"Managing Insurer Asbestos Risks"
Upcoming SlideShare
Loading in...5
×
 

"Managing Insurer Asbestos Risks"

on

  • 831 views

This article discusses insurer attempts to manage asbestos liabilities and the financial implications of asbestos claims for insurers.

This article discusses insurer attempts to manage asbestos liabilities and the financial implications of asbestos claims for insurers.

Statistics

Views

Total Views
831
Views on SlideShare
826
Embed Views
5

Actions

Likes
0
Downloads
2
Comments
0

2 Embeds 5

https://www.linkedin.com 3
http://www.linkedin.com 2

Accessibility

Categories

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

"Managing Insurer Asbestos Risks" "Managing Insurer Asbestos Risks" Document Transcript

  • InsurancedigestSharing insights on key industry issues*Americas edition • June 2004
  • The Americas Insurance digestis published three times a year,to address the key issues drivingthe insurance industry. If you wouldlike to discuss any of the issuesraised in more detail, please contactthe individual authors or theEditor-in-chief, whose details arelisted at the end of each article.We would also welcome yourfeedback and comments onInsurance digest, and as such,we enclose a Feedback Fax Replyform. Your feedback will help us toensure that our publications areaddressing the issues that you feelmost strongly about.
  • Contents Americas edition • June 2004Editor’s Comment 2John S. ScheidCorporate governance and Sarbanes-Oxley – Boon or bust for D&O insurers? 4Leslie J. HawkesIn the wake of the recent corporate scandals, insurers providing directors and officers liability insurance have seen the numberof D&O claims increase at an accelerating rate and the loss costs for these claims skyrocket. Will a renewed focus on corporategovernance and the introduction of the Sarbanes-Oxley Act 2002 actually improve insurers’ profit potential for this line of business,or will it set the standards so unrealistically high that lawsuits and loss costs will only continue to increase and cut into profits?International Financial Reporting Standards continue to progress 10David Scheinerman and William GoldsteinIFRS preparers will be required to adopt IAS 32 Revised and IAS 39 Revised for financial statements covering annual periodsbeginning on or after January 1, 2005. The scope of the revised standards is very wide, and the revisions provide further definitionand modified guidance in key areas. This article provides an overview of the provisions of the revised standards, highlightingsignificant changes and notable differences from US GAAP.Managing insurer asbestos risks 18Claire A. LouisThe financial implications of asbestos for the insurance industry, with losses estimated to be in the billions, are significant.This article examines how the industry has managed its asbestos exposure in the past and how insurers are leveraging lessonslearned to address current asbestos challenges. It also looks at efforts to legislate asbestos reform at the federal and state leveland considers the potential impact of the Sarbanes-Oxley Act of 2002 on insurer financial statement disclosures relative toasbestos liabilities and the monitoring of the controls environment surrounding insurers asbestos claims management.Managing General Agents and the implications of Sarbanes-Oxley – 26Legislating good business practicesKey Coleman, Steven Sumner and Anthony GrazianoThe Managing General Agent continues to be an excellent vehicle for the distribution of products and services of its insurerpartners. However, the Sarbanes-Oxley Act of 2002 ‘raises the bar’ in terms of corporate oversight, controllership and controlsover the financial reporting process for those insurers that do business with them.Supervision in insurance-affiliated broker dealers: 34Yesterday’s leading practices are today’s expected practicesEllen Walsh and Stephen KoslowVital insurance companies constantly change over time with new product offerings, target markets, distribution channels andoperating platforms. With these changes come increased risks that require enhancements to your NASD-required supervisorystructure. This article provides suggestions on maintaining an effective compliance program for your insurance-affiliatedbroker/dealer.
  • Editor’s Comment JOHN S. SCHEID: CHAIRMAN, AMERICAS INSURANCE GROUP Welcome to the ever, insurers will need to better understand Welcome to the June 2004 edition the risks they are insuring, and one would of Americas think that with the greater transparency June 2004 edition Insurance Digest. in financial reporting and independent assurance on controls, D&O writers will be of Americas With the first four months of 2004 better equipped to underwrite this risk. Insurance Digest. now in the record books, Our second article continues our focus on International Financial Reporting Standards many companies (IFRS) with a discussion of progress towards are seeing evidence of a growing global and adoption by some for financial statements regional economy. True there still remains covering annual periods beginning on uncertainty; however, most companies are or after January 1, 2005. This article, looking ahead to key challenges. It is some co-authored by David Scheinerman and of these challenges that form the content of Bill Goldstein, discusses the revised standards this edition of Insurance Digest. on financial instruments. IAS 32R and IAS 39R offer opportunities to reassess asset Clearly, corporate governance reform classifications and address derivative/hedge following the Sarbanes-Oxley legislation accounting effectiveness testing to name is a focus area for many insurers. Our first just a few. These revised standards represent article, authored by Leslie Hawkes, looks at a significant change from the initial standards recent trends in directors and officers liability and therefore IFRS preparers will benefit insurance. With increased corporate from a detailed review of the new provisions. responsibility for financial reporting and For many, continued uncertainty over many internal controls, will the D&O insurers be technical provisions within IFRS is making better able to assess the underwriting risks conversion more difficult. The required and offer better coverage? Today more than changes in accounting for financial2 Insurance digest • PricewaterhouseCoopers
