Industry groups spar over audit proposal: Using parts of Sarbanes-Oxley Act to toughen financial reporting would be costly, unnecessary, NAMIC says

August 8, 2005

Insurance groups are choosing sides in a brewing battle over whether private insurance companies should be forced to adopt elements of the controversial Sarbanes-Oxley Act.

The Kansas City-based National Association of Insurance Commissioners has proposed adding parts of the 2002 federal legislation to its audit rules. Public companies are already required to follow the Sarbanes-Oxley Act, which imposes stricter financial disclosure rules.

The NAIC represents insurance regulators from all 50 states and is working jointly on the amendment with the American Institute of Certified Public Accountants.

The proposal, however, is facing criticism from opponents-including the Indianapolis-based National Association of Mutual Insurance Companies-who contend implementing the changes into audit functions will be too costly for many insurance companies.

Specifically, they object to incorporating what is known as Section 404 of the act. It requires public corporations to assess their internal accounting controls to ensure their financial reporting is accurate-and requires accounting firms to vouch for those controls.

Public companies have devoted thousands of employee hours and millions of dollars to comply with the additional safeguards, which were passed in the wake of financial scandals at such companies as Enron Corp. and MCI WorldCom.

Supporters counter that integrating provisions of Sarbanes-Oxley into the insurance industry will help protect policyholders from harmful insolvencies, in which companies can no longer pay claims.

Leading the charge is Doug Stolte, deputy insurance commissioner of Virginia and chairman of the NAIC/AICPA working group, which is studying the issue. He argues policyholders deserve as much protection as public-company shareholders, for whom Sarbanes-Oxley is intended.

"You never contemplate that your insurer is not going to pay your claims or benefits," Stolte said. "Why shouldn't we demand the same of the insurance industry?"

States do not have to adopt the rules should the NAIC approve the measure, but many are likely to follow its recommendations.

The Insurance Institute of Indiana, a not-for-profit representing state insurance companies, prefers oversight remain with the states.

"One of the perils you end up with is states doing their own thing," III spokesman Marty Wood said. "It's not always consistent, but it's still better than having federal regulation, that's for sure."

Companies with less than $25 million in premium revenue would be exempt. The locally based National Association of Mutual Insurance Companies has suggested raising the threshold to $500 million.

A cost-benefit analysis conducted by NAMIC claims companies would spend $8 to implement the changes for every $1 of potential benefit, said Roger Schmelzer, the association's senior vice president of state and regulatory affairs.

"While all regulation might cost something, this is too much," he said. "The benefit is highly questionable."

Insurance commissioners already have at their disposal sufficient regulation to ensure companies remain solvent, Schmelzer further argued.

Jim Atterholt, commissioner of the Indiana Department of Insurance, agreed, saying "I have very, very serious concerns" about the proposal, as his department already scrutinizes companies closely.

While it's rare, insurance companies do go belly up, leaving policyholders in the lurch. Stolte is particularly driven by the fallout from Reciprocal of America's 2002 collapse. More than $700 million in outstanding claims remain against the Virginia-based insurer and its units, with little money available to pay them.

In late June, a judge sentenced the former company's president to 12-1/2 years in prison for conspiracy to commit insurance fraud and two counts of mail fraud. The former executive vice president was sentenced to five years for conspiracy to commit insurance fraud.

Schmelzer said it is impossible to legislate or regulate against the criminal mind. Maybe so, agreed Stolte, but certain restrictions can make it tougher to commit such fraud, he said.

In Indiana, Maxicare's liquidation in 2001 remains one of the state's more high-profile examples. It affected 87,000 members after its parent, Los Angelesbased Maxicare Health Plans, lost $64.9 million in 2000.

The Indiana operation lost $14.6 million in the first quarter of the following year, prompting state regulators to put the managed care company into rehabilitation and, later, liquidation.

Integrating Section 404 into the audit rules could happen next year, as the working group hopes to present a proposal in December that would later be voted upon by the full membership of the NAIC.

Two other portions of Sarbanes-Oxley that would be implemented into the audit rules, which concern auditor independence and corporate governance, already have been debated and are ready to be voted upon. Those proposals are far less contentious within the industry, but will not go into effect until the details of adding Section 404 are finalized, said an NAIC spokeswoman.

Vicki Yamasaki, vice president of planning and communications at locally based OneAmerica Financial Partners Inc., supports what the NAIC is attempting to accomplish. In fact, Yamasaki said the financial services firm that offers life insurance already was abiding by two of the Sarbanes-Oxley provisions under consideration by the working committee. OneAmerica is three-fourths complete with its integration of Section 404.

"We feel that we needed the financial discipline and environment upon which good, sound financial policies will be based," she said. "It's always good to take a fresh look at your internal controls and see if they're operating effectively."

Stolte said his group is willing to listen to those in the industry who have concerns about the proposals and is open to suggestions.

The insurance commissioner's consideration of certain Sarbanes-Oxley elements comes at a time when the banking industry is altering a similar proposal.

The Federal Deposit Insurance Corp. announced in July it would double the threshold for private banks' compliance, from $500 million in assets to $1 billion. The changes are set to take effect Dec. 31.
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