Budget Fiscal Impact Statement Project Cost Analysis Project/Initiative: Job Secheduler 2017 Budget Spread Description January February March April May June July August September October November December Total Budget Budget Revenues: Total Revenues Expenses: Professional Development-Training $10,000 $10, Professional Services-Computer $20,000 20,000 $20,000 $20,000 $17,500 97, Maintenance-Computer Software $36,000 $36,000 Depreciation (recognition of capital hardware, software, and equipment) - - 5,000 5,000 5,000 5,000 5,000 $5,000 $5,000 $5,000 $5,000 $5,000 50,000 60,000 60,000 Total Expenses 20,000 20,000 25,000 35,000 22,500 5,000 5,000 5,000 5,000 5,000 5,000 5, ,500 96,000 96,000 Capital Purchases: Job Scheduling Tool $180,000 $180,000 Total Capital Purchases $0 $0 $180,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $180,000 $0 $0 Recognized over the useful life of the asset acquired Attachment I 147

164 148

165 Fiscal Impact 6

166 BUSINESS AND FISCAL IMPACT STATEMENT DATE SUBMITTED: SEPTEMBER 15, 2016 NAME OF PROJECT/INITIATIVE: REGULATOR/BUSINESS SPONSOR: NAIC STAFF SUPPORT: RECALIBRATION OF DATABASE FILING FEE STRUCTURE INTERNAL ADMINISTRATION (EX1) SUBCOMMITTEE JAMES W. WOODY, CHIEF FINANCIAL OFFICER REQUESTED PROJECT START DATE: JANUARY 1, 2017 ANTICIPATED COMPLETION DATE: NA TOTAL REVENUE EXPECTED (2017): $1,658,428 TOTAL EXPENSE REQUESTED (2017): $0 TOTAL CAPITAL REQUESTED (2017): $0 I. Executive Summary The current database filing fee structure includes 33 tiers, an individual company cap, and a group cap. The database filing fee, which began in the early 1970s to facilitate the collection of financial statements in a centralized location, has evolved into a complex, multi-tier system with significant disparity in the amount small individual companies pay in relation to their premiums, as compared to larger companies within groups, particularly those within groups that exceed the group cap. In addition, the size of these tiers is not consistent. The first six tiers have relatively small premium ranges compared to the remaining tiers, resulting in companies with significantly different annual premiums paying the same database filing fee. Companies meeting the individual and group caps continue to experience premium growth without increasing support of systems and services that ensure a fair and financially stable marketplace. In 2016, companies meeting the group filing fee cap of $197,870 saved over $7.1 million in filing fees. The purpose of the recalibration initiative is to simplify the fee structure, thereby reducing the disparity of fees while retaining the individual company and group cap structure. Although the implementation of the new structure is anticipated to increase database filing fee revenue in 2017, approximately 70% of the companies are expected to pay the same or a lower database filing fee than they paid in This recalibration will more evenly distribute funding of major investments in important regulatory initiatives, including NAIC systems and technology infrastructure, all of which benefit state insurance regulators, consumers, and the insurance industry. 149

167 To address shortcomings in the current process and improve the equitable distribution of fees across insurance companies, a streamlined formulaic approach is proposed. In this approach fees are calculated by using the current measurement of an insurance company s premiums or assumed reinsurance multiplied by a base factor, subject to a minimum fee and individual and group caps. Periodic adjustment may be made to individual and group caps to cover ongoing and future regulatory initiatives by introducing an economic metric the core CPI-U, a widely used measure of inflation in the U.S. by which the caps may change. Such adjustments will allow the NAIC to continue to manage its financial position in a prudent manner and ensure the appropriate level of funding for important membership initiatives and technology investments. Finally, as acquisitions and mergers have occurred, the combined companies generally pay less than they did before the combination. Having the ability to adjust the caps annually will allow the NAIC to maintain equitable treatment among all insurers. The determination whether or not to revise the caps will be made each year as part of the NAIC s annual budget process. II. Benefits of Project/Initiative to NAIC Members: The benefit of this initiative is twofold: 1) to more equitably distribute the database filing fees across the insurance industry and 2) to ensure the fee structure enables the NAIC to maintain revenues in support of key regulatory and insurance-related initiatives as well as critical technology investments. Improve Equitable Distribution in Database Filing Fees In 2016 there were 33 groups at the current group cap and as a whole these groups paid $6.42 in fees for every $1 million in premiums, yet their collective premiums exceeded $1 trillion. The 1,264 individual companies that were not part of a group in 2016 paid on average $33.74 per $1 million, more than five times the capped groups amount. The remaining 590 groups below the group cap paid an average of $17.07, primarily due to the individual cap on premiums of $2.7 billion or more. Under the formulaic approach, assuming a 1.5% increase in premiums for the industry from 2016 to 2017, the capped groups are expected to pay $7.86 per $1 million in premiums in 2017, whereas the individual companies not part of a group are expected to pay an average of $25.93 per $1 million, a reduction of $7.81 from that in Companies in a group not capped in 2016 are expected to pay, on average, $17.97 in As long as the individual and group caps remain, the distribution cannot be completely equitable; however, the formulaic approach will reduce the disparity. Ensure Adequate Support of Regulatory Initiatives and Critical Technology Investments The NAIC as a nonprofit organization has limited revenue-generating opportunities and as such, relies on streams such as the database filing fees to fund its many insurance regulatory initiatives. In its role as the support organization for the 56 chief insurance regulators, the NAIC provides a variety of products and services to the insurance community. These products and services add greater efficiencies to state-based insurance regulation, which is vital to consumer protection and competitive markets. The NAIC s budget supports the implementation and ongoing maintenance of initiatives such as the following: Collection and maintenance of the world s largest insurance financial database. Accreditation of national solvency standards, implemented at the state level. Market share reporting, financial analysis of potentially troubled insurers, and model legislation. Uniform statutory accounting and reporting requirements. 150

