FIO, FOIA and a free market in insurance data

by R.J. Lehmann on October 27, 2011

In the United States, publicly traded companies must file quarterly financial statements with the Securities and Exchange Commission, which the SEC makes available to the public through their EDGAR service.  Bank holding companies file their own quarterly performance reports with the Federal Reserve, which the Fed makes available to the public through its National Information Center.

The nation’s thousands of insurance companies also file annual and quarterly financial statements, covering everything from their premiums to claims to assets to investments. Because insurance is a state-regulated industry, these so-called “statutory” financial reports are filed with the states in which the companies are domiciled. And these reports, too, are ultimately compiled by one central entity. But it is not a government agency, and it doesn’t release the results to the public.

At least, not for free.

The entity is the National Association of Insurance Commissioners, the private 501(c)(3) nonprofit group that acts as the collective political voice of the nation’s state insurance regulators. While the NAIC is not itself a regulator and has no statutory authority whatsoever, it nonetheless long has enjoyed a monopoly gatekeeper role for the reams of insurance financial data that are collected by state agencies using state taxpayer resources.

And insurance data is big business for the NAIC. According to the group’s just-released 2012 budget proposal, there are now 400 million data elements in the NAIC’s Financial Data Repository, which is used as the primary source for some 193 NAIC publications and data products. The group projects it will earn $25.9 million in 2012 from database filing fees paid by the industry and another $18.9 million from sales of its insurance data products. Together, those items represent 57.3% of the group’s $78.2 million in projected 2012 revenues.

The major clients for the NAIC’s insurance data are market analytics firms like Charlottesville, Va.-based SNL Financial and insurance rating agency A.M. Best (Full disclosure: I have been, at different times, an employee at both firms) who repackage the information in a lucrative secondary market populated by banks, broker-dealers, asset managers and private investment funds. While big financial institutions make good use of the data, the rates charged by firms like Best and SNL tend to be well out of the price range of media and academic outlets who might do likewise.

And where a private stockholder interested in reading the financials of a company whose shares he owns can easily look up the company’s SEC filings, a private policyholder interested in, say, the reserves held by the insurer he has entrusted to protect his financial future…has essentially nowhere to turn.

But big changes could be in the offing, in the form of the new Federal Insurance Office created by the Dodd-Frank Act.  The brainchild of former Rep. Paul Kanjorski, D-Pa., FIO is designed to be a central repository of insurance expertise within the U.S. Treasury Department, empowered under the law to “receive and collect data and information on and from the insurance industry and insurers; enter into information-sharing agreements; analyze and disseminate data and information; and issue reports regarding all lines of insurance except health insurance.”

Dodd-Frank is painstakingly specific in proscribing how FIO is to go about collecting the data it needs. To avoid duplicative reporting requirements, it must turn first to state or federal regulatory agencies, or to publicly available sources, before making any direct requests of insurers or their affiliates. The statute also specifies that confidentiality agreements between, for instance, regulated insurers and their state regulators (most often, those dealing with trade secrets) continue to apply even after that data has been transmitted to the federal office.  The office does have subpoena power to collect information should an insurer refuse to furnish it voluntarily, but the law sets a fairly high evidentiary bar for establishing that the subpoena is necessary.

Where the statute is considerably murkier is in what the office can, should or must do with the information it collects, which will presumably include the statutory financial reports currently filed with state regulators. The law establishes that the office can make information it collects available to state regulators through information-sharing agreements. It also specifies that entities (such as state insurance departments) that share information with the federal office that isn’t publicly available (such as statutory financial reports) retain “any privilege arising under Federal or State law…to which the data or information is otherwise subject.”

What that would appear to mean in this context is that, if a state has exercised a privilege not to make statutory financial reports publicly available, it does not waive that privilege just because it has shared those reports with the federal office. What the law doesn’t appear to say is that the federal office is bound to exercise the same privileges with whatever information it receives.

Indeed, the federal Freedom of Information Act would appear to require the opposite.  Dodd-Frank actually specifies that Title 5 Section 552 of the U.S. Code (better known as FOIA) “shall apply to any data or information submitted to the Office by an insurer or an affiliate of an insurer.” However, it is silent on whether information submitted to the office by state regulators is to be treated equally.

There are two ways to interpret this. Under the principle of expressio unius est exclusio alterius, the absence of state regulators from the list can be assumed to mean information they share is not covered by the statute. On the other hand, since non-confidential information transmitted from states to a federal agency generally would be covered by FOIA, it could simply be that no further clarification was necessary.

All of which is to say, it would appear the final decision on how to interpret the statute, and ultimately what to do with the data collected by FIO, will likely be made by FIO Director Michael McRaith himself.

We would urge him to come down on the side of transparency. Making insurers’ statutory financial reports available through an open source, publicly accessible database is simply good public policy. It is in line with the spirit of Dodd-Frank, the spirit of FOIA and with the precedent set by other federal agencies who receive comparable financial statements from the financial services industry. It would bring to an end the absurd situation in which a private, nongovernmental entity is granted a monopoly over data collected with governmental resources, and would help alleviate suspicions that regulators’ pecuniary interests to collect and sell ever more data could be driving public policy decisions.

