With emphasis on transparency, carriers must maintain paper trail to avoid penalties
From Eliot Spitzer probes to the evolving landscape of individual state laws and regulations, the face of records management is changing rapidly, and insurers that fail to keep pace might confront fines, penalties, judgments and other consequences.
Insurers have long been aware of state records retention requirements. However, while state auditors can target record retention practices, penalties for failure to comply in the past have been rare enough that strict compliance may have been a low priority for some.
Now, with investigators and regulators focusing upon “transparency” in the financial services industry, the potential consequences for failure to maintain an adequate paper trail properly can lead to serious financial–if not criminal, consequences.
As with most insurance regulations, insurer records retention requirements vary by state, with some having passed legislation and others promulgating regulations and/or guidelines through the insurance department.
These rules set time limits for the retention of various categories of documents maintained by insurance companies, such as policies, claim files, licensing records and financial records. Some states break down these and other categories into numerous specific subcategories.
Generally, the minimum retention period is anywhere from five to 10 years. Some states set guidelines for what constitutes adequate maintenance of records, while others specifically require the adoption of a records retention plan.
While failure to comply with these rules may in some instances result in little more than a few lines on a market conduct examination report, the scrutiny of state insurance departments on records retention issues may increase if the National Association of Insurance Commissioners decides to adopt, as part of its model audit rule, provisions similar to those of the Sarbanes-Oxley Act.
Since 2002, the Sarbanes-Oxley Act–including its provisions relating to records retention and documentation of internal controls–has applied to publicly traded insurers. Depending upon what, if any, parts of the Sarbanes-Oxley Act are incorporated into the NAIC model rule, compliance may become a concern for privately held and mutual insurance companies, as well.
While a failure to comply with records retention requirements may not lead to dire consequences by itself, the underlying purpose of the requirements is to be able to document and justify the company’s actions.
With New York Attorney General Eliot Spitzer’s office and other agencies launching probes into finite reinsurance transactions and bid-rigging between brokers and their insurance company partners, it is clear that more and more transparency will be required concerning the finances and operations of the insurance industry.
Thus, insurance companies need to be especially vigilant in maintaining records of their actions in a manner that will allow for appropriate disclosure to investigators.
Preservation Of Evidence
Even if a company has not engaged in financial wrongdoing, it may still find itself vulnerable to stiff fines or criminal penalties if, when faced with a threatened probe or litigation, it fails to preserve potential evidence.
One prominent example is Arthur Andersen’s conviction for obstruction of justice resulting from its document shredding policy in the face of a Department of Justice probe into Enron, now on appeal before the U.S. Supreme Court. While the Supreme Court may overturn the conviction, the damage to Arthur Andersen is already done.