At its summer meeting, the National Association of Insurance Commissioners (NAIC) agreed to reconsider proposed amendments to its Model Audit Rule. At a public hearing on June 14, the NAIC/AICPA Working Group decided to hold interim meetings this summer with an industry subgroup to further consider whether corporate governance provisions from the federal Sarbanes-Oxley Act (SOX) should be added to the extensive regulatory process that applies to all insurers.
At the hearing, the Property Casualty Insurers Association of America (PCI) and other industry representatives told the Working Group that it needs to step back from its assumption that the states should follow federal law in this area.
“Our members and all insurers strongly support good corporate governance and strong financial reporting. It is our members that pay for the costs of insurer insolvencies through the guaranty fund system,” said Stephen W. Broadie, PCI vice president, financial. “But the Working Group needs to examine whether there is a problem with current regulation and what the costs and benefits of potential solutions are before assuming that the very costly internal controls provisions of SOX are the answer.”
According to PCI, the Working Group has proposed to apply several onerous SOX provisions on all insurers at the state level. The proposed changes would require all insurers to prepare an exhaustive management report on internal controls over financial reporting and have their auditors issue an additional formal opinion on that report. Other provisions would require insurers to have an audit committee in their boards of directors made up solely of independent directors.
“Although NAIC leadership wants to take the time to carefully explore this issue, several members of the Working Group seem attached to their goal of adopting proposed amendments by the December NAIC meeting,” Broadie said. “Establishing this industry subgroup will allow us to address whether SOX solves any shortcomings in the oversight of the state regulatory system in a cost-effective manner.”
Broadie said that the current state regulatory structure gives commissioners far more information from and authority over insurers than is the case for a great majority of the publicly-traded companies for which SOX is designed. This structure includes the NAIC Annual and Quarterly Statements and instructions, which provide far more information than GAAP financial reports, as well as statutory accounting principles, which are far more conservative than GAAP. In addition, insurers are subject to risk-based capital requirements, state law investment restrictions and the NAIC’s investment rating system. State regulators are also required to perform on-site financial examinations every three to five years, Broadie said.
“We believe that current state regulation achieves the goals of SOX. There are no studies or information from the NAIC Working Group that indicate whether the addition of Sarbanes-Oxley’s requirements would provide greater benefits to regulators and policyholders than their costs. Moreover, the Working Group has not attempted to determine whether those provisions would have prevented prior insolvencies or would prevent future ones,” Broadie said. “We are hopeful that with the industry subgroup working together with the NAIC Working Group that these critical questions can be answered before any amendments are adopted to the Model Audit Rule.”
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