Chicago–A National Association of Insurance Commissioners panel has approved a compromise series of internal control reporting rules for mutual companies patterned after the federal Sarbanes Oxley Act but with significantly reduced regulatory burdens for companies.
Industry and regulators have been working together for more than a year to come up with a plan that would meet regulator solvency concerns, while at the same time providing a less complex system than currently exists for public companies under the 2002 Sarbanes Oxley Act.
Under the compromise proposal company management is required to affirm its responsibility for internal controls, the establishment of those controls and the fact that they are effective.
The proposal also calls for a brief description of the basis for management's assertions, which will be reviewed by regulators during the normal financial examination process, but will not require the use of a specific internal control framework.
"This is an excellent example of a situation where the industry and regulators have rolled up their sleeves, put individual agendas aside and worked together to develop a solution that is workable and acceptable for both parties," said David Steier of the Property Casualty Insurers Association of America (PCI).
For over two years the industry and regulators have been at loggerheads over the need for new reporting requirements, which carrier representatives believe were designed to protect investors rather than policyholders.
But regulators, under the leadership of Virginia's Doug Stolte and Pennsylvania's Steve Johnson contended that such rules will in Mr. Johnson's words, "fill a major hole in solvency regulation."
The so-called Title IV internal control rules will complement Titles II and III requirements dealing with auditor and audit committee independence and CEO attestations.
All three titles will be incorporated into a revised Model Audit Rule that will have to go to the states for approval sometime in 2007 as opposed to automatically becoming law by reference, which had been the case for the Model Audit Rule in previous years.
While state approval represented something of a compromise on the part of regulators, the states will eventually have to adopt the revised rule or not gain NAIC accreditation, which could put new examination burdens on companies domiciled there. Currently, only New York does not have NAIC accreditation.
The National Association of Mutual Insurance Companies has remained the virtually the sole industry holdout against the compromise, asserting the process lacks any regulatory justification and will be overly costly to its members.
Previously, NAMIC had estimated annual compliance cost at $300 million before the compromise was reached.
Another area of compromise was the $500 million premium threshold companies would be subject to before meeting Title IV internal control reporting requirements.
Mr. Johnson said he rejected efforts to make the threshold apply to holding companies as opposed to single legal entities, noting such a change would bring another 500 companies under the rules, with very little written premium added.
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