Insurers: Beefed Up Audits Would Cost Millions

By Jim Connolly

NU Online News Service, May 27, 3:44 p.m.EDT?Insurers plan to tell a meeting of state regulatorsdrafting a Model Audit Rule that it would cost carriers millions inimplementation costs if the new regulation includes recent federalprovisions for company oversight.[@@]

The carriers said their opposition to inclusion of language thatreplicates the Sarbanes-Oxley Act of 2002 will be voiced at ahearing June 14 in San Francisco. The session has been called by acommittee composed of members of the National Association ofInsurance Commissioners and the American Institute of CertifiedPublic Accountants.

Some regulators, including Doug Stolte, assistant insurancecommissioner with the Virginia Insurance Bureau, have voiced theposition that the cost of not using such a tool could be futureinsolvencies.

Mr. Stolte noted that other sectors of the financial servicesindustry are already required to attest to internal financialreporting controls in Section 404 of Sarbanes-Oxley and insurersshould be no different.

Retaining this provision would allow regulators to focus more oncompliance than on verifying balance sheets, he said.

Insurers that are public companies are already complying withSarbanes-Oxley. Under a provision in the Model Audit Rule modelregulation, there is an exemption for companies with under $25million in premium and non-public insurers are not covered.

The National Association of Mutual Insurance Companies sampledseven large and small non-public insurers for their estimates ofthe costs involved in adopting the federal provisions. The firmscalculated in the first year the internal cost increase would rangefrom 81 percent to 123 percent and external cost would go up 67percent to 76 percent.

Estimates of ongoing internal cost increases ranged from 51percent to 57 percent, and ongoing external costs from 60 percentto 64 percent.

Insurers can also point to a survey conducted by the Chicago lawfirm, Foley & Lardner, LLP. One hundred and fifteen firms fromall industries were polled. The survey found that the averageSarbanes-Oxley impact on a company with annual revenue under $1billion increased audit cost $1.6 million or 130 percent from theinception through fiscal year 2003, including an increase of$736,000 during FY 2003.

The American Council of Life Insurers, Washington, says it isnot uncommon for companies to spend between 30,000 and 60,000 hoursof internal and external advisor time complying with internalcontrol requirements associated with Section 404. ACLI also cited asurvey of 321 companies by Financial Executive International whichfound that total costs of first-year compliance with Section 404could exceed $4.6 million for each of the largest U.S.companies.

Responding to regulators' statements that the provisions in themodel could stave off insolvencies, ACLI said that in 51 percent ofcases, insolvencies are caused by insufficient and/or inadequatepricing.

"SOX was designed for companies that have significantly lessdisclosure in their financial statements than insurance companiesdo," said Steve Broadie, an assistant vice president with theProperty Casualty Insurers of America, Des Plaines, Ill. Insurersalso are far more regulated than many other types of companies, headded.

The board of the Life Insurers Council, Atlanta, has decided toexamine the issue, which Scott Cipinko, LIC executive director,said is a concern to small companies.

Jan R. Van Gordon, senior executive vice president, secretaryand general counsel with Erie Insurance Group, Erie, Pa., explainedthat an independent auditor who does the financial audits mustaudit the internal controls. Essentially, he said, three opinionsneed to be completed: a financial opinion, an assessment thatmaterial aspects of those controls are in place, and an attestationthat management has fairly stated internal controls.

It is a "monumental undertaking" just to make sure that thereare internal document controls, he adds. It can take as much timeor more as a full-time audit, he continued.