Insurers Urged To Emphasize Corporate Governance, Transparency

Asia Correspondent

Singapore

Given the recent spate of accounting scams and the bearish stock market, it is particularly important for the insurance industry to emphasize corporate governance and transparency in financial reporting, according to executives speaking at the recent annual meeting of the Washington-based International Insurance Society.

“We are in the business of financial services, and confidence and integrity is integral to the industrys success,” said Douglas Leatherdale, chairman of the New York-based IIS. Leatherdale is the retired chairman and CEO of The St. Paul Companies.

“We have to pay close attention to corporate governance to ensure that values and integrity are properly instilled. Otherwise, customers will lose confidence; and those who lose track of customers are going to be severely punished,” he said.

“Analysts have always had a certain level of discomfort with insurance because of its unique regulatory status, accounting practices and business language,” said Patricia L. Guinn, managing director of Tillinghast-Towers Perrin and Towers Perrin Reinsurance in New York.

“Recently, large-scale business failures and regulatory pressure for international accounting standards have brought financial disclosure and transparency to the forefront,” she said.

“The investment community is also much more focused on corporate governance and auditor independence issues than in the past. Companies that respond by making their value drivers and the risks associated with them more transparent will likely win greater trust from the investment community,” Guinn affirmed.

Leatherdale commented that it would be a real disaster now for a large insurer to get into trouble.

“There always have been failures, but if a major insurance firm failed at this juncture, it would be blown out of proportion because there is a general atmosphere of mistrust and uncertainty in all business sectors,” he said.

Richard Harvey, group chief executive of London-based CGNU plc, said non-executives should take greater responsibility in the boards of companies than they have so far.

Executive directors should impart “understandable and concise” information on market conditions to non-executive directors, he said.

Though it is evident that improved transparency in financial reporting can help the insurance business ward off a lot of potential dangers, there is a good amount resistance to it from senior executives in insurance firms, according to Guinn.

These executives have legitimate concerns about confidentiality and retaining competitive advantage, and they are struggling to find the right balance, she said.

The climate has definitely changed and it is time insurance companies woke up to the strident demand among investors for greater transparency in financial reporting, she said.

Large-scale business failures have made the investor much more focused on corporate governance and auditor independence issues, Guinn said.

Insurers can earn the trust of the investment community if they clearly lay out what they regard as the drivers of shareholder value and the risks associated with those drivers, she said.

Guinn said investors are also questioning the financial soundness of companies whose operations they dont understand, and analysts are rating company stocks accordingly.

Concerns about the size and complexity of operations may, in part, be responsible for recent drops in share price for a number of large multinationals, she said.

However, she emphasized, that companies are changing, noting that a review of year-end financial disclosures to the Securities and Exchange Commission (form 10-K) for several large financial services companies revealed that companies are disclosing more information than they have in the past, Guinn reported.

“Our analysis indicates a clear trend toward greater financial disclosure, particularly in the areas of special purpose vehicles and new accounting standards,” she said. “This trend has primarily affected companies that are currently under intense scrutiny by analysts and the financial press.”

But mere increase in disclosure does not necessarily increase the transparency of the financial reporting, she observed.

Some companies have tried to satisfy investors by providing more information, Guinn said, noting, however, that more numbers do not necessarily mean greater transparency.

“A vital element of transparency is understandability, for example, whether the information presented clarifies exactly how a large, complex organization has achieved its earnings and whether it will be able to continue to do so,” she said.

It is not enough for companies to be transparent in terms of the risks they are facing and the stakeholder value they are creating, she said.

“Success in this volatile marketplace will require, among other things, a comprehensive financial reporting system that lays bare the actions that drive a companys financial results, Guinn said.

“For senior management to make optimal strategic decisions, companies must also develop internal reporting methods that provide a more comprehensive understanding of what drives the expected level and volatility of future profits,” she said.

The use of more transparent financial metrics, both externally and internally, is essential, Guinn added.

“Companies that make the external reporting of their financial results and expectations more transparent to stock analysts and the investment community will have a better likelihood of being valued appropriately,” she said.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 12, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.