AIA Sets Multi-Issue Agenda for NAIC Meeting

November 23, 2004

The American Insurance Association (AIA) on Tuesday said that it has a full agenda for the upcoming National Association of Insurance Commissioners’ (NAIC) Winter Meeting.

Issues of concern to AIA include the NAIC’s draft “broker compensation” model law language, a proposal to incorporate parts of the Sarbanes-Oxley securities law into insurance statutory financial reporting, and a report regarding large deductible workers’ compensation policies.

Draft “Broker Compensation” Model Law Language
“AIA is reviewing the recently released NAIC staff draft ‘broker compensation’ model law language in detail. We believe that any new legal standards dealing with disclosure of compensation in brokerage transactions must take into account the following principles: compensation transparency, regulatory clarity, jurisdictional consistency, and business flexibility,” said Craig Berrington, AIA general counsel.

“While the latest staff draft appears to be an improvement compared to other proposals, it still requires some clarification and tightening, so that it accurately reflects the transaction-focused, broker-only orientation that commissioner members of the Task Force on this matter have described as their goal,” Berrington explained.

“AIA remains committed to working with the state regulators to ensure the adoption of appropriate new safeguards against illegal activities, while preserving the many valuable aspects of the independent agent/broker distribution system,” he said.

Berrington will testify more specifically about the draft at the NAIC’s Dec. 4 hearing in New Orleans.

Sarbanes-Oxley Act – Model Audit Rule
The NAIC has been proceeding with several projects designed to incorporate parts of the Sarbanes-Oxley Act of 2002, a federal securities law, into insurance statutory financial reporting. The largest project would amend the model audit rule to include many of the Sarbanes-Oxley provisions. The model audit rule governs the relationship between auditor and insurer, and specifies their reporting responsibilities in preparing the financial statements that must accompany the annual statement.

“AIA is opposed to the current draft of this proposal because it attempts to impose the public company model onto all insurance companies, without due regard for the variety of business structures currently in use throughout the industry,” said Phillip Carson, AIA senior counsel.

“If the NAIC pursues the current proposal, AIA has stated that it must provide a total carve-out for public companies because they are already subject to the federal Sarbanes-Oxley law. In addition, any independence or internal control reporting requirements should be applied at the entity level at which controls are imposed. And finally, no amendments to the model audit rule should be implemented until appropriate guidance is in place,” stated Carson.

The NAIC/AICPA Working Group will receive reports on the progress of its Sarbanes-Oxley subgroup during the NAIC’s upcoming meeting in December.

Workers’ Compensation Large Deductibles
The NAIC/IAIABC Joint Working Group has produced a draft report intended to examine problems in the administration of the benefit delivery system and the insurance mechanism that are caused or magnified by large deductible workers’ compensation policies.

“The Joint Working Group should be commended for conducting a serious review of potential ramifications of large deductibles on workers’ compensation practices. However, the weakness in the report remains that it began (and ended) with an untested assumption: that large deductible policies are the genesis of a variety of problems – and that these problems stem from the inherent nature of large deductibles,” explained Bruce Wood, AIA assistant general counsel.

“AIA believes that no state should take action in response to the recommendations in this report unless and until there is a thorough record developed to substantiate the recommendations,” Wood said.
“In addition to no state taking action, AIA also believes that neither the IAIABC nor the NAIC should take definitive action in response to the recommendations in this report until and unless there is a record developed that clearly substantiates the foundation for the recommendations,” Wood reiterated.

“This means the Joint Working Group should conduct an extensive factual review of the potential problems cited in the report, to verify the existence and systemic nature of those problems. Only with this record can recommendations be formulated with the assurance that their implementation will address a real and not just a perceived problem,” said Wood.

The current draft of the report (Aug. 8, 2004) was approved by the Joint Working Group at the IAIABC Annual Meeting. This draft is scheduled to be approved by the NAIC’s Workers’ Compensation Task Force during the NAIC’s Winter Meeting in New Orleans.

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