168 Coordination and implementation of data calls on behalf of state regulators, with no direct costs or assessed fees. Education and training programs. While several of the NAIC s products and services generate revenue such as SERFF and the Securities Valuation Office many others do not, such as the new Life Insurance Policy Locator service which will be deployed in late Over the past two years, the NAIC has invested heavily in cybersecurity infrastructure improvements and will continue to do so in order to protect the security and integrity of its technology solutions. The NAIC also coordinates data calls on behalf of the state regulators at no fee to the insurers. The NAIC manages its operations in a financially prudent manner. The proposed 2017 NAIC expense budget is lower than the approved 2016 budget but the NAIC s expenses continue to be higher than operating revenues. While the NAIC has been able to maintain a stable operating budget, several multi-million dollar infrastructure projects have been undertaken over the past several years. Among these projects are State Based Systems (SBS) and VISION (improvements to the securities filing system used by the Investment Analysis team). These projects improve efficiencies and provide a higher level of service to both regulators and the insurance industry. The NAIC continually examines how it provides services to identify opportunities to effectively manage its cost structure. For example, the NAIC s defined benefit plan was frozen at the end of 2012 while contributions to the defined contribution plan were increased. This allowed the NAIC to better manage its costs while continuing to provide competitive retirement benefits to staff. Another example is the NAIC s move to a self-funded health plan in 2017 to improve control over an important but increasingly expensive employee benefit. III. Stakeholders: A number of different parties will benefit from the recalibration initiative: NAIC Membership will be able to continue investing in key initiatives, many of which are provided at no cost to users or consumers. Insurance companies will be assessed a database filing fee in a more simplified, easy-to-calculate manner. They will also continue to benefit from the NAIC s sophisticated IT mechanism which allows insurers to file once instead of upwards of 50 times. IV. Business and Operational Impact: The NAIC staff from the Financial Regulatory Affairs, Information Technology Group, and Executive divisions will handle the incorporation of the formulaic approach into the filing system, and continue their support on an ongoing basis. Otherwise, there will not be an operational impact to the NAIC. V. Financial Impact: The recalibrated structure will assess a fee to insurers based on a percentage of the company s direct premiums written or reinsurance assumed from non-affiliates, whichever is greater. A base rate for the 2017 database filing fees of $ or $26 per $1 million in premium volume was derived from an evaluation of the 2016 database fees for companies in the first 32 tiers prior to the application of the group cap, which was $26.29 per $1 million in premiums. 151

169 The $26.29 was rounded down to $26.00 per $1 million in premiums for this proposal. See Appendix A for the 2016 fee evaluation. Using the formulaic approach, approximately 70% of the companies are expected to pay the same or lower database filing fee in 2017 than in 2016, even if these companies were to experience a small (1.5%) increase in their premiums or assumed reinsurance. Approximately 21% of the nearly 4,500 companies will see an increase of more than $1,000 with less than 10% of the companies experiencing an increase of more than $5,000. See Appendix B for examples of the application of the formulaic approach to insurers of varying premium volumes. As with the current structure, a minimum charge will be assessed to cover those companies with little or no premium base or reinsurance. For 2017, the minimum will remain the same as 2016 s initial tier of $235. In addition, an individual and group cap structure will be retained. For 2017, the cap is proposed to increase by $16,789, from $65,957 to $82,746. The group cap will continue its current structure of three times the individual cap, resulting in an increase to $248,238. The combined filing fee will increase 3.7% from $651 to $675. The cap on the fees is based on the annual changes to the core CPI-U as published by the U.S. Department of Labor, Bureau of Labor Statistics. The year 2006 was used as the base year since that was the last time the tier structure was changed. The core CPI-U is considered the most appropriate economic measure to use as it removes food and energy, thus making it a less volatile economic metric, but a metric that generally represents changes within the economy. The following table demonstrates the calculation used to obtain the proposed individual cap for While the minimum remains the same as that of 2016, this proposal assumes the minimum may increase along with the ceiling in future years based on the change in the core CPI-U. TABLE 1 Filing Year Minimum Fee with CPI-U change Individual Cap with CPI-U change Core CPI-U % change* CPI Year 2017 $304 $82, % $299 $81, % $294 $79, % $289 $78, % $283 $76, % $278 $75, % $275 $74, % $271 $73, % $265 $71, % $259 $70, % $252 $68, % $247 $67,145 Base *As published by the U.S. Department of Labor, Bureau of Labor Statistics; see See Attachment I for the financial impact of this fiscal in

170 VI. Alternatives or Partnerships: There are a number of alternatives but this approach was determined to the most equitable, flexible, and least complex. Several other options considered were: Maintain status quo this keeps the fee distribution inequitable and puts the larger financial burden on smaller companies that are not part of a group and have premiums of less than $2.7 billion. Increase existing tiers or add new tiers while doing so may make the fees more equitably distributed, it unnecessarily complicates the process and adds more complexity to an already complex tier structure. Increase the cap structure from the current three times the individual gap to a higher multiple. VII. Risk Management: During the last two decades, the NAIC has reduced dependence on database filing fees. In 1996, the fees comprised 47% of the NAIC s operating revenue but decreased to less than 30% over the past several years. The proposed filing fee recalibration will result in an increase of 0.7% over the 2016 budgeted revenue composition, to 28.9% in the proposed 2017 budget. Each year, as the NAIC s Executive (EX) Committee and Internal Administration (EX1) Subcommittee evaluate the proposed budget, they can determine if the projected revenue streams will support critical initiatives for the budgeted year and adjust the minimum and individual and group caps by the proposed economic metric as necessary. Doing so will impact a small percentage of filers, those large companies meeting the individual and group caps, which in turn will improve equitability across database filing fees. The NAIC is committed to managing its operations in a financially prudent manner to ensure state insurance regulators receive the high level of support required. It is anticipated this new structure will provide the level of funding necessary to support the regulatory activities of the NAIC in a more reasonable and equitable manner. 153

