We Won't Evade Legislators On Audit Rule: NAIC

By Jim Connolly

NU Online News Service, March 29 9:43 p.m. EST?The National Association of Insurance Commissioners has written a state legislators group assuring them they are not attempting to push tougher audit rules for insurers without legislative process.

The March 29 letter to the National Conference of Insurance Legislators (NCOIL) responded to concerns that group voiced in early March that changes to the Model Audit Rule (MAR) would automatically be incorporated into state laws.

The changes involve picking up best practices of the corporate reforms in the federal Sarbanes-Oxley Act of 2002

Doug Stolte, deputy commissioner of the Virginia State Corporation Commission's bureau of insurance, wrote in the letter that it has never been the intent of the working group composed of NAIC and American Institute of Certified Public Accountants members to "automatically incorporate" the proposed revisions by making them part of annual statement instructions for insurers.

The working group, he emphasized, will recommend the proposed revisions be done by statute or regulation due to their significance. "The working group is in no way trying to impinge on any state's legislative process by making substantive policy judgments."

Only a "very limited number of states" have adopted the MAR through annual statement instructions, he wrote. Rather, the overwhelming majority of states have adopted the MAR by statute or regulation and any significant changes would utilize the same statutory or regulatory process, he continued.

In his letter, Mr. Stolte stated that "it is critical to realize that virtually every regulatory tool is predicated upon high quality and accurate financial data.

"If an insurer does not possess accurate and reliable financial data, moreover, how can it accurately price its products and manage its business?" the letter asked.

NCOIL President Texas State Rep. Craig Eiland, D-Galveston, in a March 10 letter said there is a concern that the changes would be made through the annual statement instructions.

Mr. Eiland also stated that Sarbanes-Oxley was enacted to protect shareholders of publicly traded companies and its provisions are not designed to address non-public companies which are already regulated by state solvency laws.

NCOIL further stated that the new requirements are "unnecessary and will provide little, if any, benefit to insurance consumers." Rather, Mr. Eiland noted, it will "greatly increase" costs to insurers that will be passed on to consumers.

NCOIL also called for further public policy discussion.

In an interview with National Underwriter, Mr. Stolte detailed the reasoning behind the response to the NCOIL letter.

If a company doesn't have a proper grasp of its finances, Mr. Stolte wondered, how can it operate effectively. An insurer, he said, needs to have a handle on items that Sarbanes-Oxley requires, such as internal controls, so that it can manage by design rather than by crisis.

Those opposed to incorporating the best practices of Sarbanes-Oxley in state regulation have argued that insurers have not experienced the problems exhibited in other industries, Mr. Stolte said. However, he noted, current examinations of companies including American International Group and Berkshire Hathaway's Gen Re, suggest that such an argument may not hold up.

Mr. Stolte said that while incorporating the best practices of Sarbanes-Oxley may not prevent all insolvencies, it will help reduce the number by requiring, among other things, that management attest to the strength of internal controls and that there is a board of independent directors.

He noted that guaranty fund assessments may not reflect the "true cost" to consumers because policyholder money can be tied up for years as was the case with Fidelity Bankers Life Insurance Co. Fidelity Bankers was a life insurer based in Virginia that was declared insolvent in the mid-1990s. And, Mr. Stolte adds, in the case of the property-casualty guarantee fund, the limit per contract is $300,000.

Mr. Stolte said if there is not accurate financial data current regulatory tools may not alert regulators to potential problems.

He pointed to Reciprocal of America, which he said had a definite surplus and nothing to indicate that it had reached a mandatory control RBC level. Reciprocal is a Virginia based company that was taken into receivership. He Mr. Stolte said that insurance regulators ought to be on par with other financial services regulators.

He added he is confident that insurance regulators and insurance legislators at NCOIL will be able to work together. He noted how NAIC and NCOIL as well as interested parties were able to come together and reach consensus on a major accounting project, the Codification of Statutory Accounting Principles.

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We Won't Evade Legislators On Audit Rule: NAIC

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