  • instruments will undoubtedly require change Key Coleman, Steve Sumner and in insurance-affiliated broker dealers.to procedures, processes and systems. Anthony Graziano discuss the critical need Maintaining a reasonable supervisory structureAlthough the scale of change will vary from for insurers who work with Managing General is essential in managing both financial andcompany to company, we have yet to find a Agents (MGAs) to focus on controls intended operational risk. It also helps to protect thecompany whose detailed analysis has indicated to manage all processes outsourced to reputation that all insurers have worked hardthat the impact will be less than first thought. MGAs. Sarbanes-Oxley is mandating a level to maintain. of formalized control and documentation ofFor several insurers asbestos litigation all processes affecting the financial reporting I hope you find this edition of Insurancehas been an increasingly difficult challenge process that has not typically been done in Digest interesting. Please do continue tosince the mid-1980s. Claire Louis examines either the insurer or MGA. Our authors identify provide us with feedback on the topics youhow the insurance industry has managed ten critical success factors for insurers and would like to see addressed in future issues.its asbestos exposure over the years and MGAs to consider. Use of MGAs offers Copies of this publication and the Asia-Pacificconsiders some lessons learned when insurers some good benefits but only if strong and European editions are available on ouraddressing today’s challenges of increasing communication and all risk/control website (www.pwc.com/financialservices).asbestos insurance coverage disputes, considerations are addressed.reinsurance reimbursement and fine-tuningclaims practices and processes. Claire Today’s demands for corporate responsibilitydiscusses the evolution of asbestos litigation and the ever-increasing regulatory expectationstogether with national and state initiatives can be considered yet another burden to beto attempt some asbestos litigation reform. faced. Insurance companies offering generalBased on our work with insurers, there does securities, investment advisory servicesseem to be good results from strong claims and banking/trust products have increasedmanagement practices, processes and the range of their supervisory risks and John S. Scheidclinical procedures coupled with a thorough responsibilities. As a result, several insurers Editor-in-chiefinternal control environment to further have thoroughly re-evaluated their supervisorymitigate financial, operational and regulatory system. Ellen Walsh and Steve Koslow Tel: 1 646 471 5350risk in this area. discuss key considerations for supervision john.scheid@us.pwc.com Insurance digest • PricewaterhouseCoopers 3
  • Corporate governance and Sarbanes-Oxley – Boon or bust for D&O insurers? AUTHOR: LESLIE J. HAWKES4 Insurance digest • PricewaterhouseCoopers
  • Sarbanes-Oxley and other legislation require insurers to betterunderstand the risks they accept and to tighten underwriting standards. CORPORATE GOVERNANCE AND SARBANES-OXLEY – BOON OR BUST FOR D&O INSURERS?The Sarbanes-Oxley Act (SOA), a positive effect on the operation settlement amounts and thecorporate governance, enterprise- of the nation’s corporations in premium levels insurers arewide risk management, internal general. Will all this attention charging for this coverage.controls – all are terms that have to improved controls really ensurebeen in the forefront of the news that our corporations are being In 1995, in an attempt to stemrecently. However, the notions run by directors and officers who the tide of certain securityof corporate governance, risk are truly responsible and forthright class-action lawsuits, Congressmanagement, and internal individuals faithfully and honestly passed the Private Securitiescontrols are not new concepts. looking out for the shareholders’ Litigation Reform Act (PSLRA).These are the responsibilities best interests? Given the This legislation was intended toto which directors and officers extremely complex organizational decrease the number of ‘frivolous’ D&O insuranceof corporations supposedly have structure of most of today’s larger lawsuits by making it more difficultbeen regularly attending in their corporations, is it realistic to to file such suits. At the time of has been aroundroles as directors and officers expect that a single small group the passage of this legislation, for many years,since the beginning of time. at the top can provide the level of we were experiencing anYet whenever the topic turns control and oversight now expected extremely soft insurance cycle. but never beforeto recent corporate scandals as a result of new legislation and In the property and casualtyand accounting misstatements, the renewed concern with market, capacity was abundant has it receivedthese terms are bandied about corporate governance? and insurers were competing the level ofquite regularly as new and for business by offering moreimproved tactics that must But the $64,000 question coverage for lower prices. recognitionbe implemented in order to (or should it be the $64 billion Insurers offering D&O insurance question?) that D&O insurers began increasing coverage limits, experiencedreverse the current trend towardcorporate malfeasance. really want answered is: Will all of decreasing retentions, providing in the most this attention to the requirements broader coverage, and loweringPartially as a result of the recent of the SOA, corporate prices to attract more business. recent times.corporate scandals, insurers that governance, and internal controls Certain insurers began widelyprovide directors and officers actually improve insurers’ profit providing entity coverage,liability insurance have seen the potential for this line of business, also known as Side C coverage,number of D&O claims increase or will it set the standards so that covers the corporation itselfat an accelerating rate and the unrealistically high that lawsuits in the event of a shareholderloss costs for these claims and loss costs will only continue claim. Insurers were also attachingskyrocket. Recent awards to increase and to cut into profits? liberal severability provisions.in response to shareholders’ Severability provisions arelitigation in cases such as Recent Trends in Directors and designed for the protection ofCendant and Waste Management Officers Liability Insurance innocent directors and officershave boggled the mind. D&O insurance has been around in the event of misdeeds by other for many years, but never before directors or officers. One exampleD&O insurers, investors, of the applicability of the has it received the level ofand regulators alike are left severability provision is that recognition experienced in thewondering if this legislation, material misstatements by certain most recent times. D&O claimsregulation, and renewed attention directors or officers on the original are on the rise. So, too, are theto corporate governance will have application for coverage without magnitude of D&O litigation Insurance digest • PricewaterhouseCoopers 5