171 Appendix A Evaluation of 2016 Database Filing Fees Assessed For First 32 Tiers 154

172 Appendix B Company Examples with Current Structure and New Formulaic Approach Example 1 a small insurance company not part of a capped group, with premiums of $8,149,000 Current Tier Structure: Premium Base Level Tier 5 (premiums of $7,500,000 to $25,000,000) 2016 Fee of $2,283 based on 2016 Fee Schedule ($ per $1 million in premiums) Formulaic Approach: Premiums of $8,149,000 x Rate of $ = $211.88, which is less than $235 minimum fee 2017 Fee is $235 ($28.84 per $1 million in premiums) Company s Net Savings is $2,048 (89.7% or $ per $1 million in premiums) Example 2 a mid-sized insurance company not part of a capped group, with premiums of $225,125,000 Current Tier Structure: Premium Base Level Tier 8 (premiums of $200,000,000 to $300,000,000) Tier 8 Fee is $5,975 based on 2016 Fee Schedule ($26.54 per $1 million in premiums) Formulaic Approach: Premiums of $225,125,000 x Rate of $ = $5, Fee is $5, ($26.00 per $1 million in premiums) Company s Net Savings is $ (2%) 155

173 Example 3 a large insurance company not part of a capped group, with premiums of $5,300,000,000 Current Tier Structure: Premium Base Level Tier 33 (premiums of $2,700,000,001+) Tier 33 Fee is $65,957 based on 2016 Fee Schedule ($12.44 per $1 million in premiums) Formulaic Approach: Premiums of $5,300,000,000 x Rate of $ = $137,800 which is more than cap of $82, Fee is $82,746 ($15.61 per $1 million in premiums) Company s savings from the individual cap is $55,054 (savings of 40%) Company s fee increases by $16,789 (25%) Example 4 a large insurance company with premiums of $5,300,000,000 that is part of a capped group with total group premiums of $55 billion Current Tier Structure: Premium Base Level Tier 33 (premiums of $2,700,000,001+) Tier 33 Fee is $65,957 based on 2016 Fee Schedule Group cap of $197,870 when applied to the companies within the group reduces the company s fee by approximately 81% Company s prorated fee is $12,596 ($2.38 per $1 million in premiums) Formulaic Approach: Premiums of $5,300,000,000 x Rate of $ = $137,800 which is more than cap of $82, Fee is $82,746 Group cap of $248,238 when applied to the companies within the group further reduces the company s fee by approximately 81% Company s prorated fee is $16,130 ($3.04 per $1 million in premiums) Company s savings from the application of the caps is $121,670 (savings of 88%) Company s 2017 fee increases by $3,534 (28%) 156

174 Revenues Over (Under) Expenses $0 $0 $1,658,428 $0 $0 $0 $0 $0 $0 $0 $0 $0 $1,658,428 $0 $0 Total Capital Purchases $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $ Budget Fiscal Impact Statement Project Cost Analysis Project/Initiative: Recalibration of Database Filing Fee Structure 2017 Budget Spread Description January February March April May June July August September October November December Total Budget Budget Revenues: Reduction of 1% premium increase based on tier structure ($160,457) ($160,457) Adjustment for implementation of formulaic approach 1,818,885 1,818,885 Total Revenues - - 1,658, ,658, Expenses: Depreciation Amortization Total Expenses Capital Purchases: Attachment I 157

175 158

176 Unrestricted Net Assets

177 Regulatory Modernization Available Total UNA (1) Fund (2) UNA 2011 Ending Balance $69,625,170 $986,024 $68,639, Revenues Over/(Under) Expenses 18,356,233 Defined Benefit Plan Adjustment (FAS 158) (3) 2,305, Ending Balance 90,286,924 $995,802 $89,291, Revenues Over/(Under) Expenses 19,848,278 Defined Benefit Plan Adjustment (FAS 158) (3) 5,210, Ending Balance 115,345,895 $1,241,297 $114,104, Revenues Over/(Under) Expenses 7,990,834 Defined Benefit Plan Adjustment (FAS 158) (3) (3,592,803) 2014 Ending Balance 119,743,926 $1,748,292 $117,995, Revenues Over/(Under) Expenses (3,658,613) Defined Benefit Plan Adjustment (FAS 158) (3) (1,711,816) 2015 Ending Balance 114,373,497 $1,768,300 $112,605, Projected Revenues Over/(Under) Expenses (1,783,353) 2016 Projected Ending Balance 112,590,144 $1,643,203 $110,946, Proposed Revenues Over/(Under) Expenses (1,168,106) 2017 Proposed Ending Balance Before Fiscal Impact Statements 111,422,038 $1,671,331 $109,750, Proposed Fiscal Impact Statements 949, Proposed Ending Balance After Fiscal Impact Statements $112,371,444 $1,685,572 $110,685,872 NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 2017 BUDGET UNRESTRICTED NET ASSETS (UNA) 159

