FIO, FOIA and a free market in insurance data
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?