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NAIC Sarbanes-Oxley Plan Gets Tough Scrutiny By NCOIL; State Legislative-Based Alternative Contemplated

After sharp questioning about an NAIC proposal to apply Sarbanes-Oxley modeled internal controls to non-public insurance companies, the chairman of a key NCOIL committee has invited industry and regulators to work with legislators to craft an alternative.

Virginia Deputy Insurance Commissioner Douglas Stolte, who heads the NAIC/AICPA Working Group, was probed extensively on the costs and benefits of the proposal at NCOIL’s summer meeting in Newport, R.I. Legislators expressed concern that no cost-benefit analysis had been conducted by the NAIC, to which Mr. Stolte replied that regulators were “waiting for a final framework” to analyze. Asked if the NAIC would conduct an analysis when that decision was made, Mr. Stolte said “I’m sure industry will do one,” but declined to commit his organization to undertake the analysis.

Pressed further, legislators observed that since Mr. Stolte felt very strongly about his proposal, he might believe that the benefits outweighed the costs and that a cost-benefit analysis was unnecessary. Mr. Stolte agreed that this was a “fair assessment” of his position.

NAMIC's Senior Director of State Advocacy Neil Alldredge followed Mr. Stolte by summarizing the cost-benefit analysis presented to the NAIC last month in Boston which showed eight dollars in cost for every dollar in maximum potential benefit and a low rate of mutual company failures. “Mutual insolvencies have constituted only five percent of all property/casualty insolvencies since 1992,” he said. “This is a solution looking for a problem.”

Mr. Stolte later said that “mutual insurers do have a better track record” on insolvencies.

The possibility of an NCOIL alternative was raised by Michigan State Representative Joe Hune, chairman of the NCOIL Financial Services and Investment Products Committee. Noting statements from Mr. Stolte that regulators were “not wed” to the expensive Section 404 provisions now on the table, Chairman Hune asked if all the witnesses at the hearing would “work with this committee to come up with an alternative” to the regulator plan.

Alldredge stipulated that NAMIC would, but only if the work was focused on a product that represented true solvency reform rather than trying to fit shareholder protections into non-public insurance company regulations. “NAMIC is in favor of solvency reform but SOX isn’t it,” Alldredge said.

NCOIL expressed its strong opposition to the regulator’s proposal last March, prompting the presentation from Deputy Commissioner Stolte. He reiterated points made in favor of applying what he calls “best practices” from SOX to non-public insurers. “The effectiveness of virtually all of a financial regulator’s tools is dependent on high quality financial information filed by the insurer,” he said. “Without this information, a regulator could make incorrect conclusions about an insurer’s financial condition.”

The committee also heard a brief outline of a potential alternative proposal from the American Council of Life Insurers (ACLI). Their representative, Bruce Ferguson, said his organization’s board of directors believes that the “plethora of existing regulation” makes full SOX imposition unnecessary and that they were seeking a “balance between internal controls and new regulatory requirements.” ACLI plans to present a proposal to the NAIC that would exempt companies at the $500 million premium level from compliance and eliminate the requirement for external audit controls. This proposal has not been endorsed by others in industry.

After the hearing, Alldredge said, “The time has come for the NAIC to drop this proposal. It costs too much, the benefits are too few and it is not appropriately handled in the context of insurance regulation.” More foreboding for the NAIC, Alldredge said, is that regulators have pledged to take this issue to state legislatures, “when they already know there is substantial legislative opposition to the entire concept.”

A meeting of the NAIC sub-group working on Section 404 is tentatively scheduled for Aug. 11.

For more information on this issue, contact NAMIC's Senior Director of State Advocacy Neil Alldredge.

Source: NAMIC

Posted: Friday, July 08, 2005 12:00:00 AM. Modified: Friday, July 08, 2005 1:51:07 PM.

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