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SOX Dampens Risk-Taking: Execs

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Among the unintended consequences of the Sarbanes-Oxley Act of 2002 are that companies are on edge and may be less prone to take risk, said Robert Benmosche, chairman, president and CEO of MetLife, New York.

He spoke recently at “Insurance 2004: Structuring for Success Seminar,” a meeting sponsored by Standard & Poor’s Corp., New York.

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

Innovation is important, he continued, because “it is increasingly difficult for us to be a country of low-cost producers.”

Other executives who spoke at the meeting expressed different feelings about the requirements of Sarbanes-Oxley.

Seymour Sternberg, chairman and CEO of New York Life Insurance Company, said his company would implement Section 302 of the law but not Section 404, which calls for a certification by management of internal controls over compliance programs. Cost in relation to benefits was the reason, he explained.

Section 302 states that management has reviewed internal controls, that they are fairly presented in financials, and that any material changes have been noted.

Section 404 requires management to attest to the effectiveness of internal controls and an auditor to sign off on that effectiveness.

Edmund Kelly, chairman, president and CEO of Liberty Mutual Group, Boston, said his company is implementing Section 404, which he described as costly and not always of value.

A parallel change to the Model Audit Rule model regulation being discussed at the National Association of Insurance Commissioners, Kansas City, Mo., also came in for discussion.

The model would require mutual insurers with over $25 million in premium to comply with provisions similar to Sarbanes-Oxley, including Section 404 of the law.

Sternberg said insurance regulators are supposed to protect the solvency of insurers and he “didn’t know of any insurance companies that failed for an accounting issue.” Things regulators should examine include risk of investments, asset-liability matching and pricing, he added.

Kelly noted that there is a lot of pressure on public companies and that includes pressure from analysts. Consequently, he added, some companies may be cautious about assuming risk.

But there are companies that are taking product risk, some executives indicated. For life insurers, some of those risks include product guarantees such as guaranteed minimum living benefits and guaranteed minimum death benefits, they continued.

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

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

Some of the risk, he added, is coming from investment people who are arbitraging no-lapse guaranteed products.

Sternberg said he was headed to Albany, N.Y., to lobby the state legislature to prevent opening up the insurable interest clause so that investment people would not be able to leverage products.

Reproduced from National Underwriter Edition, June 25, 2004. Copyright 2004 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.


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