Va. Chief Insists SOX Debate Must Go On Despite Insurers’ Protests

The debate over insurance company financial reporting should center on the value of what is being reported by insurers and the effort to change the reporting rules must go on despite opposition by some, according to the state insurance commissioner who chairs a key national committee on financial disclosure issues.

Virginia Insurance Commissioner Alfred W. Gross, who heads the financial regulation committee of the National Association of Insurance Commissioners, took issue with critics of states’ attempts to reform financial disclosure rules, arguing that new rules are necessary for regulators to keep up with changes in how insurance companies operate.

Gross made his remarks during the annual meeting of the Independent Insurance Agents of Virginia at the Landsdowne Resort in Leesburg. He was fresh from the NAIC summer meeting in Boston where his committee continued to work on a model audit rule that would govern all insurance companies and prescribe the requirements and format for statutory financial audits. The commissioners hope to find ways to reduce the number of insurer insolvencies. They have been working with the American Institute of Certified Public Accountants to revise the current audit rules.

Gross said there appears to be consensus over key provisions including those requiring more independence of a company’s auditor and directors but that this consensus has broken down over what type of internal controls should be mandated. There is controversy over how states should apply the internal control sections of the federal governance law Sarbanes Oxley Act of 2002, also known as SOX, to insurers, including privately-held and mutual companies.

Gross suggested that some critics would prefer to drop the subject altogether. “There’s a small segment of the insurance industry that wants to stifle discussion on corporate governance and we can’t allow that. We just can’t stop talking about it,” he said.

Gross specifically singled out the National Association of Mutual Insurance Companies for its recent report that concluded that the costs of NAIC proposals regarding SOX far outweigh the benefits. But Gross said the NAMIC study is misleading because it assumes that 100 percent of the provisions of SOX would be applied to insurers when that is not what the NAIC has been considering. Gross stressed that the NAIC mandate “is not to take all of SOX and apply it to insurance companies.”

NAMIC and other property casualty groups have argued that SOX was designed to protect public company shareholders and should not apply to mutual insurance companies that are owned by policyholders.

NAMIC also argues that the insurance industry is already heavily regulated concerning its solvency and that mutual insurers in particular have a good record of financial stability. The NAMIC study pegged the first-year costs to mutual insurers of complying with SOX at more than $300 million.

Gross addressed the cost complaint as well. “Opponents of the application of SOX requirements to insurers tend to focus on cost and benefits and argue that insurance companies are already subject to financial oversight, so it’s not necessary and it’s too costly to apply additional requirements,” Gross maintained.

While he agreed it is true that insurance companies already have “extensive recording requirements,” Gross maintained that this is not an argument against better rules. “This doesn’t understand or take into consideration the total context. It’s a matter of the relevance of what is being reported, and what the financial questioning being done concerns,” he told agents.

Regulators need new tools to assess the financial condition of companies just as insurers themselves have developed new actuarial tools to assess risk, according to the Virginia official. “We need to move away from historically based financial reporting because the markets are so dynamic. What we need is more risk based analysis,” he continued. “We have to close the reality gap.”

Gross noted that financial services regulators around the world are grappling with similar issues of corporate governance and accountability and maintained that state insurance commissioners should as well.

In addition to addressing the NAIC issue, Gross provided agents with a quick analysis of Virginia’s insurance market. He described the market as “pretty healthy and prosperous” with new insurers still being licensed. In 2004 the Commonwealth licensed 16 new life insurers and 19 new property and casualty firms. Thus far in 2005 , it has licensed 13 new property casualty and two new life and health insurance companies. “So Virginia continues to be an attractive market place,” he said.