"We recommend that the NAIC's Revenue Considerations Working Group be charged in 2005 to review the NAIC's reserving practices and arrive at a stated cap for its operating reserve," said Lenore Marema, vice president, industry and regulatory affairs for the PCI.

"If the reserve becomes a fixed item, then it doesn't have the opportunity to become a cushion of extra money for the NAIC to draw on. A reasonable cap and stated purpose for the NAIC's operating reserve may be the ?built-in budget discipline' that the industry has always sought," she said.

The issue has drawn even more concern due to a provision in the NAIC's budget for 2005 that would further increase its reserve level to 100 percent of the NAIC's annual expenditures.

NAIC President and Pennsylvania Insurance Commissioner Diane Koken sought to address concerns surrounding the proposed reserve increase.

"The increase in the reserve, up to a target reserve of 100 percent, is a prudent reaction to the growing risks and uncertainties facing state insurance regulation and the NAIC's business and finances," she said.

Among those risks and uncertainties, Ms. Koken said, were the introduction of federal tools and dual charter measures in Congress, NAIC participation with the Treasury Department under the Terrorism Risk Insurance Act, and the initial start-up costs of the Interstate Compact Commission.

The PCI also called on the NAIC to reconsider a proposal to place its operating reserves in a trust or other account that would be managed by a separate board of directors, as well as creating the Regulatory Modernization and Initiative Fund to cap expenditures beyond the 2005 budget at 1.5 percent of the budget, or $700,000.

This action is a step in the right direction," said Ms. Marema. "PCI would like to see this step institutionalized in the NAIC by-laws as an annual limit, as well as the cap that the PCI has suggested on the overall amount of the NAIC's reserves."

The NAIC held a public hearing on the proposed 2005 budget via conference call last week. Among those participating, in addition to the PCI, were the Center for Economic Justice, the American Insurance Association, the National Association of Mutual Insurance Companies, the American Council of Life Insurers, the National Alliance of Life Companies, and the Life Insurers Council.

The final NAIC Budget for 2005 must be approved during the group's winter meeting Dec. 4 through Dec. 7 in New Orleans.