Proposed changes in state insurance company financial reporting requirements could cost $300 million in the first year, and implementing the changes for mutuals could be about 8 times greater than the estimated benefits.[@@]
Researchers have published those projections in a study sponsored by the National Association of Mutual Insurance Companies, Indianapolis. NAMIC commissioned the study to show regulators that the cost of requiring mutual insurers to comply with the financial reporting requirements of the Sarbanes-Oxley Act of 2002 would outweigh the benefits.
NAMIC and the Property Casualty Insurers Association of America, Des Plaines, oppose implementation of SOX requirements, such as the inclusion of new internal audit control requirements in a revised Model Audit Rule being developed by regulators at the National Association of Insurance Commissioners, Kansas City, Mo.
The American Council of Life Insurers, Washington, says it is still monitoring the study.
The issue of changes to the Model Audit Rule will receive discussion during the summer NAIC meeting in Boston, which starts Saturday.
The researchers who developed the study find that, overall, the increased costs approximate the same impact as if the industry’s federal tax rates were to be increased by 24%. According to the researchers, compliance with the proposed rules would cost smaller companies twice as much as larger companies.
Regulators say they need SOX internal control requirements as a regulatory tool and have pointed to current accounting issues at American International Group Inc., New York, as an example of the need for stricter rules.
The NAMIC study, conducted by Finnell & Company, McLean, Va., was based on 56 responses from 147 companies, including 35 groups and 21 single companies.
For insurers with at least $1 billion in annual premium revenue, new, internal compliance costs would include about $3 million for internal audits, $1.9 million for accounting and finance, and $5.2 million for other costs, the researchers write.
For insurers with $25 million to $99 million in annual premium revenue, the internal costs would be about $34,205 for internal audit, $45,568 for accounting and finance, and $15,909 for other costs, the researchers estimate.
Insurers also would spend heavily on external costs, with insurers with more than $1 billion in annual premium revenue spending $2.8 million on external audit fees alone and insurers in the $25 million to $99 million premium range spending $45,386 on external audit costs, the researchers predict.
Estimated 2005 mutual premiums will be $142 billion and internal control compliance costs under Section 404 of the MAR draft would be $302 million, the researchers write.