  • CORPORATE GOVERNANCE AND SARBANES-OXLEY – BOON OR BUST FOR D&O INSURERS? continuedknowledge of innocent directors a director or officer without into the contract to provide the the restriction of variousand officers could lead to an the protection provided by coverage, they never would have consulting services beinginsurer nullifying coverage. D&O coverage. agreed to write D&O insurance in provided by public accountingThe severability provision would the first place.4 firms that are also providingprovide coverage for the The corporate and accounting accounting and audit services toinnocent directors or officers scandals of 2001 and 2002 were Since the full impact of the past an SEC registrant. One might askwhile nullifying it for those extreme eye-openers to D&O few years will remain unknown what these outcomes have to doresponsible for the insurers, yet in terms of loss- for several years to come, D&O with D&O insurance. It is notmisstatements. In anticipation of generating incidents, they were insurers have become much these provisions, but rather twodecreased numbers of lawsuits more akin to the proverbial straw more conservative in providing other significant areas of theas a result of PSLRA, insurers that broke the camel’s back than coverage. In addition to charging SOA that will have the greatestwere willingly decreasing an epiphany-creating event. much higher premiums for D&O impact on the D&O exposuresdeductibles, retentions, and The aforementioned softening insurance, insurers skilled at faced by SEC registrants subjectcoinsurance amounts in addition insurance market of the 1990s, providing this type of coverage to the SOA.to charging much lower rates. combined with the dot-com bust are being much more selective of the few years leading up to about which businesses they Sections 302 and 404 of TheUnfortunately, the intended 2001 and 2002, had already are willing to insure and what Sarbanes-Oxley Act of 2002consequences of the 1995 begun to take a significant toll coverage grants they are willing Section 302 of the SOAlegislation were not realized, on D&O insurers’ profitability as to provide. Over the past two essentially requires companiesand in reality, the direct opposite the loss experience of the D&O years, some insureds have seen subject to the SOA to develop,occurred. In the three years that insurance line significantly their rates skyrocket, and, in implement, and institutionalizefollowed the passage of PSLRA, worsened during this period. general, rates are increasing a set of comprehensive internalthe number of securities class- The most notable of the anywhere from 30 percent to controls over all aspects of theiraction lawsuits that were filed corporate scandals – Enron, 300 percent, depending upon financial reporting to ensure thatincreased by 75 percent.1 WorldCom, and Tyco – have the type of organization and need reported financial statements areIn 1998, the Securities Litigation subsequently had a marked for limits and coverage. Insurers free from any materialUniform Standards Act was impact on the D&O marketplace. clearly are cutting back on entity misstatements that wouldpassed and did appear to stem However, it will take literally years coverage and severability and are mislead investors or regulators.the tide, at least for a couple of before all of the actual impact severely increasing retentions Section 404 of the SOA requiresyears, but now the number of created by these events will be and deductibles. that the company’s externalsuits is again rising. fully known and understood. auditors review and test these Many of the D&O insurers Enter Sarbanes-Oxley controls and attest to theIt was not too long ago that only involved with these corporations The Sarbanes-Oxley Act of 2002 effectiveness of the controls.the largest and most notable are attempting to invoke certain was enacted in direct response tocorporations purchased D&O policy provisions, such as the corporate scandals in an attempt The essence of the SOA,insurance as a regular practice. regulatory exclusion2 or the to bring investor confidence back particularly Sections 302 andToday, directors and officers of security law violation exclusion3, to the capital markets and to 404, is the requirement that allvirtually all types of to exclude coverage for some of create oversight for the accounting corporate directors and officersorganizations, particularly these scandals. Some insurers profession. Two key outcomes of exercise a much higher degreepublicly traded companies and are attempting to rescind the SOA were, first, the creation of control, take a much moreSecurities and Exchange coverage altogether by alleging of a public accounting oversight comprehensive view of allCommission (SEC) registrants, that the insured corporation entity, the Public Company internal controls, and fullyare fully aware that they simply acquired the coverage through Accounting Oversight Board assess how these controls affectcannot afford to take the misrepresentation and, had these (PCAOB), which is designed all aspects of the organization.personal risk associated with D&O insurers known the full to oversee the public accounting A summary of Sections 302serving in the capacity of picture when they first entered profession; and second, and 404 of the SOA follows5:1. PricewaterhouseCoopers LLP Securities Litigation Study (2002).2. The regulatory exclusion is included in most D&O contracts and excludes coverage for proceedings brought by regulatory agencies.3. Some D&O policies exclude coverage for losses which emanate from violations of security laws.4. ‘Enron and the D&O Aftermath – Tips and Traps for the Unwary.’ See http://www.iwancray.com/articles.htm.5. Summary of the Sarbanes-Oxley Act of 2002 located at http://www.aicpa.org/info/sarbanes_oxley_summary.htm.6 Insurance digest • PricewaterhouseCoopers
