Has Sarbanes-Oxley Gone Too Far?

Has Sarbanes-Oxley Gone Too Far?

New York

Sarbanes-Oxley came under criticism from a group of insurance executives who feel the current reporting requirements for good corporate governance are excessive and that the law needs amending.

“It has gone too far,” said Richard L. Thomas, chief underwriting officer in the domestic brokerage group of American International Group, based in New York. “Did we need it? Yes. But to the extent that we have it? No.”

“Sarbanes-Oxley came together quickly and in an uninformed fashion, and like most pieces of legislation, there is a horrendous implementation period that we are getting past,” added George T. Van Gilder, chief executive officer of TOA Reinsurance Company of America, based in Morristown, N.J. “It needs to be amended to make it more practical.”

The remarks came during a panel discussion sponsored by the New York-based Association of Professional Insurance Women.

Despite the reporting requirements, the law as it currently stands would not prevent insurance company insolvency and has no impact on the performance of management among insurers, according to the third panelistJohn P. Woods III, president of John P. Woods Company Inc., a subsidiary of the Itasca, Ill.-based brokerage Arthur J. Gallagher & Company.

Mr. Van Gilder noted that the laws reporting requirements are very costly to business and do not accomplish what the law intendedstopping corporate malfeasance. He blamed the failures of the law on career politicians who do not have an understanding of the business world. “This is why we got what we got,” he said.

Mr. Thomas said the legislation would lead to more director and officers claimsnot because someone did anything wrong, but because the abundance of data created by the reporting mandates provides fodder for those looking for a reason to sue.

“Its not that someone has done something wrong, but producing all that data adds more fuel for suits,” he said, agreeing that the law will result in an increase in D&O litigation.

The three also discussed the relationship among insurers, reinsurers and brokers, and how things have changed over the past couple of years.

Mr. Van Gilder said the reinsurance industry has become more complicated as reinsurers look to protect their interests and are questioning recoverables. Once a handshake agreement was good enough, but as risks increase in magnitude and become more complex, companies are more likely to seek litigation over claims, he said.

Mr. Thomas said insurers must be clear as to what risk they are asking to have reinsured, warning that a lack of communication will prompt a lawsuit. “The biggest thing that has happened today is that there needs to be an open and complete dialogue,” he said.

Mr. Woods observed that reinsurers, based on their experience with asbestos, are looking for risks that are well defined and have a short duration of exposure. They are also looking to be consistent in their underwriting patterns, not straying too far in their risk appetites.

One major strain between cedent and reinsurer, noted Mr. Thomas, is that companies, like AIG, are looking to insure larger risks–once in the millions, now in the billions. Reinsurers are reluctant to take on such huge amounts, and that is creating some friction, especially when underwriters are looking for collateralization of the risk. He said it was a way of protecting the cedent for a longer term.

However, Mr. Van Gilder remained critical of the practice, especially over the expense involved. “It may make the buyer more comfortable, but it does not make the market better,” he said, adding: “If all collateralization was required on all transactions, there would not be any capital left.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 27, 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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