Does An Insurer's Promise Look Like A Stock Certificate?Not From NAMIC's Perspective

Responsible corporate governance that enhances companyperformance as well as accountability is an exceptionally highpriority for the National Association of Mutual Insurance Companiesand its members. Insurance companies understand that they exist tohonor promises made to policyholders and that integrity andcompetence in governance are necessary for success.

The promises that insurance policyholders rely on are so deeplyinterwoven with the public interest that reasonable regulation isboth appropriate and expected. Indeed, the states regulation forthis purpose has extensive depth and breadth and includes uniqueaccounting authority, annual independent audits, periodic financialexaminations, quarterly and annual reporting per NAIC/stateprescription, risk-based capital and additional solvencymonitoring, and requirements for actuarial analysis andopinion.

NAMICs work in the development of public policy seeks to alignefficient regulation with the promotion of responsible service topolicyholders.

The NAIC/AICPA Working Group has proposed amending the NAICModel Audit Rule (MAR) to include certain provisions of theSarbanes-Oxley Act intended to reform corporate governance. As allbusiness leaders know by now, this law is the most significantfinancial disclosure/corporate governance legislation to be enactedin many years.

Caution should be used, however, when the original impetus forthe reform is considerably different in scope and nature than itssubsequent attempted application. Similarly, caution is advised inany attempt to transfer reform initiatives from an area of federalregulation to state regulation. In short, the proposal to amend theMAR to include Sarbanes-Oxley provisions suggests an abundance ofcaution for several reasons.

First, the state regulators of insurance, while not possessing afoolproof regulatory environment, can nonetheless be relativelysatisfied with their consumer protection history and activism todate. Indeed, there is no identified gap or deficiency in thecurrent regulatory system that specifically cries out for theaddition of the Sarbanes-Oxley provisions into the MAR.

Sarbanes-Oxley seems particularly unnecessary for the followingreasons:

Most industries do not have the level of financial solvencyregulation present within the insurance industry, nor do they havethe system of guaranty funds in place to address insolvencies whenthey in fact occur.

Company financial exams and market conduct examinations are notoften found in either state or federal regulation or oversight ofother industries.

Public companies within the insurance industry already subjectto Sarbanes-Oxley regulation should not be subject to redundantregulation at the state level.

Second, Sarbanes-Oxley was clearly directed to deficiencies andissues present in the financial disclosure activity of companiesthat sought to take advantage of the public equity markets withinthis country. Those issues do not easily or justifiably transfer toall business organizations many of which do not participate in thepublic equity markets or seek investors who rely on accuratefinancial disclosure as a minimum and reasonable expectation.Access to the equity markets is properly conditioned on suchexpectations and safeguards.

What must be noted, finally, is that huge costs will likelyresult from the additional audit and other practices that flow fromthe adoption of provisions of Sarbanes-Oxley into the MAR. Webelieve that any industry-wide aggregate assessment of theproposals cost will show tens of millions of insurer (andpolicyholder) dollars flowing to auditors for a whollyindeterminate benefit.

To date, the NAIC/AICPA Working Group has presented theinsurance industry with a top-down proposal to modify statutorysolvency regulation. This proposal presumes Sarbanes-Oxley isappropriate and relevant for all insurers. There is understandablesensitivity among members of the Working Group to public concernsabout Enron, Tyco, WorldCom and other similar corporate failures.There is also, perhaps, a feeling that Congress is watching.

Whatever our criticisms of this proposal, we believe the efforthas been motivated by good, if unexamined, regulatory intentions.We also believe that because a basic, bottoms-up deliberation didnot take place, we are now faced with a pending proposal that isinappropriate for insurers. As a result, we continue to have strongreservations with the proposal advanced by the NAIC/AICPA WorkingGroup.

In summary, the NAIC proposal may provide well-intentionedregulators a comforting symmetry with the Sarbanes-Oxley Actsprescriptions for investor-owned corporations outside the insuranceindustry. However, its utility in safeguarding insurers promises topolicyholders is at present no more than speculative and extremelyexpensive theory.

Chuck Chamness is the president of Indianapolis-based NationalAssociation of Mutual Insurance Companies, a national tradeassociation with more than 1,300 U.S. member companies.

Reproduced from National Underwriter Edition, April 23, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.