  • CORPORATE GOVERNANCE AND SARBANES-OXLEY – BOON OR BUST FOR D&O INSURERS? continuedSection 302: the assessment made by the Directors & Officers Liability insurance? It depends uponCorporate Responsibility management of the issuer. Insurance and Sarbanes- whom you ask.for Financial Reports An attestation made under Oxley: What Happens Next? this section shall be in Some insurers believe that the• The CEO and CFO of each Before we can know what future accordance with standards SOA will set the standards issuer shall prepare a lies ahead for the D&O insurance for attestation engagements so high that it will be nearly statement to accompany market, we first have to ask how issued or adopted by the impossible to meet them. the audit report to certify this legislation and increased Board (PCAOB). Similarly, the rules and the ‘appropriateness of the attention to corporate controls regulations set forth by the SOA financial statements and will affect the way our • Directs the SEC to require will be sufficiently complicated disclosures contained in the corporations will actually be run each issuer to disclose and complex that missing one or periodic report, and that those going forward. Will the SOA really whether it has adopted a code two requirements will open the financial statements and help to clean up the perception of ethics for its senior financial doors to increased shareholder disclosures fairly present, that many investors have of officers and the contents of litigation. John W. Keogh, the in all material respects, the corporate United States: that that code. president and chief executive operations and financial corporations are being poorly run officer of National Union Fire condition of the issuer.’ • Directs the SEC to revise its (or worse yet, being deceptively Insurance Co., a Pittsburgh A violation of this section must regulations concerning prompt run) and that lawsuits are the subsidiary of AIG, one of the be knowing and intentional to disclosure on Form 8-K to way to recoup monies lost in nation’s largest D&O insurers, give rise to liability. require immediate disclosure making bad investments? quoted in the October 9, 2003 ‘of any change in, or waiver issue of American Banker putsSection 404: There are those who believe that of,’ an issuer’s code of ethics. it this way, ‘God forbid you onlyManagement Assessment this new legislation and attention did 999 of the 1,000 things youof Internal Controls With the full implementation of to corporate governance will do need to do for Sarbanes-Oxley.’ the SOA (being phased in for nothing more than add layers of• Requires each annual This insurer believes that certain size companies in 2004 bureaucracy at the corporation report of an issuer to contain ‘Sarbanes-Oxley creates a and 2005), no longer will the CEO level and layers of regulation at an ‘internal control report,’ roadmap for plantiffs.’6 of an entity be able to say that he the government level. However, which shall: or she was unaware that the CFO others hope and believe that Still others believe that the (1) state the responsibility was misstating financial results to putting the spotlight and the increased transparency in of management for bolster share prices. The SOA onus on all members of the ‘C’ financial reporting and the actual establishing and will require that all corporate suite will prove to be very fruitful need for corporations to maintaining an adequate officers and directors understand in decreasing the opportunity for document, implement, and internal control structure the controls in place to ensure corporate greed to go undetected. institutionalize controls over and procedures for integrity over financial reporting As time progresses, the recent financial reporting will help D&O financial reporting; and and that they attest to the trend of corporate scandals will insurers separate the wheat from effectiveness of those controls. become a footnote to a process the chaff when it comes to (2) contain an assessment, whereby all investors stand on determining which organizations as of the end of the Like other legislation before it, equal footing and, with the are good D&O risks and which issuer’s fiscal year, of the the full effects of the SOA will proper amount of research, have are not worthy of their time, effectiveness of the internal take quite some time to shake the ability to be treated fairly by attention, and capital. control structure and out. There are still many more the capital markets. procedures of the issuer questions being asked than Clearly, insurers will need to do for financial reporting. being answered, and it will So what will be the effect of this a much more thorough job to not be until well into 2004 legislation and the other trends better understand the risk they Each issuer’s auditor shall before some of these questions toward increased corporate are insuring. This will require attest to, and report on, are answered. governance and scrutiny on the increased specialization in future of directors and officers6. Gjertsen, Lee Ann, ‘Scandal Responses Seen Multiplying D&O Risks,’ American Banker, 168, no. 195 (October 2003). Insurance digest • PricewaterhouseCoopers 7
  • CORPORATE GOVERNANCE AND SARBANES-OXLEY – BOON OR BUST FOR D&O INSURERS? continuedunderwriting for a line of business Summarythat is already one of the most These clearly are tumultuousspecialized in the market today. times for both the buyers and theD&O underwriters will have to do sellers of directors and officersa much more diligent review of liability insurance. Assimilating allthe more transparent financial of the recent changes into thestatements and disclosures. underwriting of D&O coverageUnderwriters will have to be able will be an essential step into review the level of controls insurers’ attempts to improveimplemented and understand their profitability in this line ofhow they permeate the business. The Sarbanes-Oxleyorganization. If D&O underwriters Act and a renewed attention todo this, however, they will corporate governance shouldimprove the quality of their help D&O insurers improve theunderwriting of the corporations quality of their books of businessto whom they provide coverage. and, subsequently, their profitThey will be willing to provide potential for this line of business.coverage only to those entities Will this actually prove to be thethat have adequate controls in case? Only time will tell.place. This, in turn, will makecoverage for noncompliant Leslie Hawkes is a managerorganizations prohibitively in the Actuarial & Insuranceexpensive or nonexistent. Management Solutions (AIMS)Those organizations that cannot practice of PricewaterhouseCoopersfind or afford D&O insurance will LLP. She has over 23 years ofbe unable to attract quality experience in the property-directors and officers and soon casualty insurance industry.will cease to exist. The preceding article was originally printed in ‘The John Liner Review’, Vol. 17, No. 4 (Winter 2004) and is reprinted here with permission from The Standard Publishing Corporation. AUTHOR Leslie J. Hawkes Manager, Actuarial and Insurance Management Solutions Tel: 1 646 471 7424 leslie.j.hawkes@us.pwc.com8 Insurance digest • PricewaterhouseCoopers
