Regulator says accounting scandal at top insurer supports wider oversight
By Jim Connolly
A key regulator working on corporate disclosure rules for the insurance industry said the need for such oversight has been spotlighted by revelations about American International Group accounting.
The comments were made in an interview with National Underwriter by Doug Stolte, who chairs a working group of the National Association of Insurance Commissioners and the American Institute of Certified Public Accountants that is drafting a Model Audit Rule.
Mr. Stolte, the Virginia Insurance Bureau's deputy commissioner, pointed to accounting problems at AIG as a reason for making some requirements of the Sarbanes-Oxley Act–the 2002 federal corporate disclosure law–apply to larger private mutual insurers. Publicly traded insurers already are governed by Sarbanes-Oxley provisions. (For more on SARBOX, see page 31.)
Incorporating portions of Sarbanes-Oxley into general insurance regulation, Mr. Stolte said, takes on more importance since New York-based AIG's announcement that a recalculation of financial statements would reduce shareholder equity by $2.7 billion.
Steve Johnson, deputy commissioner in Pennsylvania, said during an interim meeting on the accounting rules last week there was discussion of regulating risk-based systems and controls rather than on every possible accounting system and control.
Property-casualty insurance groups have questioned whether the costs incurred by these changes in accounting rules are worth it. The National Association of Mutual Insurance Companies, based in Indianapolis, is completing a study of insurers to determine what the extent of such costs might be, according to Bill Boyd, NAMIC's financial regulation manager.
Currently, companies under $25 million in net premiums would not be required to comply with the audit provisions, although regulators have indicated a willingness to consider a higher threshold.
Neil Aldredge, NAMIC's state affairs director, said that during the meeting last week he cited reservations about extending Sarbanes-Oxley requirements that have been raised by the National Conference of Insurance Legislators. NCOIL, he said, has concerns both about procedural and substantive changes to audit rules for insurers.
NCOIL on March 10 objected to the NAIC's incorporation of any audit changes by revising the language in annual statement instructions. It also objected to imposing accounting reporting requirements on non-public companies that are designed for public companies.
Feedback from at least one company that spoke at the interim meeting suggests that Sarbanes-Oxley requirements are “enormously burdensome,” according to Steve Broadie, vice president of financial legislation and regulation with the Property Casualty Insurers Association of America in Des Plaines, Ill. The framework does not apply well to small and medium-sized insurers, he added.
Mr. Broadie noted findings by the Financial Executives Institute in Florham Park, N.J., that the average cost for a company to comply with Sarbanes-Oxley was $4.3 million.
Jim Connolly is a senior editor with NU's Life & Health edition.
The average cost for a company to comply with Sarbanes-Oxley is $4.3 million, says one report.
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