P-C Interests: We'll Fight NAIC On SOX Rules

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By Steve Tuckey

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NU Online News Service, March 15, 4:18 p.m. EST, SaltLake City, Utah?Ignoring a plea to drop their opposition,property-casualty insurance sector representatives attending aregulators' meeting here said they would continue to fight newcorporate governance and financial reporting requirements.[@@]

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Their opposition was voiced at the National Association ofInsurance Commissioners spring meeting after Doug Stolte, aVirginia deputy commissioner, took the opportunity at a hearingyesterday to urge insurance industry representatives to abandonefforts to eliminate financial reporting requirements for mutualcompanies.

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"It is all getting kind of tiresome. I wish we could just worktogether now to get this accomplished," he said.

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But his plea fell on deaf ears.

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"It is still early in the process," said Steve Broadie,financial regulation manager for the Property Casualty InsurersAssociation of America (PCI). "There are still many opportunitiesalong the way to kill this."

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For the past year, regulators have attempted to incorporateSarbanes-Oxley auditor independence and internal control assessmentrequirements on that segment of the insurance industry that doesnot face them now because they are nonpublic entities.

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They have run into virulent opposition from the carrierrepresentatives who argue the industry is already overlyregulated.

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PCI president Ernst Csiszar, who assumed his current post afterresigning as NAIC president, opposed the additional requirementswhile a commissioner. He continues to object to them.

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"Because the NAIC continues to refuse to assess either the needor the cost, PCI is urging you and other commissioners to becomemore involved in the process now underway," he wrote tocommissioners recently. "We ask that you raise these issues withthe regulators and staff working on this project, before new,unnecessary and potentially very costly requirements are added toan already heavy regulatory burden."

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Mr. Stolte and other regulators maintain that such cost-benefitanalysis can be subjective.

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"How could anyone place a price tag on the benefit of earlyidentification of a troubled company by a regulator and the abilityof that regulator to have, therefore, avoided the necessity ofplacing that company into liquidation?" he asked.

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Pennsylvania regulator Steve Johnson insists the currentleadership, especially his boss and NAIC president Diane Koken, issolidly behind the effort.

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Regulators have for the most part developed the first twosections of the proposed additions to the NAIC Model Audit Ruleunder discussion that deal with auditor and audit committeeindependence.

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One critical unresolved issue concerns a requirement for a"financial expert" to serve on the audit committee of a companyboard who is independent or not employed by that company.

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Opponents say that independent status could make them the targetof plaintiff's bar litigation for which the NAIC could not provideimmunity.

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"The NAIC-proposed safe harbor would not provide any protectionagainst federal or state claims," said John Cullen, chiefaccounting officer for New York Life. "Those protections would onlyexist to the extent that governing legislatures or regulatorsaffirmatively adopted the safe harbor position."

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The auditor and financial expert sections were approvedyesterday for exposure and could gain full NAIC approval by the endof the year if regulators choose to separate them from the thornyissues of internal controls assessments.

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Assessments have proved the most burdensome of theSarbanes-Oxley regime for public companies going through theprocess, but regulators maintain they will provide early warningsigns that would prevent an Enron or WorldCom debacle hitting themutual insurance industry.

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Mr. Stolte said the feedback from public insurers in his statehas been positive.

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"They all say ?it has been a long time comin' and has forcedmanagement to deal with the internal control issue," he said.

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The question remains whether or not companies will then berequired to get an independent auditor assessment of management'swork on the issue.

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Indications from the meeting were that the internal controlassessment deliberations could drag on through next year.

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At least one company representative said the industry willmaintain its current full court press to derail the process. But atthe same time, it will work to ensure that the new rules are asfavorable to the industry as possible, particularly in the area ofworking to expand the small company exemptions to the greatestbreadth possible.

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Mr. Johnson, the Pennsylvania regulator, said the NAIC has ahistory of working to ensure that new processes remain costeffective. He recalled about a decade ago the process ofstandardizing accounting procedures raised the fear from industrythat it could end up shrinking surpluses.

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"We heard what you had to say, so we ended up deferring taxes,"he said.

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