  • CORPORATE GOVERNANCE AND SARBANES-OXLEY – BOON OR BUST FOR D&O INSURERS? continued Insurance digest • PricewaterhouseCoopers 9
  • International Financial Reporting Standards continue to progress AUTHORS: DAVID SCHEINERMAN AND WILLIAM GOLDSTEIN10 Insurance digest • PricewaterhouseCoopers
  • IAS 32 Revised, Financial Instruments: Disclosure and Presentationand IAS 39 Revised: Recognition and Measurement were publishedin December 2003 and amended in April 2004. INTERNATIONAL FINANCIAL REPORTING STANDARDS CONTINUE TO PROGRESSIntroduction preparers, particularly first-time The scope of the revised standards adopters, account for financial is very broad, and the revisionsPreparers of International instruments, and provide an provide further definition andFinancial Reporting Standards opportunity to reassess their modified guidance in key areas(IFRS) will be required to adopt asset classifications. such as:IAS 32 Revised and IAS 39Revised for financial statements For those companies currently • Scope – certain financialcovering annual periods beginning preparing US-GAAP financial guarantee contracts and loanon or after January 1, 2005. statements, the revised standards commitments are excluded;The revised standards on financial embody much of what is includedinstruments, IAS 32R and IAS39R, were issued in December in SFAS 115, ‘Accounting for Debt • Classification of financial The scope of the and Equity Securities,’ SFAS 133, assets and liabilities – on initial2003 clarifying principles making ‘Accounting for Declarative recognition, may choose to revised standardsthe standards easier to apply. measure any financial assetThese standards affect companies Instruments’ and SFAS 140 is very broad... ‘Accounting for Transfer and or liability at fair value throughin all industries, not just financial the profit and loss account; Security of Financial Assets andservices. Among other changes, purchased loans that are not Extinguishments of Liabilities’.the revised standards are likely quoted in an active market mayto change the way all IFRS be carried at amortized cost; FIGURE 1 Scope of revised standards overview Within Scope of Within Scope of Out of Scope Revised IAS 32 and IAS 39 Revised IAS 32 Only Debt and equity instruments, Investments in subsidiaries, and cash and cash equivalents associates and joint ventures Loans and receivables Lease receivables and payables (subject to derecognition, impairment, and embedded derivative provisions) Derivatives, including embedded Derivatives on entity’s Own use commodity contracts derivatives and on subsidiaries, own shares Financial guarantees based on related parties, and joint ventures loss incurred by holder Own debt Own equity Tax balances Employee benefits Insurance contracts Weather derivatives Loan commitments held for trading, Other loan commitments unless cannot be net settled and other criteria (required by 12/03 revisions) Source: PricewaterhouseCoopers Insurance digest • PricewaterhouseCoopers 11
  • INTERNATIONAL FINANCIAL REPORTING STANDARDS CONTINUE TO PROGRESS continued• Hedge accounting – hedging Scope A financial instrument is Initial recognition and of firm commitments are now classified as equity when it classification Generally, anything that meets treated as fair value hedges; represents a residual interest the definition of a financial IFRS, through revised IAS 39, in the net assets of the issuer. instrument is within the scope and US GAAP require an entity• The ‘derecognition’ model – Liabilities and equity components of IAS 32 and IAS 39, unless to recognize a financial asset substantially rewritten, of compound financial specifically exempted. (Figure 1 or liability on its balance sheet but retains the concepts instruments are accounted for provides an overview of what when, and only when, it becomes of rewards and control to separately. Derivatives on own is included in the scope of the party to the contractual determine inclusion within shares are classified as equity revised standards). provisions of the financial the financial statements; if they only result in delivery of instrument. Initial measurement Debt/Equity classification a fixed number of an entity’s• Fair value determination – of the financial instrument at fair shares or cash; otherwise, guidance changed and Revised IAS 32 establishes value, which will usually be the they are treated as derivatives, augmented; and principles for distinguishing same as the fair value of the accounted for under IAS 39. between a liability and equity. consideration given or received.• Certain disclosure requirements The substance of a financial If a financial instrument is valued The treatment of interest, moved from IAS 39 to IAS 32. instrument, rather than its legal by reference to a more favorable dividends, gains and losses form, governs its classification. market than the one in which the in the income statement followsThis article provides an overview The critical feature in identifying transaction occurred, an initial the classification of the relatedof the provisions of the revised a liability is the existence of an profit is recognized. Transaction financial instrument.standards, highlighting significant obligation to pay cash (or to costs are included in the initialDecember 2003 changes and exchange another financial Figure 2 provides a framework for carrying value of the financialnotable differences from instrument) under conditions that distinguishing between a financial instrument unless the instrumentUS GAAP. are potentially unfavorable to liability or equity instrument. is carried at fair value through the issuer. profit or loss. FIGURE 2 Financial liability and equity instruments framework Instrument Cash obligation Cash obligation for Settlement in fixed Classification for principle coupon/ dividends number of shares Ordinary stock n/a n/a n/a Equity Redeemable preferred ✓ ✓ n/a Liability stock, with 5% fixed dividend subject to distributable profits Redeemable preferred ✓ n/a n/a Liability for principal stock with discretionary Equity for dividends dividends Convertible bond into ✓ ✓ ✓ Liability for bond and fixed number of shares equity for conversion option Convertible bond into ✓ ✓ n/a Liability shares equal to value of the liability Source: PricewaterhouseCoopers12 Insurance digest • PricewaterhouseCoopers