178 (1) On July 7, 2015, the Executive (EX) Committee and Internal Administration (EX1) Subcommittee approved a report from the consulting firm hired to review the NAIC s operating reserves, which changed the NAIC s liquid reserve target from a range of 80% to 91% established in September 2011, to a target range of 83.4% to 108.2%. These changes in the operating reserve target are the result of current and future identified risks and benchmarking to comparable organizations. (2) The NAIC instituted the Regulatory Modernization and Initiatives Fund during the 2005 budget process to manage spending beyond the proposed budget by establishing spending guidelines for new initiatives and proposals submitted subsequent to the annual budget presentation. The fund balance was established at 1.5% of projected consolidated net assets for that year. (3) Statement of Financial Accounting Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit Pensions and Other Postretirement Plans requires plan sponsors to reflect the funded status of their defined benefit plans on a company balance sheet on a projected benefit obligation basis. This is accomplished through an adjustment to unallocated net assets, or net equity of the NAIC, and results from the actual performance of the NAIC's defined benefit plan compared to assumed performance of investments, discount rates, and covered participants. In 2012, the defined benefit plan experienced a loss due to a lower discount rate impacting the present value of future benefit liabilities. Offsetting the loss on liabilities was an asset gain as a result of market performance. In addition, as of December 31, 2012, accrued benefits for all active employees were frozen. As a result of the elimination of future accruals, an immediate gain in comprehensive income was recognized equal to the decrease in projected benefit obligations. The net SFAS 158 adjustment for 2012 decreased the defined benefit plan liability by $4,326,836 and increased net assets by $2,305,521. At December 31, 2013, the SFAS 158 adjustments decreased the liability $4,282,550 and increased net assets $5,210,693, driven by market performance during The defined benefit plan experienced an overall increase in obligation in The SFAS 158 adjustments at December 31, 2014, increased the liability $2,248,604 and decreased net assets $3,592,803. This increase in plan obligations was driven by market performance during Continued declines in market performance and updated plan assumptions increased the plan obligation in As of December 31, 2015, SFAS 158 adjustments increased the liability $1,455,624 and decreased net assets $1,711,816. UNRESTRICTED NET ASSETS 160

179 2015 Annual Report

180 161

181 OPERATIONS, DATA & TECHNOLOGY Association Highlights The NAIC is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer review and coordinate their regulatory oversight. Its staff supports these efforts and represents state regulators collective domestic and international views. Its members, together with the central resources of the NAIC, form the national system of state-based insurance regulation in the U.S. The NAIC provides its members a national forum for discussing common issues and interests, while working cooperatively on matters shared across jurisdictions. Collectively, commissioners work to develop model legislation, rules, regulations and white papers to coordinate regulatory policy. The overriding objective is to protect consumers and help maintain the financial stability of the insurance marketplace. With its wide range of services, the NAIC supports the work of its committees, the state insurance departments, state and federal officials and the public. The association maintains three offices: the Executive Office, located in Washington, D.C.; the Central Office, in Kansas City, Mo.; and the Capital Markets & Investment Analysis Office in New York City. The NAIC home of the world s largest insurance financial database maintains extensive systems linking all state insurance departments and provides financial, actuarial, legal, research, technology, market conduct and economic expertise. Staff research and create standard and custom reports, develop uniform statutory financial statements, monitor federal activity, submit legal briefs, conduct educational training programs and much more. The Center for Insurance Policy and Research (CIPR) leverages NAIC resources to collect and analyze information provided to officials, agencies and policymakers in the U.S. and abroad. Through seminars, presentations and publications, CIPR efforts strengthen: Coordination with federal, state and international agencies and regulators; Understanding of insurance-related topics and issues by thought leaders; Information exchange between the states and the federal government; and NAIC and state regulator participation in public policy decisions affecting insurance and the broader financial services sector. NAIC Operations To provide the highest quality of member service requires a talented and dedicated workforce. The NAIC is dedicated to creating a work environment that results in high job satisfaction with our employees. The association provides flexible work options including flex scheduling and work-from-home opportunities, which promote work-life balance. The association also has an Infants in the Workplace program that allows parents to bring their newborn to work. In its 15th year, the NAIC welcomed eight new babies to the NAIC office, meaning 140 babies have accompanied their parents to work since the program s inception. One of the results of the association s culture is our low employee turnover rate. The NAIC had just a 4% net turnover in Member Services The NAIC is dedicated to providing the best possible services to its members through education and training, new member orientation and sponsoring regulator travel to meetings. In 2015, the association hosted three National Meetings in Phoenix, Ariz., Chicago, Ill. and National Harbor, Md. with a total of 6,416 attendees. The NAIC also held 70 interim meetings and 3,677 meetings via conference call. The NAIC made it possible for each member department to send a second senior regulator to NAIC-sponsored meetings at no cost to the state insurance departments

182 With change in our membership, the NAIC implemented a new member outreach initiative in A NAIC executive staff member traveled to meet with each of the new commissioners and directors within a month of taking office. This new program is an opportunity for an orientation to the association and its resources, as well as a chance to connect with key staff members to answer any questions they may have. In 2015, the NAIC also provided more than 60 free education and training courses for state regulators. CIPR Events The NAIC held several well-attended symposiums hosted by the Center for Insurance Policy and Research (CIPR). Events included The Risk of Pandemics to the Insurance Industry at the Spring National Meeting Boom or Bust, a Look at Retirement Issues Facing Baby Boomers in June, All Things Earthquake during the Summer National Meeting and Regulation of Captives during the Fall National Meeting. The center also published four editions of its CIPR Newsletter in 2015 as well as a new study on telematics (Usage Based Insurance and Vehicle Telematics: Insurance Market and Regulatory Implications). NAIC Cybersecurity Enhancements The NAIC s focus on cybersecurity came to the forefront in Data breaches within the insurance industry led the association to make cybersecurity enhancements. To accommodate these improvements, the NAIC expanded its footprint in our Central Office in Kansas City by leasing additional office space on a new floor. In 2015, the NAIC hired its first chief technology officer as well as seven new cybersecurity staff members to strengthen our efforts in this area. In total, the NAIC spent $1.2 million on its cybersecurity initiatives in State Based Systems State Based Systems (SBS) is an electronic system owned by the NAIC designed to provide a comprehensive, webbased application for use by state regulators in support of insurance regulatory functions. SBS offers a variety of products for producer licensing, company licensing, continuing education tracking, consumer services, enforcement, fraud reporting, exam tracking and revenue management. The Wisconsin Office of the Commissioner of Insurance joined and implemented SBS in 2015, making it the 29th state to license SBS. SBS is currently the system of choice in Alabama, Alaska, Arizona, Arkansas, Delaware, the District of Columbia, Florida, Illinois, Iowa, Kansas, Maryland, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Puerto Rico, Rhode Island, Tennessee, U.S. Virgin Islands, Wisconsin and West Virginia. Limited SBS services are also licensed by South Carolina and Virginia. I-SITE I-SITE is an online regulator-only interface designed for state insurance departments to obtain comprehensive financial, market conduct and producer licensing information. I-SITE offers regulators access to NAIC database information through a variety of standardized reports including summary reports, batch reports, and detailed lookup reports. The NAIC is constantly updating and enhancing the I-SITE application to meet regulator needs and ensure compliance with blanks changes. I-SITE is also consistently upgraded to meet new security requirements to ensure our application and data are secure. A new application, the Market Actions Tracking System (MATS), will replace the Examination Tracking System (ETS) and the Market Initiatives Tracking System (MITS) in I-SITE. MATS incorporates existing functionality from both ETS and MITS, and includes functions for calling, updating, closing and viewing market actions, for accessing information about the states and people involved and for tracking an action s schedule and results. The I-SITE Statutory Group Profile Report is a new application report that provides a five-year look at the combined U.S. statutory insurance entities within a group. These include: select assets, liabilities, surplus; income statement; direct writings segmentation; ratio analysis section covering leverage, profitability, and asset quality; and key financial data for each insurer in the group

