For Mutuals, SOX Rules Don’t Fit

Crucial differences between public and mutual insurers cause the National Association of Mutual Insurance Companies to oppose the National Association of Insurance Commissioners’ proposal to embed in state insurance regulation the expensive and burdensome provisions on financial disclosure found in Section 404 of the Sarbanes-Oxley Act of 2002. These provisions, as proposed for addition to the NAIC’s Model Audit Rule, were intended by Congress for public companies and not for mutual insurers. NAMIC has submitted a study to the NAIC to distinguish mutual insurers’ record in relation to insolvencies and related facts and to emphasize the cost consequences of the Section 404 requirements.

Section 404 requires 1.) that an insurer’s management document and assess the effectiveness of the company’s internal accounting control over financial reporting and 2.) that the insurer’s independent auditor provide an attestation on management’s assessment of the adequacy of the insurer’s internal control. Both steps require highly material additions to non-public insurers’ resources allocated to financial reporting. This burden will fall disproportionately on smaller mutual insurers.

NAMIC members’ reservations with this proposal arise from both the different motivations between public and mutual insurers and the corresponding minimum of failures among mutual insurers. The estimated costs of implementing the borrowed Section 404 material prompted NAMIC to commission a study of the costs and benefits of this proposal.

Findings
NAMIC’s study, conducted by Finnell & Company PLLC, examines the costs and potential benefits that would be experienced by mutual insurers in complying with the 404 prescriptions. It also abstracts from a number of respected sources to provide perspective to regulators on mutual and public insurers’ past involvement with financial restatement and insolvency.

Among findings of the NAMIC study:

Conclusions
The solvency record of mutual insurers does not justify transfer of an expensive regulatory measure intended for investor-owned entities into state insurer-solvency regulation. There has been no specific identification of regulatory failure and corresponding remedy during NAIC deliberations on this matter. Reasonable regulation reconciles its costs with the potential for benefits.

Insurers, consumers, and regulators have a shared interest in promoting company solvency. Meaningful efforts to strengthen solvency regulation should be based on a three-step evaluation that would include:

Until this evaluation is complete, state regulators and legislators should reject proposals to apply investor-oriented protections to non-public companies, particularly through revisions in the NAIC Model Audit Rule, leaving companies free to adopt provisions of the act voluntarily, as indeed many have.

Chamness is president and chief executive officer, National Association of Mutual Insurance Companies, a national trade association with more than 1,400 member companies. Visit www.namic.org.