The extension of Sarbanes-Oxley to non-public insurance companies is a good example of the era of regulatory hyper-vigilance in which it is difficult to know when an issue is of legitimate public policy concern or when it is just something someone has taken upon themselves to pursue.
Roger H. Schmelzer, National Association of Mutual Insurance Companies senior vice president of state and regional affairs, shared this view on Sarbanes-Oxley with the Society of Insurance Research members in St. Petersburg, Fla., in October.
“Sarbanes-Oxley applied to mutual insurers is a very bad and unnecessary idea and one on which regulators and private industry have spent two years and hundreds of thousands of people hours,” he said.
Schmelzer said that Sarbanes-Oxley was intended to protect people who own stock, indicating that people who own stock often have very little knowledge of a public company’s financial health. He said its goal is to provide comfort to stockholders, so they know they are dealing with a company that is going to be around, is well managed and is capitalized exactly the way they say it is.
“Sarbanes-Oxley did its job but is widely acknowledged to have been too broad, too big and implemented too fast,” Schmelzer said. “The auditing profession exacerbated things by going too far in requiring a level of financial reporting that was too granular in their efforts to analyze what companies were working on.”
Schmelzer emphasized that Sarbanes-Oxley does not apply to non-public insurance companies. He said there was recent confirmation of this when Congressman Mike Oxley (R-Ohio) wrote a letter to the National Association of Insurance Commissioners stating, “We could have expanded this to non-public companies if we wanted to, but we chose not to and you need to understand that.”
“Insurance regulators stand in the shoes of the insurance-consuming public,” Schmelzer said. “They have enormous powers to find out anything they want to find out about what a company does.”
Schmelzer said NAMIC’s estimates indicate that for every dollar of potential benefit, which is defined as the elimination of all mutual company insolvencies, it would cost companies $8 to comply with the original NAIC proposal.
The cost of regulation
He said the NAIC, since 1981, has expanded its budget 14 times. “It is no surprise that they have never even considered the cost-to-benefit ratio, they have never looked at it and still have not looked at it,” Schmelzer said. “Although they have now reduced their proposal significantly, they still couldn’t tell you what it costs, they can’t even tell you exactly what the benefit is going to be.”
Schmelzer explained that mutual insurance company insolvencies accounted for 5 percent of all insolvencies in the P/C industries in the past 13 years.
“Avoiding insolvency is of course the responsibility of an insurance company, but we do not think there is an insolvency problem that justifies a blank check from the perspective of new regulations to enforce internal rules.”
NAIC cuts back
He said NAIC is cutting back on its proposals significantly, but that NAMIC is not satisfied with mitigation. “Four times we have asked the NAMIC board if it wants us to come to the table and compromise on this,” Schmelzer said. “We have asked if they want to make some proposals to alleviate the burden.
“NAMIC’s answer has been, ‘No, because at the core, it does not apply to non-public insurance companies.'”
Schmelzer said that to NAMIC “this is not an example of a proposal that you just want to make better. Our board is saying that a bad idea is a bad idea and to just tell the NAIC that.”
NAMIC has been working on that every day. Schmelzer said that if NAMIC has to take this to the state legislatures it will, but hopefully it will not get to that point.
Schmelzer said NAMIC has a focused issue agenda and does not believe in pursuing every issue that comes down the pike.
“We pick two or three on which we can become involved and be effective, Schmelzer said. “There is no great value to our members if we are involved in too many things and produce no results, so we pick out the most important issues to our members and focus on producing our results.”
He said NAMIC will focus on ongoing issues. He said that with rate modernization, it believes property and casualty rates should not require approval.
“A lot of states have actually attempted to do that,” he said. “None have gone as far as Illinois to eliminate it altogether, but people are interested in doing it.”
He said that the proposed federal SMART Act calls for the total elimination of rate regulation. Schmelzer said this is the right direction to go, but it is questionable whether states will ever get there.
Schmelzer said NAMIC is going to work very hard to prevent the application of Sarbanes-Oxley to mutual insurance companies.
He pointed out that the NAIC has a $59 million budget, 70 percent of which is paid for by the insurance industry. He said he is skeptical of database fees, where an insurance company sends its information to the NAIC, pays a fee to file the information, then another fee to get comprehensive aggregate information back.
“NAIC is filled with lots of really good public servants who care about insurance regulation and what we care about,” Schmelzer explained. “We believe, however that you have to have a value-added system of regulation. Regulation for regulation’s sake really does not make sense.
“The NAIC meets four times a year, whether they need to or not; they have interim meetings, whether they need them or not; when you meet that often, you are going to do things, not all of them necessary. It’s unavoidable.”
Schmelzer predicts that, at some point, someone is going to look at a bad idea like the extension of Sarbanes-Oxley, look at the $59 million NAIC budget, put the two together and say, “Why is this organization collecting $59 million for this?”
“Insurance companies are going to ask, why are we paying this amount of money for something we do not agree with, bad regulation like the extension of Sarbanes-Oxley? It wouldn’t take much for companies and people in public policy to say, if that’s the best they can do, maybe they shouldn’t do it.”
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