183 2015 NAIC Organizational Chart Senator Ben Nelson, Chief Executive Officer Andrew J. Beal, Chief Operating Officer & Chief Legal Officer Kay Noonan General Counsel Jim Woody Chief Financial Officer Scott Morris Chief Technology Officer Frosty Mohn Chief Security & Information Officer Christina Urias Managing Director, International Insurance Regulatory Affairs Jeff Johnston Senior Director, Financial Regulatory Affairs, Domestic Policy & Implementation Elise Liebers Senior Director, Financial Regulatory Affairs, International Policy & Market Surveillance Ethan Sonnichsen Director, Government Relations Eric Nordman Director, Regulatory Services and Center for Insurance Policy & Research Trish Schoettger Director, Member Services Scott Holeman Director, Communications Todd Sells Director, Financial Regulatory Policy & Data Dan Daveline Director, Financial Regulatory Services Charles Therriault Director, Securities Valuation Office Eric Kolchinsky Director, Structured Securities Group Ed Toy Director, Capital Markets Bureau Ramon Calderon Director, International Policy Denise Matthews Director, Information Systems Kris DeFrain Director, Research & Actuarial Services Tim Mullen Director, Market Regulation Brent Roper Director, Human Resources 4 164

184 FINANCIAL REGULATION Financial examinations and analysis processes are central to effective solvency oversight. By employing sophisticated analytical tools and expert resources, regulators minimize insolvencies and their profound impact on policyholders and the marketplace. The Financial Condition (E) Committee and the Financial Regulation Standards and Accreditation Program work in tandem to maintain the U.S. system of solvency regulation. Group Supervision All 50 states, D.C. and Puerto Rico have passed key amendments to their holding company statutes, which will aid in assessing the potential contagion risks present in the business enterprise that include insurers. Updating the NAIC s Holding Company Act was one of the NAIC s initial responses to the financial crisis to improve group supervision. In just five years since the NAIC developed the model, states have passed this flagship legislation nationally, bolstering our approach to group supervision. Thirty-four states have adopted legislation based on the NAIC Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act, which among other things, requires insurance groups above a certain size to file an annual ORSA Summary Report with their lead state. In 2014, the NAIC adopted additional revisions to the Insurance Holding Company System Regulatory Model Act, which provide clear legal authority for a state insurance commissioner to act as a group-wide supervisor for a defined class of internationally active insurance groups and further defines the activities the commissioner may engage in related to such authority. At the end of 2015, the NAIC adopted a new charge to the Financial Condition (E) to construct a U.S. group capital calculation using a risk-based capital (RBC) aggregation methodology. In developing this calculation, the committee is charged with considering group capital developments by the Federal Reserve Board as well as similar developments on international capital standards. State insurance regulators continue to enhance their group supervisory framework through these efforts and their ongoing involvement in U.S. and non U.S. lead supervisory colleges. Reinsurance Under the 2011 revisions to the NAIC Credit for Reinsurance Model Law and Regulation (Revised Reinsurance Models), reinsurers from a qualified jurisdiction are eligible to be certified for reduced reinsurance collateral requirements. To date, 32 states have passed the revised Model Law (#785), with 19 jurisdictions also adopting the revised Model Regulation (#786), covering approximately 66% of the direct insurance premium written in the U.S. across all lines of business. The Financial Regulation Standards and Accreditation (F) Committee is considering making the certified reinsurer provisions a uniform accreditation standard requirement for all NAIC accredited jurisdictions. The NAIC adopted the Process for Developing and Maintaining the NAIC List of Qualified Jurisdictions, and evaluated and approved seven jurisdictions (Bermuda, France, Germany, Ireland, Japan, Switzerland and the United Kingdom) for inclusion on the NAIC List of Qualified Jurisdictions. The Reinsurance Financial Analysis Working Group of the Financial Condition (E) Committee was established to provide a peer review process for certified reinsurer designations. The working group s mission is to facilitate consistency among the states and to coordinate multistate efforts. To date, the working group has approved 27 certified reinsurers. They also adopted the Uniform Application Checklist for Certified Reinsurers, to provide further guidance and ensure consistency across the states certification processes. On Jan. 8, 2016, the NAIC adopted revisions to the Credit for Reinsurance Model Law (#785), which provide the commissioner with the authority to adopt regulations with respect to the following types of captive reinsurance transactions: XXX/AXXX; Long-Term 5 165

