In one corner, a number of professional organizations support federal regulation of the insurance industry. And, on the opposite side of the ring, other groups support state oversight. The debate over state and federal regulatory control seems to have resurfaced, and a host of parties affected are gearing up for the battle.Some insurance carriers, however, are asking: Does it really matter who's standing when all is said and done? Many insurers simply recognize that there is a need for regulatory reform -and where that control lies is of secondary concern, according to Dick Luedke, spokesperson for State Farm Mutual Automobile Insurance Co., Bloomington, Ill.

"We do not necessarily support one type of regulation over another, state or federal," Luedke says. "We support modernizing regulation, but our focus is more on how to regulate the industry-rather than on who should be handling the regulation. What's important is the quality and consistency of insurance regulation."

Indeed, the need for regulations that are fair and easy to follow is most important and far outweighs the state vs. federal issue, says Michael Romano, senior vice president and corporate compliance officer at Highmark Inc., a Pittsburgh-based health insurance company.

"The problem right now with the way regulations are written is that insurance carriers need to figure out which is the most stringent, the state or federal rules, and then follow those," Romano says. "In other instances, the state and federal regulations might even be contradictory."

Although insurers recognize the overall need for regulatory reform, some industry groups are taking sides-advocating for either state or federal control (see chart, page 16). Helping to draw a line in the sand is the State Modernization and Regulatory Transparency (SMART) Act, which U.S. Rep. Mike Oxley (R, Ohio) and U.S. Rep. Richard Baker (R, La.,) proposed last year. The Act would not establish a federal insurance regulator but instead would attempt to improve speed to market for insurers by pre-empting state rating laws and creating "nationwide competitive insurance pricing."

The approach stands in opposition to the optional federal charter alternative, which has been bandied about for years. With a federal charter option, insurers would no longer have to file rates and forms in each state but instead could choose to file just once with a federal regulatory body.

Fighting for federal regulation

The American Council of Life Insurers (ACLI), Washington, D.C., strongly supports such federal regulation and contends that the SMART Act does not throw enough power into the hands of the federal regulators, according to Jack Dolan, managing director of media relations at ACLI.

"The problem is: There is a real lack of uniformity in the states. We are really advocating for a meaningful federal presence," Dolan says. "We are on record as supporting an optional federal charter so that insurance companies are given a choice of state or federal regulation."

Because many insurance companies operate nationally-and even internationally-it is important to have a Washington presence, making it possible to monitor the impact of various developments on a federal level, Dolan says.

As such, the SMART Act should provide an optional federal charter, according to ACLI. As a result, the larger companies that do business across the nation could be regulated federally, while the smaller companies would continue to be subject to state regulations.

"It is not that federal regulation is better than state regulation or vice versa," Dolan says. "What's important is that there is a choice. For some business models, state regulation is better and for others federal regulation is preferred."

The optional federal charter would not supplant state regulation but would simply provide an alternative that would help to:

* Provide uniformity of regulatory standards and the opportunity to operate under one national producer's license.

* Act as an industry advocate before Congress to protect the special tax preferences given to insurance products.

* Encourage modernization of the state based system, via federal "competition."

Advocating states' role

Not surprisingly, the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., does not buy into the federal charter option. It supports reform of the current state-based regulatory system.

NAIC contends that the SMART Act incorporates unacceptable levels of federal pre-emption that would create both legal and practical problems for the insurance industry. As a matter of fact, the NAIC's review of the SMART Act shows the bill would preempt many important state laws that protect consumers from unfair or discriminatory marketing, inadequate or excessive rates, and unsound products, according to NAIC officials?


* National Association of Insurance Commissioners

* National Association of Professional Insurance Agents

* Independent Insurance Agents & Brokers of America

* National Conference of Insurance Legislators


* American Council of Life Insurers

* Property Casualty Insurance Association of America

NAIC moves forward on financial reporting changes

The National Association of Insurance Commissioners (NAIC) has been studying how portions of the Sarbanes-Oxley Act can be applied to state regulatory reform.

The Title IV working group is specifically concerned with what it considers to be inadequate financial reporting under current state laws.

"The old requirement is that insurers have to provide positive assurance of internal controls over financial reporting only when there are significant deficiencies," says Doug Stolte, chair of the working group and deputy commissioner of the Virginia State Commission's bureau of insurance. "Most states have had that rule on the books for 13 or 14 years," he says. "But we'd like a substantive type of audit, and the reporting needs to focus more closely on internal controls."

The group is advocating for a system that ensures similar internal controls as those required under Section 404 of Sarbanes Oxley.

SOX requires public companies to include a statement of management's responsibility for establishing and maintaining adequate internal controls and an assessment of how effective the controls are for financial reporting. In addition, Section 404 requires a company's auditor to review the financial controls as well.

"We want to know that management has assessed and tested its internal controls over financial reporting and everything is working effectively," Stolte says. "And, we want to see an audit that verifies that management has assessed and tested its internal controls."

At the NAIC's annual meeting in May, the group met and developed the following eight guiding principles that it believes should be considered when revising the Model Audit Rule:

* There needs to be a solvency focus.

* The requirements should be risk-based with a focus on significant risks.

* The required reporting should be at the appropriate level.

* Existing risk approaches should be used for the framework.

* The implementation dates should be reasonable.

* The subgroup should consider the confidentiality of information provided to them.

* The revisions should have minimal impact on SEC registrants who have prepared reports required by the Sarbanes-Oxley Act.

* The subgroup should recognize the issues associated with small companies that have limited resources.

Stolte says the NAIC has asked the industry for a proposal to address its concerns regarding internal controls over financial reporting. The American Council of Life Insurers, Washington, D.C., has filed a proposal, which the working group is scheduled to review at its meeting this month.

The Property Casualty Insurers Association of America, Des Plaines, Ill., opposes any SOX-like financial reporting requirements by the states, arguing that they will put an unnecessary financial burden on small and mutual insurance companies.

John McCormack is a business writer based in Riverside, Ill.

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