INDIANAPOLIS (Feb. 7 2005)––Despite opposition by NAMIC and others in the insurance industry, an NAIC panel meeting this week will begin to discuss whether costly new audit measures based on the federal Sarbanes-Oxley (SOX) law should be imposed on non-public insurers.
The SOX content comes from Section 404 of the statute requiring that a) management assess and report on the adequacy of internal accounting controls and b) the insurer’s independent auditor to attest to the adequacy of management’s statements on internal control.
“Much of the industry does not want this,” said William Boyd, NAMIC’s financial regulation manager. “What we have stressed again and again is that regulation of insurance is already stronger than that applied to public companies and that regulators need to justify, via specific cases and cost-benefit, what they propose to do. They just haven’t done this yet. They need to do more than say that it feels good to them and that other regulators in other industries are doing it”
Meeting in Orlando, Florida on Wednesday, what is known as the “Title IV Subgroup” will begin discussion of the appropriateness of transplanting the SOX Section 404 content into the solvency regime used by state regulators of insurers. (“Title IV” refers to that part of the SOX Act that includes Section 404, and the “Subgroup” part of the committee’s title denotes it as a subgroup of the NAIC/AICPA Working Group. That parent committee’s turf includes how independent accountants must conduct annual audits of insurers and relate to state regulators.”
A number of state solvency regulators decided early in 2004 that key content of the federal Act should be imposed, via NAIC adoption, on insurers not already subject. The federal Act affects companies—insurers and all other sectors—that are regulated by the SEC but does not apply to non-public companies, including mutual insurers.
Of the SOX content proposed for addition to state regulation, the Section 404 strictures are by far the most expensive and burdensome for addition to non-public insurers’ regulatory obligations. A number of trade associations, including NAMIC, have strongly remonstrated against the proposed addition of the Section 404 content to the NAIC’s Model Audit Rule, or MAR, which is the model regulation adopted or affecting states’ prescriptions for conduct of audits.
NAMIC will remain firm in its opposition, according to Boyd, in keeping with direction from its board of directors. “There is caution about even appearing to negotiate with the regulators, who believe these measures are needed for state regulation of insurers to have parity or credibility alongside federal regulation of public companies and banks, despite the fact that existing solvency regulation provides regulators with expansive authority to assure the financial health of an insurer.”