185 Care; Variable Annuities; and any other life, health or annuity products for which the NAIC adopts model regulatory requirements with respect to credit for reinsurance. Principle-Based Reserving The NAIC continued work to implement principle-based reserving (PBR), including addressing regulatory and NAIC staff resources, developing analysis and examination procedures, changes to the statutory blanks and creating a Valuation Analysis (E) Working Group to provide consistent oversight and application across each jurisdiction. PBR will become effective when 42 states representing at least 75% of U.S. premium volume adopt the revised Standard Valuation Law (SVL). Thirty-nine jurisdictions representing approximately 72% of premium have adopted the SVL. Use of Captives by Life Insurers In 2014, the NAIC adopted a conceptual reinsurance framework for life insurers use of captives for business subject to Regulation AXXX and/or the Valuation of Life Insurance Policies Model Regulation, commonly referred to as Regulation XXX. Several important components of this framework were adopted in 2014 and almost all of the other components were adopted in 2015, including new risk-based capital requirements and additional disclosure within the annual audit report. The Financial Regulation Standards and Accreditation (F) Committee adopted changes to its Preamble that requires states to subject captives that assume XXX or AXXX business from U.S. ceding insurers to the full scope of the required laws and regulations in the accreditation program unless the U.S. ceding insurer(s) for which the captive assumes business meets the conceptual reinsurance framework. With the XXX and AXXX nearly completed the NAIC shifted its focus in 2015 to the next major category of captive reinsurance used by life insurers variable annuities. The NAIC formed a Variable Annuities Issues (E) Working Group and by year-end, developed and adopted a framework for change which sets forth a commitment for the organization to make changes to the statutory framework for variable annuities. The details of changes are expected to be developed in 2016 and the NAIC plans to have new standards in place by the end of Financial Regulation Standards and Accreditation Program The N AIC F inancial R egulation S tandards a nd Accreditation Program was established to maintain standards to promote effective fi nancial solvency re g- ulation. NAIC accreditation allows non-domestic jurisdictions to rely on the accredited domestic regulator to fulfill baseline financial regulatory oversight. Currently all 50 states, the District of Columbia and Puerto Rico are accredited, making regulation more efficient an d coordinated. Accreditation also creates far greater efficiencies for insurance companies, which are then not subject to burdensome or repetitive regulation. In 2015, the NAIC conducted nine full accreditation reviews, 43 interim annual reviews and eight pre-accreditation reviews. The N AIC v oted t o u pdate t he Part A: Laws and Regulations Preamble to include in the scope of the Accreditation Program certain captives and special purpose vehicles that assume XXX/ AXXX business. The R isk M anagement a nd O wn Risk and Solvency Assessment Model Act was voted to be included as a new Part A Accreditation Standard. Additionally, various accreditation guidelines were revised for related updates to the risk-focused surveillance process. International Insurers Department The International Insurers Department (IID) functions as a national gatekeeper for non-u.s. insurers to gain access to the U.S. excess and surplus lines markets. This f unction i ncludes solvency monitoring a nd t rust account maintenance of all NAIC-listed insurers, as well as oversight and analysis of the process for considering new applications. During 2015, six new insurers were added, offset by t wo w ithdrawals, resulting i n a net increase to 144 listed entities on Jan. 1, The most recent financial statistics (from 2014) reflect that listed insurers wrote direct surplus lines premiums of nearly $11.5 billion, or approximately 29% of the $40.3 billion in total of U.S. surplus lines premiums written for the year. At year-end 2015, listed insurers maintained $4.7 billion in trust assets which are held as collateral against gross claim liabilities estimated at $18.1 billion

186 Securities Valuation Office The NAIC s Securities Valuation Office (SVO) is comprised of investment professionals who assess the credit risk of insurer investments. The SVO assigns an NAIC designation, a measure of credit risk, to filed insurer investments. In 2015, the SVO received filings from 1,401 insurers. These filings covered 12,997 securities with an insurer total carrying value of approximately $560 billion. This unique capability allows the NAIC to assess investment credit risks through its own independent regulator-driven process instead of relying exclusively on nationally recognized statistical rating organizations. The NAIC designation and other analysis produced by the SVO are used in regulatory processes to monitor insurers, including the appropriateness of the risk-based capital investment charges. Mortgage-Backed Securities The NAIC s Structured Securities Group (SSG) is an internal team of investment professionals that builds upon the NAIC s technical expertise to provide specialized analysis, valuation, research and reporting for structured securities. The NAIC first began modeling expected losses for non-agency residential mortgage-backed securities (RMBS) owned by insurance companies as of the end of This project was successful and expanded in 2010 to include commercial mortgage-backed securities (CMBS). For 2015, SSG modeled 5,310 unique CMBS and 22,406 unique RMBS CUSIPs. The book values of these securities were approximately $152 billion for CMBS and $101 billion for RMBS. Capital Markets The NAIC Capital Markets Bureau (CMB) provides a macroprudential view in support of the efforts of state insurance regulators. The CMB monitors trends, developments and activity in financial markets around the world, analyzes the potential impact on investment activities and portfolios of U.S. insurance companies and reports on the results to state insurance regulators, as well as publishing reports that are available to both regulators and the general public. In 2015, the group published 15 Capital Markets Special Reports. These reports include updates on U.S. insurer exposures to various investment markets, as well as topical issues such as whether insurers are reaching for yield in the low interest rate environment, developments in the derivatives market and regulation and their impact on hedging costs, the impact of declining oil prices and trends in third-party investment management. The CMB also provides quick updates on current events prominent in the capital markets through periodic Hot Spots. In 2015, these alerts focused on equity market volatility, turmoil in Greece and Puerto Rico, the city of Chicago rating downgrade and volatility in major foreign currencies

