State insurance regulators have plowed ahead with efforts to tighten standards for corporate governance and auditor independence, but they are taking longer to update standards for internal controls.[@@]

Panels at the National Association of Insurance Commissioners, Kansas City, Mo., are drafting revisions to Title II of the NAIC’s Model Audit Rule, which deals with auditor independence; Title III, which deals with governance; and Title IV, which deals with controls.

Talks on Title II and Title III already have produced proposals that could be incorporated into draft revisions of the Model Audit Rule, but regulators want to put those proposals on hold until panels complete work on proposed changes to Title IV, says Doug Stolte, chairman of the NAIC-American Institute of Certified Public Accountants working group and deputy commissioner of the Virginia Bureau of Insurance.

Regulators working on the revisions hope to advance all components through the NAIC together and then send a single package of changes to state legislatures, Stolte says.

Today, 39 states use laws and regulations based on the Model Audit Rule, which is formally known as the Model Regulation Requiring Annual Audited Financial Statements, to regulate insurance company financial reporting.

Regulators will be talking about the Model Audit Rule in Boston June 11-14 at the NAIC’s summer meeting.

State legislators will be talking about the model in July, during the summer meeting of the National Conference of Insurance Legislators, Troy, N.Y., in Newport, R.I.

Stolte has argued that recent events, including revisions to financial statements at American International Group Inc., New York, underscore the need for more stringent auditing requirements at the state level as well as at the federal level.

Insurers argue that the costs of updated standards will outweigh the benefits. The National Association of Mutual Insurance Companies, Indianapolis, hopes to release a study next week that will quantify the cost of complying with the stricter standards.

In related news:

- Ed Stephenson, a representative for the National Alliance of Life Companies, Rosemont, Ill., says proposed changes to the Model Audit Rule that would require the appointment of an independent board of directors go beyond the regulatory authority of a significant number of insurance commissioners and impinge on state statutes.

- Regulators who participated in a recent discussion of corporate governance issues said the draft model defers to state law when a state’s statutes conflict with draft model requirements.

- Regulators are deleting a requirement that companies appoint financial experts to their audit committees, mainly because regulators concluded that states cannot give the experts the same kind of safe harbor protection from liability that federal law provides.