Insurers Fight SARBOX-Like Rules

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

But his plea fell on deaf ears. "It is still early in the process," said Steve Broadie, financial regulation manager for the Property Casualty Insurers Association of America. "There are still many opportunities along the way to kill this."

For the past year, regulators have attempted to incorporate Sarbanes-Oxley requirements on auditor independence and internal control assessments on that segment of the insurance industry that does not face them now because they are nonpublic entities. They have run into strong opposition from carrier representatives who argue the industry is already overly regulated.

PCI President Ernst Csiszar, who assumed his current post after resigning last year as NAIC president, opposed the additional requirements while the commissioner of South Carolina. He continues to object to them.

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

Mr. Stolte and other regulators maintain that such cost-benefit analysis can be subjective. "How could anyone place a price tag on the benefit of early identification of a troubled company by a regulator and the ability of that regulator to have, therefore, avoided the necessity of placing that company into liquidation?" he asked.

Pennsylvania regulator Steve Johnson insists the current leadershipespecially his boss, NAIC President Diane Kokenis solidly behind the effort.

Still, industry opposition persists. "The NAIC is a private organization lacking standing and process to make policies with wide-reaching consequence. That is the function of a legislative body," said Roger Schmelzer, senior vice president of state and regulatory affairs at the National Association of Mutual Insurance Companies.

"Trying to wedge investor protections into the solvency regulation of nonpublic insurance companies is a misunderstanding of the intent of [Sarbanes-Oxley] by the NAIC," he added. "This error should not be compounded by slipping it into law using a process intended to enact only the most detailed aspects of insurance regulation."

Regulators have for the most part developed the first two sections of the proposed additions to the NAIC Model Audit Rule under discussion that deal with auditor and audit committee independence.

One critical unresolved issue concerns a requirement for a "financial expert" to serve on the audit committee of a company board who is independent or not employed by that company. Opponents say that independent status could make them the target of litigation, for which the NAIC could not provide immunity.

"The NAIC-proposed safe harbor would not provide any protection against federal or state claims," said John Cullen, chief accounting officer for New York Life. "Those protections would only exist to the extent that governing legislatures or regulators affirmatively adopted the safe harbor position."

The auditor and financial expert sections were approved here for exposure and could gain full NAIC approval by the end of the year if regulators choose to separate them from the thorny issues of internal control assessments.

Assessments have proven to be the most burdensome of the Sarbanes-Oxley regime for public companies going through the process, but regulators maintain they will provide early warning signs that would prevent an Enron or WorldCom debacle from hitting the mutual insurance industry.

Mr. Stolte said the feedback from public insurers in Virginia has been positive. "They all say it has been a long time coming' and has forced management to deal with the internal-control issue," he said.

The question remains whether companies will then be required to get an independent auditor assessment of management's work on the issue.

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

At least one company representative said the industry will maintain its full-court press to derail the process, but at the same time will work to ensure that the new rules are as favorable to the industry as possibleparticularly in the area of working to expand the small-company exemptions.

Mr. Johnson, the Pennsylvania regulator, said the NAIC has a history of working to ensure that new processes remain cost effective. He recalled that about a decade ago the process of standardizing accounting procedures raised the fear from the industry that it could end up shrinking surplus. "We heard what you had to say, so we ended up deferring taxes," he said.

Reproduced from National Underwriter Edition, March 17, 2005. Copyright 2005 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.