Regulators Respond To Legislators SOX Concerns NAIC says SOX best practices wont be incorporated automatically into state laws

By Jim Connolly

Insurance regulators responded to concerns voiced by state legislators in early March that changes to the Model Audit Rule incorporating best practices of the Sarbanes-Oxley Act of 2002 would be incorporated automatically into state laws.

In a letter dated March 29 to the National Conference of Insurance Legislators, Doug Stolte, deputy commissioner of the Virginia State Corporation Commissions bureau of insurance, wrote that it never has been the intent of the National Association of Insurance Commissioners NAIC/AICPA working group to “automatically incorporate” the proposed revisions by reference through the annual statement instructions. The working group, he emphasized, will recommend the proposed revisions be done by statute or regulation due to their significance. “The working group is in no way trying to impinge on any states legislative process by making substantive policy judgments.”

Only a “very limited number of states” have adopted the MAR through annual statement instructions, he wrote. Rather, the overwhelming majority of states have adopted the MAR by statute or regulation and any significant changes would utilize the same statutory or regulatory process, he continued.

In his letter, Stolte stated that “it is critical to realize that virtually every regulatory tool is predicated upon high quality and accurate financial data.

“If an insurer does not possess accurate and reliable financial data, moreover, how can it accurately price its products and manage its business?” the letter asked.

In a March 10 letter, Rep. Craig Eiland, a Texas representative of NCOIL, based in Troy, New York, stated his concern that the changes would be made through the annual statement instructions.

Eiland also said SOX was enacted to protect shareholders of publicly traded companies and its provisions are not designed to address non-public companies which already are regulated by state solvency laws.

NCOIL further stated that the new requirements are “unnecessary and will provide little, if any, benefit to insurance consumers.” Rather, Eiland noted, it will “greatly increase” costs to insurers that will be passed on to consumers.

NCOIL also called for further public policy discussion.

In an interview with National Underwriter, Stolte detailed the reasoning behind the response to the NCOIL letter.

How can a company operate effectively if it doesnt have a handle on its finances? he asked. An insurer needs to have a handle on items that SOX requires such as internal controls, he said, so that it can manage by design rather than by crisis.

Those opposed to incorporating the best practices of SOX in state regulation have argued that insurers have not experienced the problems exhibited in other industries, Stolte said. However, he noted, current examinations of companies including American International Group and Berkshire Hathaways Gen Re, suggest that such an argument may not hold up.

Stolte said that while incorporating the best practices of SOX may not prevent all insolvencies, it will help reduce the number by requiring, among other things, that management attest to the strength of internal controls and that there is a board of independent directors.

He noted that guaranty fund assessments may not reflect the “true cost” to consumers because policyholder money can be tied up for years as was the case with Fidelity Bankers Life Insurance Company. Fidelity Bankers was a life insurer based in Virginia that was declared insolvent in the mid-1990s.

If there if is not accurate financial data, Stolte said, current regulatory tools such as risk-based capital may not alert regulators to potential problems. For instance, he said Reciprocal of America, a Virginia-based company that was taken into receivership, had a definite surplus and nothing to indicate it had reached a mandatory control RBC level. Insurance regulators, he added, ought to be on par with other financial services regulators.

Stolte said he is confident that insurance regulators and insurance legislators at NCOIL will be able to work together. He noted how NAIC and NCOIL as well as interested parties were able to come together and reach consensus on a major accounting project, the Codification of Statutory Accounting Principles.


Reproduced from National Underwriter Edition, April 1, 2005. Copyright 2005 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.