187 MARKET REGULATION Through the work of the Market Regulation and Consumer Affairs (D) Committee, state insurance regulators protect and serve consumers through monitoring all aspects of the market regulatory process for continuous improvement. In 2015, the NAIC held the second Market Regulation Summit, where state insurance regulators set priorities for market conduct regulatory activities. Attendees also exchanged perspectives on regulatory best practices and discussed shared challenges and insights into industry practices. Market Conduct Annual Statement The Market Conduct Annual Statement (MCAS) provides a uniform system of collecting market conduct information for personal lines annuities, life insurance, homeowners and private passenger automobile insurance as well as long-term care insurance. In 2015, there were 47 participating jurisdictions, up from 29 when the program launched in In addition, 2015 was the first year in which data on long-term care insurance was collected. The NAIC assists member jurisdictions by receiving MCAS filings, validating data and enhancing the analysis of market conduct information across all participating jurisdictions. The NAIC received 30,208 MCAS filings to be centrally stored in 2015, a 16.68% increase in filings over Regulatory Information Retrieval System The Regulatory Information Retrieval System (RIRS) contains records of regulatory actions finalized by state insurance departments against entities engaged in the business of insurance. States entered 7,799 actions into the database in Online Fraud Report System Increased reporting to the jurisdictions helps reduce fraud, which helps cut insurers expenses, protects consumers and reduces costs that otherwise lead to higher premiums. NAIC-member jurisdictions use the Online Fraud Report System (OFRS) to receive referrals of suspected fraud from consumers and the insurance industry. The NAIC also receives reports from the National Insurance Crime Bureau (NICB). The NAIC received 60,764 reports in 2015 that were made available to members. State regulators protect consumers by ensuring insurance policy provisions comply with state law, are reasonable and fair, and do not contain major gaps in coverage that might be misunderstood by consumers and leave them unprotected. Complaints Database System Our 56 member jurisdictions submitted a total of 189,295 complaints to the NAIC s Complaints Database System (CDS) in This database contains information about closed consumer complaints filed against insurance entities and producers. The CDS automates the collection and storage of complaint data submitted by state insurance departments. The departments can then leverage nationwide data otherwise unavailable to them individually

188 CONSUMER EDUCATION We want insurance consumers to make informed decisions. Insure U advances the NAIC s mission of serving and protecting consumers by targeting and educating consumers about a variety of insurance-related issues, utilizing both traditional and social media channels. Insure U provides materials organized by life event, life stage and insurance type. Additional special sections support mini-campaigns with specific targets, such as young singles, established families and disaster preparation. The NAIC updated Insure U website content including apps and quizzes in 2015 redesigned to better reflect current trends and feature additional life-stages. The NAIC s websites had a record-breaking year, with Insure U garnering more than 330,000 visits while NAIC.org attracted more than 8.8 million visits. NAIC social media ended the year with 11,300 Twitter followers, 5,186 Facebook likes, 3,370 LinkedIn followers and 2,760 LinkedIn group members. Total 2015 outreach generated more than a billion impressions. Insure U for Small Business The Insure U for Small Business website was redesigned and relaunched in January to provide small business owners with a variety of resources to help them understand their specific insurance needs and tips for risk protection. As a former small business owner, NAIC President and Montana Insurance Commissioner Monica J. Lindeen served as the spokesperson for the campaign s launch during a nationally broadcast radio media tour. The campaign also leveraged LinkedIn promotion to raise awareness of these resources where small business owners connect in social media. The campaign drew more than 213 billion impressions, netting an estimated $750,000 in equivalent ad value. Traffic on the Insure U website increased in the months after the launch with page views nearly doubling in the following three months. Award-Winning Amy Grant Campaign Wraps Up Since 2012, the NAIC has teamed with Grammy award-winning singer/songwriter Amy Grant to educate consumers about the importance of preparing for complex family and financial decisions. This threeyear campaign specifically targeted the sandwich generation baby boomers who have children at home and are also caring for aging parents. Amy s campaign focused on her personal story of helping her mother at the end stage of life, while emphasizing the importance of planning ahead for the unexpected. Grant s television and radio public service announcements (PSAs) produced impressive results: 192 million impressions for 2015; a total of more than 1.2 billion impressions during the campaign s three-year run; and over $18.5 million in ad equivalency. Because of these strong outreach results achieved with a celebrity partnership, the NAIC engaged two more entertainers in 2015 to reach specific consumer groups including established families and millennials. Kimberly Williams-Paisley Shares Her Story Actress Kimberly Williams-Paisley partnered with the NAIC to share her family s experience with her mother s diagnosis of dementia. She also urged consumers to plan for the unexpected. In a radio PSA, she underscored the need for baby boomers and established families to have a plan. Williams-Paisley s campaign generated 552,186,517 media impressions, translating into an estimated ad value of $4,827,750. Her story was also featured People Magazine and SPRY Living magazine. RJ Mitte Connects With Millennials Breaking Bad star RJ Mitte reached out to millennials about his own Bad Breaks that taught him firsthand the importance of insurance. He was featured in three NAIC social media videos candidly speaking about his personal experiences with theft, car accidents 8 169

189 and the importance of talking with parents about insurance planning. This unique campaign targeting a hard-to-reach audience generated more than 100 million impressions, including a live Twitter chat with Mitte that promoted talking about insurance. Mitte, who has an impressive social media following, shared personal comments and Insure U content about a variety of important insurance issues. Jump$tart The NAIC boosted our partnership with Jump$tart. The Jump$tart Coalition for Personal Financial Literacy is a non-profit organization that is committed to advancing financial literacy among pre-school through college-age youth and working collaboratively toward effective financial education. Pennsylvania Insurance Commissioner Teresa D. Miller presented to educators at the 2015 Jump$tart National Educator Conference in November in an effort to develop classroom tools for insurance literacy via Insure U. Professional Recognition NAIC s education outreach is not only resonating with consumers, but also with public relations and communications associations. In 2015, the work of the Communications Division was recognized by the International Association of Business Communicators (IABC) with Awards of Merit for the Life s a Journey public service announcement with Amy Grant and the Protecting the Future Campaign. The Greater Kansas City Public Relations Society of America also recognized the superior work of Communications Division at its PRISM Awards Gala. NAIC Communications took home awards for seven entries, including five gold and two silver awards. Gold PRISMs were awarded to the 2014 Annual Report, Get Ready New Car, Teen Driving, Small Business and Protecting the Future. Silver PRISMs were awarded to Get Ready Job Change and Get Ready Turning