  • INTERNATIONAL FINANCIAL REPORTING STANDARDS CONTINUE TO PROGRESS continuedFigure 3 lists the four classification categories of financial assets and their key provisions under IFRS and US GAAP are: FIGURE 3 Financial asset classifications under IFRS and US GAAP Asset Classification IFRS Provisions US GAAP Provisions Financial assets at fair • Assets acquired or originated principally for generating short-term profits Similar to IFRS frequent buying and selling value through profit or from trading usually indicates a trading instrument. loss (previously • Derivatives No option to designate, the classification is ‘trading’ assets) • Any financial asset designated at initial recognition; may not be reclassified based on prescribed classification definitions. Held-to-maturity (HTM) • Financial assets with fixed or determinable payments and fixed maturity Similar to IFRS. investments that an entity has positive intent and ability to hold to maturity (assessed at each balance sheet date) • Excludes originated loans and equity securities • If an entity sells more than an insignificant amount of HTM securities, the entity will generally be prohibited from using the HTM classification for any financial assets for 2 years and must reclassify existing HTM instruments as available for sale Loans and receivables • Non-derivative financial assets with fixed or determinable payments that All debts receivable that are not securities are originated by the entity are not quoted on an active market recognized at amortized cost. • Includes loans acquired as a participation in a loan from another entity or purchased by the entity (provided for by revised IAS 32) • Must recover all of its initial investment from the financial asset (other than due to credit deterioration) to be classified as a loan or receivable (provided by revised IAS 32) • May be classified and accounted for as held-to-maturity, ‘fair value through profit or loss’, or available for sale Available-for-sale • All financial assets not classified in another category are classified as Similar to IFRS. Changes in fair value reported in financial assets available for sale other comprehensive income. • Includes equity securities other than those classified as at fair value through income Source: PricewaterhouseCoopersFinancial liabilities are classified Reclassification of assets between This is consistent with SFAS 115 • It requires no or a smallereither as ‘financial liabilities at categories will likely be relatively and US GAAP accounting. initial investment than requiredfair value through profit or loss’ uncommon under revised IAS 39 to purchase the underlyingor as ‘other financial liabilities’. and is prohibited into and out of Embedded derivatives financial instrument; andLiabilities at fair value through the fair value through profit or loss Revised IAS 39 maintains theprofit or loss may be classified criteria. Reclassification from held- • It is settled at a future date definition of a derivative as aas held for trading or designated to-maturity as a result of a change (note: there is not a financial instrument with allto this category at inception. of intent or ability are treated as requirement for net of the following characteristics:If adopted, a proposed sales and generally result in the settlement, as requiredamendment to IAS 39 would whole category being ‘tainted’ and • Its value changes in response by US GAAP FAS 133).restrict the application of fair remeasured at fair value, with any to changes in an ‘underlying’value for liabilities to situations gain or loss recognized in equity. Derivatives embedded within price or index;satisfying certain strict criteria. a host contract are separately Insurance digest • PricewaterhouseCoopers 13
  • INTERNATIONAL FINANCIAL REPORTING STANDARDS CONTINUE TO PROGRESS continuedrecognized (bifurcated) and Generally, a financial asset transfer of substantially all the Similarly, under US GAAP, in theaccounted for separately if: (or part of an asset) is risks and rewards; control is then transfers of financial assets, derecognized when: applied as a secondary test. each entity that is a party to the• The economics of the transaction recognizes only the embedded derivative are not • The rights to the cashflows A financial liability is removed assets it controls and liabilities it ‘closely related’ to those of from the asset expire; from the balance sheet only has incurred. In addition, a party the host contract; when it is extinguished. can only derecognize assets • The rights to the cashflows Extinguishment occurs when the when control has been• The embedded derivative and substantially all the risks obligation in the contract is surrendered, and derecognize would meet the definition of and rewards of ownership of discharged, cancelled, or liabilities only when they have a derivative on a stand-alone the asset are transferred; expired. A transaction is been extinguished. basis; and accounted for as a collateralized • An obligation to transfer the borrowing if the transfer does not Subsequent measurement,• The entire contract is not cashflows from the asset is satisfy the conditions for fair values, and impairment carried at fair value. assumed and substantially all derecognition. The classification of a financial the risks and rewards areDerecognition asset determines the subsequent transferred; and On derecognition of a financial measurement of the asset.Derecognition is the term used asset in its entirety, the difference • Control of the asset is Figure 4 summarizes thefor removal of an asset or liability between