Financial Reporting Requirements: An Evolution from EZ Reader to World Almanac

Panel Summary authored by Michael Goldstein, Mound Cotton Wollan & Greengrass 

J. Marcus Doran, Assistant Vice President of Commutations at The Hartford (and Vice Chair of the AIRROC Education Committee), moderated this panel of regulatory professionals regarding the increase in financial reporting and regulatory oversight that has occurred over the last twenty five years, and whether the costs have outweighed the benefits to insurers and regulators alike. Audience participation was solicited during the panel through the use of thought-provoking survey questions.

Norris W. Clark of Locke Lord, LLP, began the discussion with an overview of the NAIC Solvency Agenda developed in 1989 (“Agenda”), and amended in the years following. The Agenda was national in scope, adopted uniformly by state, and created in response to the Dingell Report, a federal study criticizing state oversight of the solvency of P&C insurers. The major initiatives of the Agenda were, among others things, the codification of comprehensive statutory accounting principles; revisions to the NAIC Financial Condition Examiners Handbook; development of risk-based capital; and certain other steps to improve regulatory oversight.

Internal assessments have developed subsequent to the Agenda, such as the “Own Risk and Solvency Assessment” (or “ORSA”), which assesses the risks associated with an insurer’s business plan and the sufficiency of capital to support those risks. In September 2012, the NAIC adopted the “Risk Management and ORSA Model Act” (effective January 1, 2015), which imposes core requirements on a state’s domestic insurers -- twelve states have so far passed the legislation. Mr. Clark concluded with a brief overview of additional solvency modernization plans that are being developed, including, “principles based reserving.”

John Bator (CFO, RiverStone Resources, LLC), proceeded to discuss the increased cost of financial compliance and reporting that has occurred since the late 1990s; including, the implementation of Sarbanes-Oxley, ORSA requirements, enterprise risk management, COSO requirements, insurance contracts standards, new revenue recognition standards, and more comprehensive disclosure requirements under both statutory and GAAP reporting. All of these increased reporting demands have resulted not only in foreseeable costs, such as, (a) those associated with an increased regulatory/compliance staff, and (b) higher standards and scrutiny for the accounting profession, in general -- but also indirect costs associated with activities like the increase of encryption of devices in order to reduce the risk of cyber-attack targeting the sensitive data created in response to new regulatory requirements. Mr. Bator concluded with a brief comparison of U.S. GAAP and the International Financial Reporting Standards (or “IFRS”).

Lynn Bachstetter (Associate Director of Insurance, SNL Financial), concluded the panel with additional insights into the significance of data reporting as relates to the acquisition of books of business and other investment opportunities.