190 HEALTH, FEDERAL & INTERNATIONAL POLICY Government Relations The U.S. system of state-based insurance regulation is effective in providing consumer protection and market stability. This is accomplished through the commitment of state insurance departments and the collective efforts of the NAIC. As the political climate and insurance markets evolve, insurance regulation continues to innovate to best serve the public. Federal Engagement State regulators engage federal agencies on a number of financial policy issues including working with the Federal Reserve on proposed capital standards for insurers that fall under their jurisdiction. In addition, NAIC Past President and North Dakota Insurance Commissioner Adam Hamm serves as the designated state insurance commissioner on the Financial Stability Oversight Council. This position represents the interests of the nation s state insurance regulators, providing critical insurance regulatory expertise. Working with Congress Through the NAIC, state regulators work closely with Congress, both informally and during Congressional hearings. Missouri Insurance Director John M. Huff testified before Congress in September on the impact of domestic regulatory standards on the U.S. insurance market. Topics discussed included the potential for a covered agreement with Europe, insurance capital standards for systemically important insurance companies, coordination of state and federal regulators and the impact of Dodd-Frank on insurance regulation. Legislation A legislative priority for the NAIC was the Policyholder Protection Act, which passed in December. The NAIC had long supported the bill as it clarifies state insurance regulators authority to wall off insurance company assets within savings and loan holding companies in order to protect insurance consumers. This bill maintains essential consumer protections that state insurance regulators provide by protecting insurance assets for their intended purpose, to pay claims began with two legislative victories for the NAIC. In January, Congress passed legislation to reauthorize the Terrorism Risk Insurance Act (TRIA), extending the program through the end of This program provides a federal backstop to insurers in the event of a catastrophic terrorist attack. TRIA is a critical program that ensures a stable insurance marketplace for terrorism insurance. Congress also passed legislation in January to create the National Association of Registered Agents and Brokers (or NARAB II). NARAB II is designed to streamline the non-resident licensing process for insurance agents and brokers while preserving state regulatory authorities that protect consumers. The President is in the process of appointing NARAB II board members, which will include eight state insurance commissioners. Health Policy 2015 marked the 5-year anniversary of the passage of the Affordable Care Act. State regulators continue to coordinate through the NAIC to navigate health insurance reforms and regulatory challenges. The NAIC continues to coordinate with federal agencies on health reform rule-making activities. Federal Engagement Health and Human Services Secretary Sylvia Mathews Burwell met with NAIC members during the 2015 Fall National Meeting. Burwell discussed issues regarding health reform implementation and took questions from the members. In September, NAIC President and Montana Insurance Commissioner Monica J. Lindeen testified before Congress in support of the Protecting Affordable Coverage for Employees Act (PACE). The NAIC endorsed the PACE Act because it would retain state flexibility to set the appropriate limits for the small group health

191 insurance market and ensure stable small group markets that reflect the unique characteristics and dynamics at play in each state. The bill passed in early October. Health Reform The NAIC s work on implementation of health reform continues. Last year the NAIC made revisions to the Managed Care Plan Network Adequacy Model. As Commissioner Lindeen testified in 2014, state insurance regulators must have the flexibility to regulate provider networks based on appropriate considerations such as geographic access and impact on premiums. The revisions are designed to make sure consumers can access clear information on which providers are in the network of each plan. In 2015, some health insurance cooperatives (co-ops) struggled as new entrants into the health insurance marketplace as they competed against well-established companies. Julie Mix McPeak, Tennessee Insurance Commissioner, and Jim Donelon, Louisiana Insurance Commissioner, testified before Congress in November regarding the status of co-ops in their states. International Policy As the business of insurance becomes globally interconnected, the NAIC s commitment to international engagement deepens. Insurance regulators collaborate regionally and bilaterally with foreign counterparts and through international standard-setting bodies. International Association of Insurance Supervisors The International Association of Insurance Supervisors (IAIS) is a component of the NAIC s interaction with foreign regulators. Through the IAIS regulators coordinate with colleagues on global standards and best practices, always with a focus on protecting U.S. insurance consumers and companies. Members of the NAIC met with counterparts from the Financial Services Agency of Japan for the third NAIC- FSA Insurance Regulatory Dialogue. Topics discussed at the May forum included international group supervision and the development of global capital standards. The NAIC hosted the Second Annual Asia-Pacific Forum in October. The forum provided participants the opportunity to discuss important issues facing the region, exchange best practices and continue to build relationships amongst insurance supervisors. In November, the NAIC hosted a public meeting of the EU-U.S. Dialogue Project. The third of its kind, the event provided the public with a status report of the dialogue project and future work plans. More than 200 people attended the event. International Fellows The NAIC hosted two classes of international fellows from insurance regulatory agencies around the world in Since the program began in 2006, more than 230 participants from 31 countries have participated in the technical training. The NAIC has had 37 U.S. jurisdictions participate in the training program by hosting fellows. Congressional Engagement Congress has become more interested in how international developments impact U.S. insurance consumers and companies. In April, Florida Insurance Commissioner Kevin McCarty testified before Congress on behalf of the NAIC regarding the state of the insurance industry. His remarks focused on domestic and global capital rules for insurers. The testimony outlined how U.S. regulators are working internationally to strengthen open and competitive insurance markets globally, while protecting U.S. interests. International Forum The NAIC hosted the annual International Forum in May. Nearly 300 attendees from around the world traveled to Washington, D.C. to attend the forum. Speakers and panels covered cybersecurity, crisis prevention and CEO perspectives on international insurance standards. Bilateral and Regional Dialogues

192 TO SERVE & PROTECT 2015 IN THE DIGITAL AGE NATIONAL ASSOCIATION of INSURANCE COMMISSIONERS ANNUAL REPORT FINANCIAL STATEMENTS SM 2016 National Association of Insurance Commissioners. All rights reserved. Insure U and Stop. Call. Confirm. are registered service marks of the National Associations of Insurance Commissioners. 173