The Sarbanes-Oxley Act can serve as a catalyst for improvements to financial management in areas such as risk and capital management that can further enhance operational discipline, corporate governance, and enterprise risk management, according to new research from TowerGroup.
"The globalization of insurance and the current complex regulatory environment necessitate a systematic, integrated approach to risk management," said Cindy Saccocia, senior analyst in Tower's insurance practice and author of the research. "Sarbanes-Oxley regulation drives a tight alignment between top-office and daily internal control activities. It calls for improvements to financial management in areas such as risk and capital management that can enhance operational discipline and corporate governance across insurers' total operations."
Insurers are hastening to comply with the act. Between 2004 and 2005, Tower predicts that individual firms will invest an average of $250,000 to $750,000 each on Sarbanes-Oxley related activities. These investments will peak by 2006, with some individual insurers expected to invest over $1 million to achieve compliance.
Any insurance company's technology spending for the act will be a long-term strategy to attend to operational changes needed to comply, Tower found. The initial focus is to document the reporting process and assess gaps that present risks in compliance and reporting. Although the act requires compliance only from publicly-traded financial institutions, mutual insurers are keeping a close eye on their competitors to mitigate competitive differentiation, Tower noted.
Regulatory compliance clearly often results in additional cost and complexity for the business of insurance, Saccocia pointed out. "Sarbanes-Oxley has exposed weaknesses in the infrastructure, and compliance with the act can be an opportunity for insurers to realize the benefits of real-time reporting as a step toward enterprise risk management," she said.
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