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Is SOX Making Executives Too Careful?

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The new legal climate might be making insurance company executives too careful these days.[@@]

Top insurance industry executives gave that assessment here at an insurance seminar sponsored by Standard & Poor’s Corp., New York.

Seminar topics included the unintended implications of the Sarbanes Oxley Act of 2002 and proposals to include SOX-like features in the auditing regulation model under discussion at the National Association of Insurance Commissioners, Kansas City, Mo.

Because of SOX, executives at many insurance companies are on edge and might be less prone to take risk, according to Robert Benmosche, chairman of MetLife Inc., New York.

“For the industry to remain competitive, it has got to take risk,” Benmosche said during the S&P seminar. “If business is afraid to risk making a mistake, it will eventually hurt this country.”

Innovation is especially important in the United States because “it is increasingly difficult for us to be a country of low-cost producers,” Benmosche said.

One SOX provision, Section 302, requires managers of publicly traded U.S. companies to certify that they have reviewed internal controls, that the controls are fairly presented in financials and that any material changes have been noted.

SOX Section 404 requires that a public company’s managers and auditors attest to the effectiveness of the company’s internal controls.

Efforts to include SOX-like features in the NAIC’s Model Audit Rule might require mutual insurers with more than $25 million in assets to comply with requirements similar to those in SOX Section 302 and SOX Section 404.

Executives from 2 big mutual insurers said their companies will be taking different approaches to the SOX requirements.

Seymour Sternberg, chairman of New York Life Insurance Company, New York, said his company will implement SOX Section 302 but not SOX Section 404. The cost of implementing Section 404 is greater than the benefits, Sternberg said.

Edmund Kelly, chairman of Liberty Mutual Holding Company Inc., Boston, said his company is implementing Section 404. But Kelly also questioned the cost and value of Section 404 compliance.

Sternberg said that insurance regulators are supposed to protect the solvency of insurers and that he doesn’t know of any insurance companies that failed because of an accounting issue. Regulators should be looking at risk of investments, asset-liability matching and pricing, he argued.

Analyst pressure and other pressures might be making some public companies cautious about assuming risk, Kelly said.

But there are companies that are assuming product risk, including risks related to guaranteed minimum living benefits, guaranteed minimum death benefits and other product guarantees, the executives said.

“Some products are sold and we wonder how they make money on it,” Benmosche said. “I think they will, too, in a couple of years.”

Sternberg added that risk management is very important for product pricing in a low interest rate environment.

And, he added, some of the risk is coming from investment people who are arbitraging no-lapse guaranteed products. Sternberg said that he was headed to Albany, N.Y. to lobby the state legislature to prevent opening up the insurable interest clause so that there would not be a leveraging of products for investment people.


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