Mutuals’ SOX Success

The insurance industry effects real public policy change when our arguments are based on principle. Presented in an assertive, thoughtful and focused manner, we can succeed. Recent developments in the National Association of Insurance Commissioners’ effort to mandate non-public insurance companies to adopt the Sarbanes-Oxley Act internal control content vividly illustrates this point.

After months of vigorous debate, regulators have accepted an alternate proposal to significantly reduce the scope and rigor of the NAIC’s original proposal for internal control procedures. Under the alternate, aggregate, first-year compliance costs for non-public insurance companies would fall from $300 million to $80 million. Better yet, most property/casualty companies are spared altogether from any increased audit burden and accompanying costs.

NAMIC has worked against this initiative from the start and our advocacy has been directly credited for securing changes to the proposal. One of the measure’s most prominent proponents has said, “We have listened to NAMIC and that is why this proposal looks like this today.”

Basic principles
Our opposition has been based on several basic principles: 1) Congress deliberately chose not to subject non-public companies to SOX. 2) SOX was designed to benefit public company investors. 3) All insurers are subject to a rigorous regulatory regime that is designed to address the unique features of the insurance enterprise. There has been no credible demonstration of regulatory failure requiring extension of SOX to insurers, let alone non-public insurers who account for less than 5 percent of all insurance company insolvencies. 4) Among public companies, SOX has generated high compliance costs, greatly exceeding government estimates. Even a less prescriptive requirement will be costly. The NAIC has failed to estimate or justify these substantial costs, the unjustified burden of which would ultimately be borne by policyholders.
Bringing these principles to bear has resulted in several key changes, including:

Why oppose?
Despite these improvements and the fact that many in the insurance industry have endorsed the alternate proposal, the NAMIC Board of Directors has voted unanimously to oppose it. Why?

Policyholder cost is especially important. NAMIC’s analysis of the regulators’ original proposal showed a first-year implementation cost of about $300 million and an 8:1 cost benefit ratio. An analysis by the Virginia Department of Insurance, based on NAMIC’s cost-benefit study, suggests that the first-year implementation costs to policyholders might be about $80 million, or a ratio of about three dollars of premium for every one dollar of benefit manifested as avoided guaranty-fund assessments on surviving insurers. Regulators offer the promise of reduced projected costs, but have yet to identify commensurate benefits.

A fundamental and practical question is: What will state insurance departments, already backed up with rate and form reviews, market conduct and financial exams actually do with this new information? Will this material really be helpful, or is it being mandated specifically for regulators in states where there have been problematic insolvencies?

Support with chairmen
While NAMIC may stand virtually alone within the industry, our position has received vital support from Chairmen Michael Oxley and Richard Baker of the U.S. House Financial Services Committee, as well as the National Conference of Insurance Legislators and the American Legislative Exchange Council.

That these last two organizations have weighed-in is especially important and potentially dispositive. Whatever the NAIC might eventually settle on will be subject to state legislative approval; the NAIC’s proposal may not pass muster in the states. This notion may be surprising to some: state legislatures make public policy, while insurance regulators implement it. That fact may be the greatest lesson to be taken away from this entire exercise.

Roger H. Schmelzer is senior vice president, State Regulatory Affairs for the National Association of Mutual Insurance Companies, based in Indianapolis, Ind.