NAMIC Not Part of Group Submitting Alternate Proposal to NAIC on SOX-Like Internal Control

October 13, 2005

Maintaining its position that such measures are unwarranted for mutual insurers, the National Association of Mutual Insurance Companies (NAMIC) was reportedly not part of an industry interested
parties’ group submitting an alternate proposal about added internal
accounting control to the National Association of Insurance Commissioners (NAIC) last Friday.

The alternate proposal responds to a key regulator’s request to industry to formulate its own version of what might be added to state solvency regulation of insurers in emulation or adaptation of Section 404 of the Sarbanes-Oxley Act of 2002. That element of the Act prescribes expensive new accounting controls for those companies – insurers and others – regulated by the SEC.

Based on analysis of what species of companies exhibited those failures in accounting integrity that were impetus for the Act and on the expense of those measures prescribed in it, NAMIC’s policy-making bodies had voted on several occasions that the added measures are unwarranted for mutual insurers.

“The industry interested parties’ alternate proposal submitted to Steve
Johnson, chair of the NAIC’s Title IV Subgroup, is greatly mitigated
from the original appearing early last year,” said William Boyd, NAMIC’s financial regulation manager. “But that relaxed version forwarded to the Title IV Subgroup still adds costs to state solvency regulation that aren’t needed, based on the insolvency record of mutual insurers.”

The original regulator proposal to add Sarbanes-Oxley Section 404
content to state insurance regulation would reportedly have cost almost eight times the maximum potential benefit to mutual insurance companies if all insolvencies were eliminated, according to a study conducted by A.Thomas Finnell Jr., CPA of Finnell & Company, PLLC for NAMIC.

Since 1991, mutuals’ share of total insolvency cost has been only five
percent of the industry total, despite mutuals representing more than
33 percent of the total property/casualty premium.

The alternate proposal, prepared by a group representing insurers from
most lines, including many public insurers, deletes provision for the
attestation by the auditor embodied in the NAIC’s original proposal and relaxes the internal control documentation that was also part of that original, floated in February, 2004.

“The interested parties’ plan requires management to state that it is
responsible for internal control and that such internal control is in place and functioning,” Boyd added. “The very detailed and expensive
documentation of internal control present in the original NAIC proposal
is relaxed to the extent that some existing documentation can be used, although there must still be evidence on hand to support management saying what it says about internal control.”

Separately, recent correspondence from U.S. Rep. Mike Oxley, R-Ohio, an author of the Act and chair of the House Financial Services Committee, to NAIC President Diane Koken, who is Pennsylvania’s insurance commissioner, explicitly notes that Congress did not intend to include non-public companies, including mutual insurers, in the purview of the Act.

Koken’s response to Oxley asserts that state regulators will take the initiative to install in their regulatory regime certain solvency-preservation measures similar to those in the Act.

“What we wonder now,” said Boyd, “is what the NAIC will do with the
interested parties’ alternate proposal. We have been an observer in
creation of the interested parties’ alternate proposal and know that
many believe certain regulators will try to re-install some of the most
objectionable elements of the original proposal. Finally, the regulators
should be happy with the measures on auditor independence and corporate governance already on deck for movement up the NAIC hierarchy and leave the internal control mess behind.”

Key regulators are known to want to have closure in the first quarter of 2006, on content from the Act, including internal control measures that would be added to the NAIC Model Audit Rule.

Because such amendments to the Model Audit Rule are intended to be part of the NAIC’s accreditation system, they would generally be mandatory about 2009, except for states that adopt early.

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