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Press Release

Regulators Need to Evaluate Costs and Benefits of New Audit Rules

On Saturday, June 2, Dr. Wayne Brough, Chief Economist of FreedomWorks will testify at the National Association of Insurance Commissioners (NAIC) meeting in San Francisco. His comments will highlight testimony submitted earlier that emphasizes the need for cost-benefit analysis as an integral part of the rulemaking process, especially when discussing accreditation standards that often act as de facto national mandates. Dr. Brough, who has studied and written extensively on regulation, noted, “Insurance is an anomaly. Because it has always been regulated at the state level, it has not benefited from changes in the regulatory review process that governs industries regulated at the federal level.”

The NAIC plays a crucial role by allowing states to coordinate activities and share best practices. NAIC model laws are a key part of this process. Typically states can adopt these model laws as they see fit and incorporate them into their own regulatory processes. This allows states to rely on NAIC expertise when developing their own laws. The accreditation process however, requires states to adopt certain NAIC standards and practices whole cloth, making the NAIC act more like a national regulator.

“In this sense, the accreditation process is similar to a national mandate,” said Dr. Brough. “If states do not adopt the law they risk loss of accreditation, which imposes significant burdens on the state’s domestic insurance companies.” Without accreditation, other states are less likely to accept the domestic regulator's assertions about a company's solvency, making it difficult for an insurer to do business in more than one state.

“Given the nature of these accreditation laws, it is important that they be evaluated carefully. I have urged the NAIC to use well-established regulatory review practices that have achieved a national consensus in the public arena. This includes a careful analysis of the costs and benefits of the rule. The basic approach is to determine if there is a problem, and if so, identify the least-cost alternative for addressing the problem. This ensures that new rules provide benefits commensurate with their costs.” The basic concept of regulatory analysis, particularly cost-benefit analysis, has consensus among academics and politicians of both parties, and it would be an appropriate tool for evaluating the New Model Audit rule.

At this point it is difficult to determine whether the new Model Audit Rule will provide benefits which justify its costs, given the lack of analysis to date. However, the potential for costs and the mandatory nature of the rule make it more urgent that the NAIC perform a more thorough, quantifiable cost-benefit analysis before adopting the rule.

Prior to his work at FreedomWorks, Dr. Brough has served in important government posts, including the Office of Management and Budget in a regulatory analysis capacity, and has testified before Congress and federal regulatory agencies on various rulemakings, and has written extensively on regulatory review.