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

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

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

Under the compromise, company management is required to affirm its responsibility for internal controls, the establishment of such 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 exam 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, manager of financial regulation at the Property Casualty Insurers Association of America. He noted that the proposal does not include mandatory internal control documentation, "nor does it require external auditors to perform any additional work on internal controls beyond that required by the auditing profession's own standards."

For over two years, the industry and regulators have been at loggerheads over the need for new reporting requirements similar to SOX, which carrier representatives believe were designed to protect investors rather than policyholders.

However, insurance regulators, under the leadership of two deputy commissioners–Virginia's Doug Stolte and Pennsylvania's Steve Johnson–contend 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 Title II and III requirements dealing with auditor and audit committee independence and CEO attestations. The Title IV compromise must now be approved by the full NAIC-AICPA Working Group.

All three titles will be incorporated into a revised Model Audit Rule, which, after full NAIC blessing, 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 lacks NAIC accreditation.

Another area of compromise was the $500 million premium threshold companies would be subject to before having to meet Title IV 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.

Flag: Recap

Head: What Else Happened At NAIC?

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

o Alabama Commissioner Walter Bell was elected president-elect and will take over next December, succeeding Maine Commissioner Al Iuppa, who became president at last week's session. Kansas Commissioner Sandy Praeger was elected vice president and Eric Serna was elected secretary-treasurer.

o An NAIC panel decided without comment not to take any regulatory action concerning the use of loss history in property insurance underwriting. Earlier this year, the National Conference of Insurance Legislators passed such a model law. For the past year, the NAIC had also looked at developing such a law.

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

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