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Regulation and Compliance > State Regulation

Tug Of War Over SOX Continues

By Jim Connolly

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Regulators and insurers continued their tug of war over inclusion of provisions of the Sarbanes-Oxley Act of 2002 in a model law under consideration by state insurance regulators.

At an interim meeting in Atlanta last week, trade groups including the American Council of Life Insurers and National Association of Mutual Insurance Companies weighed in on the potential cost and redundancy of inclusion of any SOX provisions in the draft of the Model Regulation Requiring Annual Audited Financial Reports.

But speaking for regulators at the National Association of Insurance Commissioners, Kansas City, Mo., Doug Stolte, chair of the NAIC/AICPA working group and Virginia deputy commissioner-financial regulation, said that currently, if a company has a significant deficiency in its financial statements, its auditors are supposed to send a letter to regulators stating that fact. In 12 years, he said, he has only received one such letter.

Responding to an argument from insurers that there are already regulatory tools such as risk-based capital requirements, Stolte said all such tools depend on accurate financial reporting and implementing provisions similar to Sarbanes-Oxley are needed.

Stolte also pointed out that banks have requirements similar to Section 404 of SOX, which requires managers to attest that there are sufficient controls over systems. Insurers should not be different than other financial services operations, he added.

Another issue is the expense of making individual legal entities rather than the parent company comply with the new measures. Stolte said regulators believe that if both use the same systems, then one attestation should be enough. He also said the $25 million premium ceiling for the definition of a small company is something regulators would be willing to discuss with insurers. In the model, small companies are exempted from the reporting requirement.

Bill Boyd, NAMICs financial regulation manager, said there will be enormous costs for auditors and employee hours expended. Indeed, reports from the meeting suggest that one large public insurer spent $10 million and 100,000 employee hours complying with Sarbanes-Oxley.

And, Roger Schmelzer, NAMIC senior vice president-state and regulatory affairs, adds that there should be some demonstration that there is a problem that needs to be resolved.

Jim Renz, ACLI director of accounting policy, said costs will be significant for large life insurers that are not public and do not currently have to comply with SOX. Even if a company does have to comply with SOX, he adds, it is for GAAP accounting. If a company also has to comply for statutory accounting, it could create expenses and raise issues associated with requirementssuch as reservingwhich are treated differently under GAAP and SAAP.

Reproduced from National Underwriter Edition, July 29, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.