INDIANAPOLIS (Nov. 9, 2005)—Following Tuesday’s unanimous vote by insurance regulators to withdraw their original proposal intended to transfer the complete internal control framework of Sarbanes-Oxley to state insurance regulation, the National Association of Mutual Insurance Companies (NAMIC) said that it will continue to oppose an industry alternative that would apply public company shareholder protections to non-public companies.
“The partial SOX content that regulators continue to consider isn’t needed for an industry that is already highly regulated with respect to solvency,” said Neil Alldredge, NAMIC’s senior director of state advocacy. He said questions of cost and applicability would become more critical to principal regulators as the alternative works its way through the NAIC process.
Alldredge said two fundamental questions still remain: 1) Why should shareholder-based protections apply to companies which do not have shareholders? 2) Can regulators justify the cost of this new proposal?
During the NAIC Title IV Subgroup session held Tuesday in Chicago, regulators voted to remove the original Title IV proposal from consideration and began to discuss an alternative plan offered by a group of “interested parties” from industry. Despite the progress made to eliminate outright 404 requirements, NAMIC did not join in the industry proposal when first presented in October. Alldredge said his association’s members remain opposed to the concept of applying federal public-company regulations to non-public insurers. He stressed that mutual insurers have very low insolvency rates and that the impetus for SOX came from those failures among public, non-insurance entities.
“Because Congress did not intend that SOX apply to mutual insurers, and because the costs of the SOX Section 404 measures on internal control exceed the benefits to policyholders, we continue our opposition,” said William Boyd, NAMIC’s financial regulation manager, questioning specifically the costs associated with the alternative.
“Based on the regulators’ own rough estimate, the alternate proposal would cost policyholders about $100 million, a third of the projected cost of the original. NAMIC’s original study developed a ratio of costs at 8:1 over potential benefit. Although the new proposal brings that ratio down to 3:1, under any examination how can a proposal that costs three times its benefit be considered cost effective, a principle adopted by regulators the regulators themselves,” Boyd questioned.
The Title IV Subgroup intends to vote out the alternate proposal, with a number of smaller changes, during the NAIC’s winter meeting in December. The proposal may then move up the NAIC hierarchy, but opposition within the NAIC and among state legislators concerned with insurance matters may slow its progression. Alldredge reminded regulators on Tuesday that national legislative groups NCOIL and ALEC are opposed to the NAIC proposal. “Principal regulators have begun to see that the potential for support of sweeping public policy made outside the legislative process is very questionable. Further scrutiny on questions of cost and appropriateness for non-public insurers will occur,” he said.
Both NAMIC staff members noted that the “implementation guide” proposed by the industry group to flesh out provisions of their alternate proposal has potential for “backdooring” some of the burden that was abandoned. The industry group envisioned the implementation guide as similar to rules providing implementation guidance for Section 404 of the alternate proposal.
“The alternate proposal is an improvement on the original proposal the regulators have now dropped,” said Boyd, “but we have to observe that the industry group that developed the alternate proposal had extra heavy representation of insurers that are public or voluntarily compliant. The principled opposition that NAMIC has brought to this process has been crucial in precluding a truly oppressive new layer of regulation.”
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Posted: Wednesday, November 09, 2005 12:00:00 AM. Modified: Wednesday, November 09, 2005 4:16:50 PM.
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