Boston--A new trade group study suggesting that greaterfinancial disclosure by small insurers may be burdensome andunneeded is flawed and missing data, according to a leadinginsurance regulator and a consumer advocate.

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They said the study that puts a $300 million price tag on whatit would cost a mutual insurer to satisfy new disclosurerequirements fails to present a proper picture of the effect ofmutual insolvencies.

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The cost benefit study regarding implementation of components ofthe Sarbanes-Oxley Act of 2002 was released by the NationalAssociation of Mutual Insurance Companies, Indianapolis, asregulators meeting here for the summer meeting of the NationalAssociation of Insurance Commissioners were due to discuss changesto the Model Audit Rule (MAR).

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According to NAMIC, the burden of additional disclosure willfall heaviest on smaller companies.

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NAMIC's study also found that mutual insolvency costs were 27percent of total insolvency costs from 1977 to 1991, and since 1991have represented only 5 percent of the industry total.

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Doug Stolte, deputy insurance commissioner with the VirginiaBureau of Insurance and chair of the NAIC/ American Institute ofCertified Public Accountants (AICPA) working group, said thatlosses often extend beyond the $300,000 limit paid out byproperty-casualty guarantee funds and the $100,000 paid out by lifeguaranty funds. The harm that can be done to life policyholders andto creditors can be in excess of those totals and is a "major hole"in the study.

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Mr. Stolte also said that regulators have invited insurers tocome up with an alternative proposal to insure strong internalaudit controls and that they "are not wedded to SOX[Sarbanes-Oxley]." Regulators are concerned with a system ofcontrols that cover the major processes and not necessarily allprocesses as covered by Title IV of SOX, he explained.

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He said of the announcement of the study, "It is a bigfrustration that there is an obvious attempt to kill [changes toMAR.] It is an obvious attempt to frustrate discussion on thetopic."

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Regulators need tools to look into internal management controlsof insurers, according to Mr. Stolte. For instance, he said that inVirginia they are getting ready to question American InternationalGroup, New York, regarding allegations the company categorizedworkers' compensation premiums as a liability in order to avoid thepayment of tax.

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Of those who are opposing implementation of internal controls,he says, "I don't know what they have to fear. Give us aproposal."

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And, according to Mr. Stolte, it is hard to analyze costs when astructure for assessing internal controls has not been decided uponyet. He suggested that a dialogue and framework should be decidedupon before looking at costs.

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"I don't see why they wouldn't want the best availablegovernance. It is not like we are living in an age where there areno problems," said Brendan Bridgeland, an NAIC-funded consumerrepresentative with the Center for Insurance Research, Boston.

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"If it can happen at AIG, it can happen at smaller companies. Itmight be more important for smaller companies to have [internalcontrols]."

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Mr. Bridgeland said that while he can understand concern aboutexpense and difficulty in complying with potential newrequirements, if smaller companies experience problems they may beless able to handle them than a company the size of AIG.

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Companies should counterbalance costs by looking at thepotential for savings if a company is saved from rehabilitation andguarantee fund assessments are not levied, he added.

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"Regulators are really on the ball to be looking at this," Mr.Bridgeland said.

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But during a discussion of the study, NAMIC representativesdisagreed with the idea the companies will ultimately benefit.

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"The pending proposal is unnecessary, ill-advised and tooexpensive," said Chuck Chamness, NAMIC president.

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The NAMIC study found that the cost is almost eight times theestimated benefit level to mutual insurers. And, the study found,although estimated second-year cost reductions range from 41percent for larger companies, they are only 14 percent for smallercompanies.

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Since the survey was completed, one participating company hascome back and said that the cost is actually greater than itinitially estimated, said Roger Schmelzer, NAMIC senior vicepresident-regulatory affairs.

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