As regulators prepare to convene in San Francisco this week for their summer meeting, the National Association of Mutual Insurance Companies (NAMIC) has announced its testimony at a June 14 National Association of Insurance Commissioners’ (NAIC) meeting will focus on the premise that state regulation of insurers already effectively provides “affirmative protection of the policyholder in both solvency regulation and creating and maintaining orderly markets.”
Pending before the NAIC/AICPA Working Group is a proposal that borrows content from the federal Sarbanes-Oxley Act of 2002 concerning insurers’ corporate governance, including audit committees and their processes, and additionally requires that management make representations about a company’s internal accounting control and have those representations audited. According to NAMIC, under the proposal non-public insurers face having the most onerous elements of the Sarbanes-Oxley Act of 2002 extended to state regulation. Mutual insurers are the largest segment of the “non-public” insurer population.
The NAMIC testimony will be part of extensive industry remonstrance against the proposal to be heard by the NAIC/AICPA Working Group.
NAMIC claims its testimony will echo results of a recently published study by the A.M. Best Company, titled Best’s Insolvency Study: Property/Casualty U.S. Insurers, 1969-2002. The Best study found that the national system of state-based insurance regulation has been increasingly effective in protecting policyholders and decreasing the effects of insurer insolvencies, especially over the past 15 years under the National Association of Insurance Commissioners’ (NAIC) Solvency Agenda.
A key argument in earlier and current NAMIC testimony against embedding Sarbanes-Oxley elements in the NAIC’s Model Audit Rule is that insurance regulation already has great breadth and depth for assuring companies’ capacity to pay legitimate claims. Financial Regulation Manager William Boyd will itemize basic components of existing solvency regulation as including:
· A unique and conservative accounting system, wholly separate from generally accepted accounting principles and maintained by insurance regulators.
· Annual and quarterly financial reporting to regulators.
· Independent annual audits of insurers’ financial statements and periodic financial examinations conducted by state insurance departments.
· Continuing solvency monitoring done on a centralized basis by the NAIC.
· State laws prescribing criteria on proportion and quality for insurers’ investments.
· A risk-based capital system for measuring risk of insurer assets and liabilities and integrating these for assessment of claims-paying ability.
· Holding company laws that limit or govern mergers and inter-company transactions involving insurers.
· Pages in annual statements that make clear who is responsible for the representations of the reporting insurer.
“In contrast to this, regulation of public companies by the SEC is much more limited, even with the addition of the Sarbanes-Oxley Act,” said Boyd. “The SEC regulates those companies in any business that are in the public capital markets and in which investment is made by those who hope for—but are not guaranteed—a return on their capital.”
“Insurance regulators are affirmatively regulating insurers’ promises to policyholders,” Boyd added, “and they have a full toolkit. Adding the corporate governance and financial reporting strictures of Sarbanes-Oxley is simply another layer of regulation that, unfortunately, duplicates in principle what is already available.”
The NAMIC testimony will include results of a survey that estimated those additional costs of complying with the proposal.