the carrying amount transferred, even if substantially principles:from the balance sheet. Revised and the consideration received all the risks and rewards are is included in the incomeIAS 39 sets out the criteria for Financial assets categorized as neither transferred nor retained, statement. If only part of aderecognition of financial assets those at fair value through profit in which case the asset is financial asset is derecognized,or liabilities and the resulting or loss (including trading assets) recognized to the extent of the the carrying value of the financialaccounting treatment. are measured at fair value, with entity’s continuing involvement. instrument is allocated based changes in fair value included inUnder US GAAP, derecognition is on relative fair value at the date The revisions to IAS 39 clarify the net profit or loss for thebased on control. Legal isolation of transfer and the gain or loss that derecognition is to be period. All other (non-trading)of assets even in bankruptcy is accounted for on the initially assessed based on financial assets are carried atnecessary for derecognition. derecognized part. amortized cost. The carrying amount of a FIGURE 4 Summary of principles of financial assets financial instrument carried at amortized cost is computed as the amount to be paid at Financial Assets Measurement Changes in Impairment test maturity adjusted for any carrying amount (if objective evidence) unamortized original premium or discount, net of any Financial assets at fair Fair value Income statement No* origination fees or transaction value through profit or loss costs and any principal repayments. The financial Loans and receivables Amortized cost Income statement No** instrument is amortized using the effective interest method, Held-to-maturity Amortized cost Income statement Yes* which uses the rate of interest investments necessary to discount the cashflows through expected Available-for-sale Fair value Equity Yes* maturity or derecognition date financial assets in order to equal the amount at * This is consistent with the accounting under US GAAP; initial recognition. ** SFAS 114 and 118 requires companies to evaluate loans for impairment. Source: PricewaterhouseCoopers14 Insurance digest • PricewaterhouseCoopers
  • INTERNATIONAL FINANCIAL REPORTING STANDARDS CONTINUE TO PROGRESS continuedFair value is ‘the amount for IFRS requires an entity towhich an asset could be consider impairment when thereexchanged, or a liability settled, is an indicator of impairment,between knowledgeable, willing such as: the deterioration in theparties in an arm’s length creditworthiness of atransaction.’ Revised IAS 39 counterparty; an actual breachprovides a hierarchy to be used of contract; a high probability ofin determining a financial bankruptcy; or the disappearanceinstrument’s fair value: of an active market for an asset.1. If there is an active market, Generally US GAAP requires the the quoted market price is write-down of financial assets to be used. when an entity considers a decline in fair value to be ‘other2. If no active market, valuation than temporary’. Indicators of techniques, incorporating all impairment are: the financial factors that market health of the counterparty; participants would consider whether the investor intends to in setting a price, consistent hold the security for a sufficient with the economics and period to permit recovery in methodologies for pricing value; the duration and extent financial instruments. that the market value has been Hedge accounting can be instrument is recognized below cost; and the prospects of applied to three types of directly in equity.3. If there is no active market for a forecasted market price recovery. hedging relationships: an equity instrument and the US GAAP is similar to IFRS in the range of reasonable fair value Hedge accounting 1. Fair value hedges, for which accounting for hedging of financial estimates is significant and the gain or loss from the instruments except as follows: IAS 39 allows for hedge no reliable estimate can be hedging instrument is accounting, subject to strict made, an entity is permitted recognized immediately in the 1. US GAAP does not consider requirements, including the to measure the equity income statement, and the a basis adjustment on cash existence of formal instrument at cost less carrying amount of the hedged flow hedges of forecasted documentation and the impairment as a last resort. item is adjusted for the gain or transactions; achievement of effectiveness loss attributable to the hedged tests. Their documentationSimilar to US GAAP, realization of risk (and the change is also 2. When measuring hedges of must include the entity’s riskgains on initial recognition of a recognized immediately in the foreign entity investments, management objective andfinancial instrument are expected income statement); ineffectiveness is recognized strategy for undertakingto be rare. in the income statement. the hedge. 2. Cash flow hedges, includingImpairment losses are incurred hedges of foreign currency If the hedging relationship All derivatives that involve anif, and only if, there is objective risk associated with firm comes to an end (e.g., the external party may be designatedevidence of impairment as a commitments, for which the hedging instrument is sold), as hedging instruments (exceptresult of a past event that gain or loss from the hedging one of the hedge criteria is no certain written options).occurred subsequent to the initial instrument is recognized longer met (e.g., the hedge does An external non-derivativerecognition of the asset. directly in equity. The gain or not pass effectiveness tests) instrument may only beExpected losses as a result of loss is ‘recycled’ to the income or the hedging relationship is designated as a hedgingfuture events, no matter how statement when the hedged revoked, then hedge accounting instrument of foreign currencylikely, are not recognized. cash flows affect income; and must be discontinued. Hedge risk. The fundamental principle is effectiveness requires twoBoth IFRS and US GAAP have that the hedged item creates an 3. Hedges of a net investment in separate tests which must besimilar requirements for the exposure to risk that could affect a foreign operation, for which applied prospectively andimpairment of financial assets. the income statement. the gain or loss on the hedging retrospectively: Insurance digest • PricewaterhouseCoopers 15
