A spokesman for the Property Casualty Insurers Association of America told a National Association of Insurance Commissioners panel today in Orlando that a proposal to apply new requirements based on the Sarbanes-Oxley law to non-public insurers could cost companies and policyholders $1 billion a year or more. He said passing other new requirements based on SOX to non-public insurers is not based on demonstrated need.
“It leaves questions unanswered regarding benefits versus anticipated cost,” explained Broadie, PCI vice president of financial legislation and regulation. “We first need to know if the patient is sick before we begin surgery. If it’s determined there is a flaw in the current state regulation of insurer financial reporting that needs to be fixed, we’ll work with you on the diagnosis, and the cure if necessary. But if there is no problem, it should be left alone.”
Today’s financial panel included regulators Doug Stolte, Virginia deputy commissioner; Steve Johnson, Pennsylvania deputy commissioner; Jim Armstrong, chief examiner of the Iowa Insurance Division and Mike Motil of the Ohio Department of Insurance.
Under discussion is Section 404 of the SOX statute which requires that management assess and report on the adequacy of internal accounting controls, and the insurer’s independent auditor attest to the adequacy of management’s statements on internal control.
“Insurance companies are already held to a higher standard under state regulation, which is far more extensive than regulation of most public companies,” Broadie said. “Insurers face more financial reporting requirements and more conservative accounting standards under state regulation. Imposing 404 standards on non-public insurers implies that current state regulation may not adequately ensure the accuracy of financial statements, which we don’t agree with.”
Section 404 compliance results in enormous costs for insurers and policyholders, with smaller insurers predicting compliance costs of almost 0.3 percent of premiums. This could make the total compliance cost approximately $1 billion annually for property/casualty, life and health insurers. And depending on how 404 is imposed, the cost could be significantly more if it is imposed at the legal entity level, Broadie noted.
A clue as to how SOX is working can be seen in the experience of public companies. “What’s happening in the public world is anecdotal at this point, but we’re hearing that accounting firms are routinely using non-audit staff to perform 404 attestation work, and that there is barely sufficient staff to perform this work for public clients,” Broadie said. “Implementation of 404 with public companies is a work in progress. Why not see how that work goes before committing the entire insurance industry to it?”
Two fundamental questions
“The regulators still haven’t answered two fundamental questions: whether there is a problem with insurer financial reporting that needs to be addressed, and, if so, what are the potential solutions and their costs and benefits,” he said. “The regulators must address these questions seriously before further work continues.”
Under discussion is Section 404 of the SOX statute which requires that management assess and report on the adequacy of internal accounting controls, and the insurer’s independent auditor attest to the adequacy of management’s statements on internal control. PCI opposes extension of Section 404 to mutual and other non-publicly traded insurers.
Designed for public companies
In the past, PCI has observed that Sarbanes-Oxley – and in particular Section 404 — was designed for public companies in general, which by and large are subject to far less regulation than insurers. Under law, insurers must file detailed financial reports, are subject to a special accounting system designed to help regulators ensure solvency, and meet specific provisions in state regulation designed to ensure that the financial statements are accurate. In addition, publicly traded insurers that are already subject to SOX should not be subjected to any different requirements at the state level.
“Before it undertakes further review of extremely costly additional regulation, PCI asks that the NAIC study whether a problem exists with insurer financial reporting, and then conduct a cost-benefit analysis that takes into consideration all costs and benefits to all players in the system — regulators, insurers and policyholders – not just costs and benefits to regulators,” Broadie said. He offered PCI’s help in conducting these studies.
Topics Carriers Legislation
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