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June 10, 2005 at 08:00 PM
A regulator and a consumer advocate say a new analysis of the costs and benefits of strengthening insurance company financial reporting rules fails to reflect the full cost of insurer insolvencies.[@@]
On the eve of several planned discussions on implementation of changes to the Model Audit Rule, the National Association of Mutual Insurance Companies, Indianapolis, says the cost of implementing requirements comparable to those given in the Sarbanes-Oxley Act of 2002, including an attestation by management to the strength of internal audit controls, will add $300 million in costs in year 1 of implementation for mutual insurers with the burden falling more heavily on smaller companies.
NAMIC says mutual insolvency costs were 27% of total insolvency costs from 1977 to 1991 and since 1991 have represented only 5% of the industry total.
The discussion is scheduled to take place here during the summer meeting of the National Association of Insurance Commissioners, Kansas City, Mo.
Doug Stolte, deputy insurance commissioner with the Virginia bureau of insurance and chair of the NAIC/AICPA working group, says losses often extend beyond the $300,000 limit paid out by property-casualty guarantee funds and the $100,000 paid out by life guaranty funds. The harm that can be done to life policyholders and to creditors can be in excess of those totals and is a “major hole” in the study.
Stolte also says regulators have invited insurers to come up with a alternative proposal to insure strong internal audit controls and that they “are not wedded to SOX.” Regulators are concerned with a system of controls that cover the major processes and not necessarily all processes as covered by Title IV of SOX, he says.
He says of the announcement of the study, that “it is a big frustration that there is an obvious attempt to kill it[changes to MAR.] It is an obvious attempt to frustrate discussion on the topic.”
Regulators need tools to look into internal management controls of insurers, according to Stolte. For instance, he says in Virginia, they are getting ready to ask questions of American International Group Inc., New York, regarding categorizing workers compensation premiums as a liability in order to avoid the payment of tax.
Of those who are opposing implementation of internal controls, he says, “I don’t know what they have to fear. Give us a proposal.”
