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Sarbanes-Oxley for Non-Public Insurance Companies ‘Doesn’t Fit,’ says NAMIC Report; Offers Process to Evaluate Solvency Laws

INDIANAPOLIS (June 2, 2005)— The case against a regulator initiative to apply Sarbanes-Oxley type requirements to non-public insurers continues to grow stronger with the release by the National Association of Mutual Insurance Companies (NAMIC) today of a detailed report that argues forcefully against the proposed initiative. In an effort to more effectively address the stated purpose of the regulator initiative, the report also outlines a series of steps that regulators should take to improve state solvency regulation.

Authored by economist Sophie M. Korczyk, Ph.D., the NAMIC Issue Analysis is entitled “It’s Time to Admit that SOX Doesn’t Fit: The Case Against Applying Sarbanes-Oxley Act Governance Standards to Non-Public Insurance Companies.” It urges regulators to summarily reject proposals to impose SOX-like requirements on non-public insurers based on several key findings:

  • While the federal Act was designed for the express purpose of protecting the interests of investors and to restore public confidence in the capital markets, “non-public companies, by definition, do not have investors, and are subject to neither the advantages of access to the public equity markets nor, more importantly, to the peculiar pressures, incentives, and temptations that apply to publicly traded companies.”
  • Existing regulation of solvency, disclosure, reporting, and examination are “designed to guarantee the integrity of the contract between the insurer and the policyholder”—an objective that would not be served by a state-based version of an investor-oriented law such as the Sarbanes-Oxley Act.
  • The most recent projected costs of complying with the Sarbanes-Oxley Act greatly exceed early estimates, suggesting that to graft elements of the Act onto the existing state-based regulatory regime would produce “fewer and less substantial public benefits while the costs—ultimately to be borne by insurance policyholders—will be at least as great” as the costs incurred by public companies subject to the federal Act.

“Applying elements of the Sarbanes-Oxley Act, particularly Section 404, to non-public insurance companies is unnecessary, overly burdensome, and counterproductive,” the NAMIC paper concludes.

While noting that “insurers, consumers, and regulators have a shared interest in securing insurance company solvency,” the paper criticizes regulators for “beginning deliberation with an ill-fitting set of requirements that will result in substantial new costs for insurance policyholders.” Instead, the paper sets forth a three-step evaluation process “to explore how the current system of solvency regulation might be improved.” The process would include:

  1. A detailed study of the causes and effects of insurer insolvencies across the country. To the extent possible, the study should make use of existing data and source material collected by state insurance departments, and should avoid focusing on a single jurisdiction.
  2. An examination of the existing body of financial regulation law to identify what shortcomings, if any, can be linked to recent insolvencies.
  3. Development of targeted, cost-effective remedies to address the identified weaknesses.

“Until this evaluation is complete, state regulators and legislators should reject proposals to apply investor-oriented protections to non-public companies,” the paper concludes, leaving insurers “free to adopt provisions of the Act voluntarily, as indeed many have.”

“NAMIC members have proclaimed loudly and often that they oppose the costly mandatory imposition of public company regulation on non-public insurance companies, especially without thoughtful consideration of other public policy options,” said Roger H. Schmelzer, NAMIC senior vice president of state and regulatory affairs. He said the paper gives voice to such member concerns and is intended to provide the “social, political and economic context” for policymakers to factor into their deliberations.

“This is a critical time for state regulation,” Schmelzer said, echoing one of the arguments in the paper. “It is important for regulators to add credibility to solvency oversight rather than adopt requirements that are certain to raise consumer costs for uncertain benefits.”

The NAMIC Issue Analysis, “It’s Time to Admit that SOX Doesn’t Fit: The Case Against Applying Sarbanes-Oxley Act Governance Standards to Non-Public Insurance Companies,” will be e-mailed this week to insurance regulators and state legislative insurance chairs in all 50 states.

The paper can be downloaded from NAMIC’s website, NAMIC Online.

Posted: Thursday, June 02, 2005 12:00:00 AM. Modified: Thursday, June 09, 2005 10:57:38 AM.

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