State insurance regulators are telling state legislators that they are not out to use annual statement instructions to impose tough new financial reporting standards.[@@]

Doug Stolte, deputy commissioner of the Virginia Bureau of Insurance, has written a letter emphasizing that members of an accounting standards working group at the National Association of Insurance Commissioners, Kansas City, Mo., respect the traditional rulemaking process.

Because of the significance of the financial reporting changes that the working group is proposing, the working group will recommend that states adopt the changes through statutes or through regulations, Stolte writes in the letter.

“The working group is in no way trying to impinge on any state’s legislative process by making substantive policy judgments,” Stolte writes.

The controversy deals with working group efforts to incorporate some of the financial reporting requirements in the Sarbanes-Oxley Act of 2002 in changes to the NAIC’s Model Audit Rule.

Rep. Craig Eiland, a Texas lawmaker who is active in the National Conference of Insurance Legislators, Albany, N.Y., wrote in March that states would use changes in annual statement instructions to implement the changes.

Eiland, an opponent of applying SOX financial reporting rules to privately held insurers, says imposing the new requirements on privately held insurers is “unnecessary and will provide little, if any, benefit to insurance consumers.” Instead, Eiland argues, the new requirements will greatly increase the costs that insurers will pass on to insurers.

Stolte responds in his letter by noting that only a few states have used annual statement instructions to adopt the Model Audit Rule changes and that most other states have been adopting the changes through regulatory or legislative processes.

Stolte argues that imposing the “best practices” of SOX requirements on private insurers could help reduce the number of insolvencies by requiring company managers to attest to the strength of internal controls. The changes also could help increase the independence of company boards, Stolte says.

These days, simply looking at surplus levels or risk-based capital ratios may not alert regulators to potential problems, Stolte adds.

Stolte cites the example of a Virginia insurer that became insolvent despite having a solid level of surplus.