INDIANAPOLIS (May 13, 2005)— Even if there were an insolvency crisis in the insurance industry, “there is no reason to think that applying Sarbanes-Oxley rules would solve the problem,” writes NAMIC Public Policy Director Robert Detlefsen in an ALEC Issue Analysis published by the American Legislative Exchange Council (ALEC).
The ALEC paper is in response to the efforts of some regulators at the NAIC solvency level to impose certain elements of the federal Sarbanes-Oxley Act to non-public insurance companies, ostensibly to enhance the efficacy of solvency regulation. But as Detlefsen writes, there have been few insolvencies among property-casualty insurers in recent years, and their incidence is trending downward.
Detlefsen observes that the Sarbanes-Oxley Act is a form of securities regulation that was designed by Congress to protect the interests of shareholders in publicly-held companies and that its goal is to ensure that investors have accurate information about the financial status of the companies in which they hold shares. By contrast, solvency regulation seeks to ensure that an insurer is able to honor its promise to indemnify policyholders according to the terms of their policy agreement.
“Subjecting non-public insurers, such as mutual companies, to the accounting and governance standards of an inapposite federal securities law in the name of ‘solvency enhancement’ does not make sense,” writes Detlefsen.
The ALEC paper also notes that mutual companies are not susceptible to the corporate governance improprieties that Sarbanes-Oxley is intended to correct. “Whereas the interests of shareholders and corporate executives often diverge in a public company setting, the goals of mutual insurance company boards, executives, and policyholders are closely aligned: each of these parties share a common interest in maintaining the company’s ability to pay claims.” Thus, Detlefsen continues, “No one party stands to benefit from accounting machinations that would harm the other parties or impair the solvency of the company.”
The paper concludes by suggesting that if regulators are sincere in their professed desire to improve solvency regulation, they should examine the specific causes of particular insolvencies, determine whether there are defects in the existing body of financial and accounting regulation to which the insolvencies could be attributed, and develop targeted, cost-effective remedies for the identified shortcomings.
ALEC has distributed the paper to its more than 2,400 state legislator members throughout the United States.
“Applying Sarbanes-Oxley Rules to Mutual Insurance Companies: A Regulatory Fix in Search of a Real-World Problem” can be downloaded at http://www.namic.org/pdf/ALECSOXIssue0405.pdf
The American Legislative Exchange Council (ALEC) is the nation’s largest nonpartisan, individual membership organization of state legislators with over 2,400 legislator members from all fifty states.
For further information, contact
Rick Nelson, APR (Indianapolis, Ind.)
Founded in 1895, NAMIC is a full-service national trade association with more than 1,400 member companies that underwrite 43 percent ($196 billion) of the property/casualty insurance premium in the United States. NAMIC members account for 44 percent of the homeowners market, 38 percent of the automobile market, 39 percent of the workers’ compensation market, and 31 percent of the commercial property and liability market. NAMIC benefits member companies through advocacy, public policy and member services. Information about the association, its member companies and the property/casualty insurance industry can be found at NAMIC Online. www.namic.org.