NAMIC Blasts Compromise On SOX Rule

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Mutual group opposes internal control reporting requirementsapproved by regulators

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Chicago

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The National Association of Mutual Insurance Companies remainsopposed to a compromise series of internal control reporting rulespatterned after the federal Sarbanes-Oxley Act, despite significantreductions in the proposed regulatory burdens placed oncarriers.

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A National Association of Insurance Commissioners panel approvedthe compromise at its winter meeting in Chicago last week.

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Industry officials and regulators have been working together formore than a year to come up with a plan that would meet solvencyconcerns, while at the same time providing a less complex systemthan currently exists for public companies under the 2002Sarbanes-Oxley Act.

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Despite strong backing by other industry groups and a sense ofinevitability, NAMIC President Charles Chamness said his boardremains opposed to any new reporting requirements–especially thosehe estimates contain initial compliance costs at $90 million forthe entire industry. "This is a solution in search of a problem,and the price tag cannot be ignored," he said.

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Under the compromise, company management is required to affirmits responsibility for internal controls, the establishment of suchcontrols, and the fact that they are effective. The proposal alsocalls for a brief description of the basis for management'sassertions, which will be reviewed by regulators during the normalfinancial exam process, but will not require the use of a specificinternal control framework.

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"This is an excellent example of a situation where the industryand regulators have rolled up their sleeves, put individual agendasaside, and worked together to develop a solution that is workableand acceptable for both parties," said David Steier, manager offinancial regulation at the Property Casualty Insurers Associationof America. He noted that the proposal does not include mandatoryinternal control documentation, "nor does it require externalauditors to perform any additional work on internal controls beyondthat required by the auditing profession's own standards."

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For over two years, the industry and regulators have been atloggerheads over the need for new reporting requirements similar toSOX, which carrier representatives believe were designed to protectinvestors rather than policyholders.

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However, insurance regulators, under the leadership of twodeputy commissioners–Virginia's Doug Stolte and Pennsylvania'sSteve Johnson–contend that such rules will, in Mr. Johnson's words,"fill a major hole in solvency regulation."

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The so-called Title IV internal control rules will complementTitle II and III requirements dealing with auditor and auditcommittee independence and CEO attestations. The Title IVcompromise must now be approved by the full NAIC-AICPA WorkingGroup.

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All three titles will be incorporated into a revised Model AuditRule, which, after full NAIC blessing, will have to go to thestates for approval sometime in 2007–as opposed to automaticallybecoming law by reference, which had been the case for the ModelAudit Rule in previous years.

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While state approval represented something of a compromise onthe part of regulators, the states will eventually have to adoptthe revised rule or not gain NAIC accreditation, which could putnew examination burdens on companies domiciled there. Currently,only New York lacks NAIC accreditation.

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Another area of compromise was the $500 million premiumthreshold companies would be subject to before having to meet TitleIV reporting requirements.

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Mr. Johnson said he rejected efforts to make the threshold applyto holding companies as opposed to single legal entities, notingsuch a change would bring another 500 companies under the rules,with very little written premium added.

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Flag: Recap

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Head: What Else Happened At NAIC?

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Beyond airing a proposal to revamp coverage for naturalcatastrophes (see page 7), a number of other issues were addressedat last week's NAIC winter meeting in Chicago, including:

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o Alabama Commissioner Walter Bell was elected president-electand will take over next December, succeeding Maine Commissioner AlIuppa, who became president at last week's session. KansasCommissioner Sandy Praeger was elected vice president and EricSerna was elected secretary-treasurer.

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o An NAIC panel decided without comment not to take anyregulatory action concerning the use of loss history in propertyinsurance underwriting. Earlier this year, the National Conferenceof Insurance Legislators passed such a model law. For the pastyear, the NAIC had also looked at developing such a law.

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o The full NAIC adopted the Insurance Receivership Model Act.Industry representatives vociferously opposed adoption, assertingit shortchanges guaranty funds when it comes to insolventcompanies.

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o The Reinsurance Task Force paved the way for reopening thedebate over collateral rules for alien reinsurers with the adoptionof a white paper setting the terms for discussion and receiving aseries of alternative proposals developed by an ad hoc group ofcommissioners to ease the collateral requirements.

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