Moreover, expanding public access to insurance data could have the added benefit of encouraging new or existing credit rating agencies to expand their monitoring of the financial strength of U.S. insurance companies, the vast majority of whom are mutuals that do not file disclosures with the SEC. As Terri Vaughan, the NAIC’s current CEO and a former state regulator herself, has said in defending the fragmented nature of state insurance regulation:

“In our state-based regulatory system, we have many eyes focusing on an issue, including some 13,000 people across the states,” she said. “Because of that, we’re less likely to miss things and to come down on the side of dogmatic solutions.”

We would agree with Dr. Vaughan that markets work best when information is dispersed widely and shared freely. If the eyes of 13,000 state regulators represent a good start, then why not the eyes of the whole world?

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  • David_Merkel

    The NAIC uses fees from the sale of Statutory statement data to fund itself.u00a0 Absent that, the NAIC would have to seek funding from the states to stay afloat, and in this era of tight budgets, that’s not likely.nnThe NAIC may technically be a nonprofit charity, it is the product of 50 state governments cooperating to standardize insurance law and regulations in the US.u00a0 As a result, insurance is much better regulated than banking, and much harder to capture the regulators, because the states don’t automatically go along with anything, and standardizing laws and regulations is quite a wrangle.nnThink about the state legislators as well.u00a0 Insurance laws are complex, and the legislators barely understand them — knowing that the NAIC has worked through a lot of the issues simplifies matters for them, and for the state regulators, who in the small states, aren’t the sharpest tools in the shed.nnBut that’s a feature, not a bug, because dumb legislators and regulators tend to be cautious about innovations, unlike the sophisticated souls who continue to mess up the regulation of depositary financials in DC, and are solidly captured by the banks.nnBut, if you want statutory statement data, I’ve got advice for you.u00a0 Just ask the companies to give it to you.u00a0 In eight years of analyzing insurance companies, I have never been turned down.u00a0 That includes AIG sending me 60 pounds of books in 2009 for 2008 year end.u00a0 (Really, a CD or a flash drive would have been easier…)nnNow you might have trouble getting the data from the bitty companies, but who cares?u00a0 With a little effort, you could have all the statements for 99% of all the insurance liabilities in the US for the last few years, and be on the e-mailing list for regular releases of statutory data.u00a0 All you have to do is ask.

  • Timothy B. Lee

    There’s a big difference between getting a particular bit of data from one company, and having comprehensive data that covers all firms over a long period of time. Although theoretically anyone can get the latter by making many requests for the former, doing so is not cost-effective for journalists or academics who may be interested in studying the insurance industry. Is the government has aggregated data, and is sharing it with private parties, then the data should be available to everyone, not just the people who can pay a lot of money for it.

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  • Bob Detlefsen

    Coercing insurers into coughing up private information to government regulators, who then make the information freely available to the public, hardly constitutes a u201cfree market in insurance data.u201du00a0 Indeed, it seems that part of your objective here is to remove insurance data from the market by making it u201cfree.u201du00a0 In any case, I think your proposal is intriguing, not least because it hadnu2019t occurred to me that insurer accounting data collected by FIO from state insurance departments might be subject to FOIA requests.u00a0 Assuming that it is, I suppose thereu2019s no reason why the data shouldnu2019t be made easily accessible through a mechanism such as EDGAR, as opposed to requiring people to expend time and energy navigating the often protracted FOIA process.u00a0 nu00a0nWith that said, Iu2019m not entirely convinced by the u201ctransparencyu201d rationale you put forward, at least insofar as mutual insurers are concerned.u00a0 We are all familiar with the argument that for markets to work, government intervention is sometimes necessary to minimize information asymmetries between buyers and sellers.u00a0 This is especially true of the capital markets, which is why there is such heavy emphasis in federal securities regulation on enhancing the transparency of public companies for the benefit of investors and shareholders.u00a0 But how does this apply to a mutual insurer?u00a0 It is arguable that a mutualu2019s policyholders, as the companyu2019s nominal owners, have a legitimate interest in acquiring the companyu2019s financial data.u00a0 But does anyone else?u00a0 nnI sympathize with academics and journalists who would like free access to such information, but Iu2019m not sure that satisfying their curiosity rises to the level of a public-interest imperative.u00a0 Perhaps you could explain why mutuals should be subject to the sort of u201ctransparencyu201d regime that, to my mind at least, is more appropriate to publicly-held companies.

  • H G Stern, LUTCF, CBC

    Julie Ferguson channels her inner toddler to bring us this week’s fun and insightful Cavalcade of Risk, and your post is in it:nn let your readers know.nnAnd au00a0 friendly reminder to newbies and regulars alike that, while it’s not mandatory to give a link back, itu2019s the way that carnivals work best. If your submitted post has been included in the Cav, please remember to post about it on your blog because it helps us all.nnBTW: We’re now scheduling for late 2011/early 2012. Hosting is fun and easy, just drop us a line to grab yours.nnThanks!

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  • Anonymous

    Tim,nnStay on the case. Open access to insurance firms’ info is a terrific idea, long past overdue.nnThe 1st poster’s response reminds me of a period in my career when I u00a0had cause to pursue information from the NYS Insurance Department. A more secretive, defensive, foot-dragging bunch of industry-protecting bureaucrats could scarce be imagined, much less found. Mr. Merkel’s otherwise helpful comments notwithstanding, his suggestion that insurance regulators have matters firmly in hand is comical, judging solely from their “efforts” in the realm of health insurance.nnThat the two preceding posters’ remarks imply solidarity with that lot should be incentive enough for you to proceed.

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