Risk Management

Life Insurer CFOs Concerned about Sarbox Costs

Finance chiefs doubt FASB will converge with international accounting standards within five years, study also shows.
Stephen TaubAugust 16, 2004

Most life insurance CFOs are worried about the costs associated with implementing Sarbanes-Oxley and the demands required to meet the internal control requirements of Section 404.

These are among the key findings from the most recent survey of 32 finance chiefs from North American life insurance companies, conducted by the Tillinghast business of Towers Perrin. According to the report, 93 percent of the respondents cite cost of compliance as a significant concern in general.

Exactly half, however, are also worried that implementing Sarbanes-Oxley will distract key management from other high-priority duties. These concerns, the report says, could overshadow the positive aspects of implementing Sarbanes-Oxley, including a more comprehensive consideration of risk management issues (57 percent) and improved financial transparency (43 percent).

The insurance finance chiefs are also concerned about the costs and demands associated with complying with Section 404 of Sarbox, which officially goes into effect in mid-November. Nearly 90 percent of respondents said that 404 has at least some impact on their company.

Of these respondents, nearly two-thirds concede they will need to restructure their documentation processes, 43 percent said they will increase their use of technology tools in compliance-related tasks, and more than one-third said they will implement significantly more stringent data review and approval processes.

The CFOs also acknowledged in the survey that global accounting standards are inevitable, at least when it comes to the insurance industry. Eighty-one percent believe that the U.S. and Canada will eventually adopt a global accounting standard for insurance within the next 10 years.

Twenty-eight percent, however, are confident this will occur within the next five years. Of course, the European Commission has mandated that all European companies switch to international standards by 2005. The International Accounting Standards Board (IASB), which is overseeing the development of a single set of international accounting standards for the European Union, is currently in talks with the Financial Accounting Standards Board (FASB) to “converge” their rules and guidelines into one uniform set.

There is no large consensus over whether fair value will be the chosen standard, Tillinghast noted. For example, about two-thirds of the CFOs polled believe fair value is highly or somewhat likely to become the accepted insurance industry standard in their country regardless of whether a global standard is adopted. The rest expect the accepted standard to include some aspects of fair value but not necessarily include it in full.

The IASB “has set a precedent that we expect other countries to adopt, but the specific methodology and time frame for that activity is uncertain,” said Jack Gibson, managing principal for the North American Life Insurance and Financial Services Practice. “Fair value will likely prevail as the accepted standard to some degree for the insurance industry going forward, but no one expects it anytime soon.”

Gibson added that with an accepted industry standard in North America not expected within the next five years, U.S. GAAP and statutory reporting methods would continue to fill the void in the short term. “But companies will have start addressing differences between GAAP, statutory, and fair- value accounting much sooner,” he said.