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

Responsible corporate governance that enhances company performance as well as accountability is an exceptionally high priority for the National Association of Mutual Insurance Companies and its members. Insurance companies understand that they exist to honor promises made to policyholders and that integrity and competence in governance are necessary for success.

The promises that insurance policyholders rely on are so deeply interwoven with the public interest that reasonable regulation is both appropriate and expected. Indeed, the states regulation for this purpose has extensive depth and breadth and includes unique accounting authority, annual independent audits, periodic financial examinations, quarterly and annual reporting per NAIC/state prescription, risk-based capital and additional solvency monitoring, and requirements for actuarial analysis and opinion.

NAMICs work in the development of public policy seeks to align efficient regulation with the promotion of responsible service to policyholders.

The NAIC/AICPA Working Group has proposed amending the NAIC Model Audit Rule (MAR) to include certain provisions of the Sarbanes-Oxley Act intended to reform corporate governance. As all business leaders know by now, this law is the most significant financial disclosure/corporate governance legislation to be enacted in many years.

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

First, the state regulators of insurance, while not possessing a foolproof regulatory environment, can nonetheless be relatively satisfied with their consumer protection history and activism to date. Indeed, there is no identified gap or deficiency in the current regulatory system that specifically cries out for the addition of the Sarbanes-Oxley provisions into the MAR.

Sarbanes-Oxley seems particularly unnecessary for the following reasons:

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

Company financial exams and market conduct examinations are not often found in either state or federal regulation or oversight of other industries.

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

Second, Sarbanes-Oxley was clearly directed to deficiencies and issues present in the financial disclosure activity of companies that sought to take advantage of the public equity markets within this country. Those issues do not easily or justifiably transfer to all business organizations many of which do not participate in the public equity markets or seek investors who rely on accurate financial disclosure as a minimum and reasonable expectation. Access to the equity markets is properly conditioned on such expectations and safeguards.

What must be noted, finally, is that huge costs will likely result from the additional audit and other practices that flow from the adoption of provisions of Sarbanes-Oxley into the MAR. We believe that any industry-wide aggregate assessment of the proposals cost will show tens of millions of insurer (and policyholder) dollars flowing to auditors for a wholly indeterminate benefit.

To date, the NAIC/AICPA Working Group has presented the insurance industry with a top-down proposal to modify statutory solvency regulation. This proposal presumes Sarbanes-Oxley is appropriate and relevant for all insurers. There is understandable sensitivity among members of the Working Group to public concerns about 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 effort has been motivated by good, if unexamined, regulatory intentions. We also believe that because a basic, bottoms-up deliberation did not take place, we are now faced with a pending proposal that is inappropriate for insurers. As a result, we continue to have strong reservations with the proposal advanced by the NAIC/AICPA Working Group.

In summary, the NAIC proposal may provide well-intentioned regulators a comforting symmetry with the Sarbanes-Oxley Acts prescriptions for investor-owned corporations outside the insurance industry. However, its utility in safeguarding insurers promises to policyholders is at present no more than speculative and extremely expensive theory.

Chuck Chamness is the president of Indianapolis-based National Association of Mutual Insurance Companies, a national trade association 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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

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