AAI Gathering Told Increased Corporate Governance Requirements Will Impact Both Stock and Mutual Insurers

November 18, 2002

The strict new requirements of the Sarbanes-Oxley Act of 2002 will impact not only publicly-held insurance companies, but they also set the bar for mutual insurers, according to experts who spoke at the Corporate Governance Seminar held by the Alliance of American Insurers and KPMG in Chicago recently.

“I think what Sarbanes-Oxley is doing for non-public companies is, it’s setting the bar,” Robert Michels, a partner in the Litigation Department of Chicago law firm Winston & Straw, said. “Clearly the public and Congress have spoken on public companies, the SEC can control those. As to non-public companies, how do you think a jury is going to look at it if you don’t have a separate audit committee, if your company is set up without those kinds of controls and procedures that now are being universally and sweepingly enacted to apply to all public companies? Most people, I think, believe that that sets the standard that you should be following.”

Michels also warned the CEOs, financial officers and board members who attended the seminar that the trial bar is looking for opportunities to sue. “Civil litigants basically consider this time period a feeding frenzy,” he said. “They see an opportunity. They see corporations and their top managers exposed for any kind of wrongdoing, any kind of second-guessing of business decisions, and to the extent they can glob onto that, they are all over it.”

The availability and affordability of Directors and Officers (D&O) insurance has been dramatically impacted by the increase in lawsuits, bankruptcies and restatements of earnings that have taken place recently, according to William Cotter, chief underwriting officer of AIG’s National Union Fire Insurance.

“It’s very difficult for us to differentiate in today’s marketplace,” Cotter said. “We need to focus, as an industry, upon just the simple premise of insurance, and that’s pooling our premiums to make sure you’ve got enough there to pay for the losses. We’re nowhere near close enough to getting to that point. And that’s why, as an industry, we need to see average rate increases increase by more than 200 percent across the board.”

Cotter said this year has seen increases of 50 to 200 percent for public companies’ D&O policies. But he argued that policies have been under-priced for several years and the few remaining companies in the D&O business need sharp increases to even begin to reach a break-even point.

Alliance staff members Lenore Marema, vice president of legal and regulatory affairs, and James Olsen, director of financial regulation, said insurance company executives and board members have a tremendous responsibility to educate not only themselves, but also their employees, about corporate governance.

“New standards and expectations are being developed,” Marema said. “Executives and board members can’t bury their heads in the sand and plead ignorance when there’s wrongdoing anywhere in their organization. That’s why we are encouraging our members to examine their practices to ensure corporate governance is practiced as if every employee’s job depends on it, because, in reality, it does.”

“Auditing and financial regulation used to put people to sleep,” Olsen remarked. “Now, it’s keeping a lot of CEOs, CFOs and board members awake at night. The only cure for this ailment is to study the new law and diligently pursue all avenues to ensure full compliance.”

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