INDIANAPOLIS (Dec. 4, 2009) The National Association of Mutual Insurance Companies (NAMIC) recently submitted written comments and provided testimony at a Public Regulation Commission’s Insurance Division public hearing on the adoption of a model audit rule for insurance companies.
According to Christian J. Rataj, NAMIC’s Western state affairs manager, the PRC-ID proposed regulation on the model audit rule is a “radical and imprudent departure” from the National Association of Insurance Commissioner’s Model Audit Rule, known formally as the “Annual Financial Reporting Model Regulation.”
“The New Mexico PRC-ID-proposal fundamentally departs from the NAIC Model Audit Rule model in a number of significant and concerning ways, which would impose needless administrative costs and burdens on small insurers and adversely impact market competition and the affordability of insurance for consumers,” Rataj said.
“Of particular concern to NAMIC is that the New Mexico PRC-ID-proposed MAR would eliminate the NAIC MAR’s $500 million direct written and assumed premium threshold for requiring the filing of the Management’s Report of Internal Controls Over Financial Reporting. It would also create an impractical and unworkable requirement that domestic insurers report ‘Significant Deficiencies in Internal Controls,’ which is a much stricter and burdensome standard than the NAIC MAR requirement of reporting only ‘Unremediated Material Weaknesses.’”
In testimony to the superintendent of insurance and the hearing officer, Rataj asserted that the New Mexico PRC-ID should adopt the entire NAIC MAR because it was thoroughly debated and analyzed over a two-year evaluative process that considered how to best promote sound corporate governance practices and regulatory transparency without imposing excessive and unreasonable economic burdens on small insurance carriers.
“The NAIC MAR is a compromise model that should be implemented and evaluated before being discarded by the New Mexico Division of Insurance. It is flawed reasoning to assume that excessive regulatory oversight automatically equates to more effective regulatory oversight.” The NAIC model has been adopted in 32 states and under deliberation in virtually every other jurisdiction.
Rataj argued that the PRC-ID has “utterly failed” to provide any evidence to support the contention that the comprehensive NAIC MAR or the department’s current regulatory surveillance procedures do not provide consumers with necessary solvency protections and facilitate appropriate regulatory oversight.
Rataj testified that the PRC-ID proposed MAR would frustrate the very purpose of model regulations, i.e. to promote national uniformity and consistency in regulatory practices, so that insurers from different domiciled states can compete on a relatively level playing field and offer consumers a vast array of price-points and insurance products.
“The proposed MAR would impose new cost-drivers on small domestic insurers, thereby putting them at a competitive disadvantage in the New Mexico marketplace and would encourage insurers to engage in ‘regulatory forum shopping’ in an effort to avoid being domiciled in a state that imposes unnecessary economic burdens on small domestic insurers,” Rataj said.
“The proposed New Mexico MAR does not provide consumers with any better protection against an insurer becoming insolvent. Financial insolvency is pretty rare in the property and casualty insurance world, and when it does occur, state guaranty funds provide consumers with appropriate insurance coverage protections.”
As part of NAMIC’s testimony, Rataj provided the Insurance Division with a copy of NAMIC’s study on the cost of SOX-like compliance for small insurers, and pointed out to the hearing officer that the economic burden of compliance with the proposed accounting and auditing practices exceeds the savings in guaranty fund assessments to insurers by a factor of three.
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