  • INTERNATIONAL FINANCIAL REPORTING STANDARDS CONTINUE TO PROGRESS continued• Prospective effectiveness Conclusion testing must be performed IFRS continues to evolve and will at inception of the hedge have significant impact on the and at each reporting date financial statements of IFRS during the life of the hedge. preparers, as evidenced by the This test requires the entity recent revised IAS 32 and IAS 39. to demonstrate that it expects The revised standards are a changes in the fair value or significant change from the initial cash flows of the hedged standards and have essentially item to be almost fully offset rewritten the rules for derecognition. (i.e., nearly 100%) by the change in fair value of the IFRS preparers and those entities hedging instrument. considering adopting/converting their accounting policies to• Retrospective effectiveness IFRS will benefit from a detailed testing is performed at each assessment of the provisions reporting date throughout the of the revised standards, life of the hedge in given the potential required accordance with the hedge changes in the way entities documentation methodology. account for financial instruments, which may therefore require Similar to US GAAP substantial changes to systems, requirements for hedge processes, and documentation. effectiveness, the objective is As IFRS is in a period of to show that the actual results significant change, it’s essential of the hedge are within the that IFRS preparers continue range of 80-125%. to monitor the developmentsBased on the recently issued and proposed changes andamended IAS 39, most portfolio evaluate their potential impacthedges of interest rate risk to their business.(sometimes referred to as‘macro’ hedges) will qualify forfair value hedge accounting. AUTHORS David Scheinerman Principal Consultant, Actuarial Insurance Management Solutions Tel: 1 860 240 2046 david.c.scheinerman@us.pwc.com William Goldstein Senior Manager, Assurance Services Tel: 1 646 471 7253 william.goldstein@us.pwc.com16 Insurance digest • PricewaterhouseCoopers
  • INTERNATIONAL FINANCIAL REPORTING STANDARDS CONTINUE TO PROGRESS continued Insurance digest • PricewaterhouseCoopers 17
  • Managing insurer asbestos risks AUTHOR: CLAIRE A. LOUIS18 Insurance digest • PricewaterhouseCoopers
  • The mounting costs of asbestos litigation continue to take their toll on insurers.Increasingly, smaller, regional, and specialty insurers are being drawn into the fray.These companies may be especially vulnerable because they lack the knowledge,experience, infrastructure, processes, and resources of insurers for which themanagement of asbestos liabilities is a mature enterprise. If they are to maintain theconfidence of shareholders and rating agencies, insurers must practice a sound riskmanagement strategy, which is aligned with the ever shifting nature of asbestos litigation. MANAGING INSURER ASBESTOS RISKSIntroduction since the late 1990s; the surge With the increase in reinsurance in policyholder bankruptcies disputes related to asbestosDespite the general introduction and related ‘pre-packs’; case liabilities, Sarbanes-Oxley providesof the asbestos exclusion into management efficiencies that more reason than ever for insurersgeneral liability policies in the favor plaintiffs, force defendants to reassess the reasonablenessmid-1980s, the insurance industry and insurers into unfavorable of their provisions for reinsurancein 2004 continues to try to come settlements, and encourage the recoverables. Past assumptionsto grips with its historical filing of more claims; skyrocketing regarding the expected level ofasbestos liabilities. Analysts and jury awards; non-products-related payments from reinsurers mayrating agencies alike identify exposures; the recent emergence no longer be valid. As such, it isasbestos as one of the majorfactors impeding insurance of ‘mixed dust’ (asbestos and silica) possible that insurers may find In 2003 alone, claims; and increasing reinsurance themselves having to adjust theindustry growth. This article will disputes. We will discuss efforts level of their provisions. US insurersdiscuss insurers’ attempts tomanage asbestos liabilities and to legislate asbestos reform at the strengthened federal and state levels. Increased regulatory and ratingsthe financial implications of asbestos reserves agency scrutiny, reduced profits,asbestos for insurers. We will consider the potential potential ratings downgrades, impact of the Sarbanes-Oxley impaired reinsurance recoveries, by $5.204 billion.Rating agencies, including Fitch Act of 2002 on insurers’ financial shareholder actions, and evenand A.M. Best, estimate that statement disclosures relative insolvency are some of the perilsUS insurance industry asbestos to asbestos liabilities and related faced by insurers with asbestoslosses may reach $65 billion1. reinsurance recoverables and liabilities. Those insurers thatAccording to Morgan Stanley, the monitoring of the controls recognize and mitigate these risksUS insurers increased asbestos environment surrounding insurer through a consistent, disciplinedreserves by close to 70% asbestos claims management. program of asbestos portfoliobetween 1998 and 2003. The quality of insurer reporting management, which includesIn 2003 alone, US insurers of asbestos liabilities varies conservative reserve provisioning;strengthened asbestos reserves considerably. Not all insurers have aggressive claims management;by $5.204 billion2. Despite these robust, formalized processes and and consistency, accuracy, andsignificant actions, the projected controls for collecting and thoroughness in loss presentationshortfall between the insurance appropriately analyzing relevant, to reinsurers stand the bestindustry’s estimated $39 billion in accurate, and complete asbestos chance of weathering this ‘Perfectfuture asbestos-related costs and claim data and managing their Storm,’ which asbestos litigationexisting reserves is $20 billion3. asbestos exposures. Sarbanes- has become. Indeed, legislativeWe will examine how the industry Oxley provides the impetus for relief from asbestos liabilities atmanaged its asbestos exposure insurers to enhance their asbestos the federal level in the near termin the past and how insurers are claims processes and controls is far from certain as there is aleveraging lessons learned to and, in so doing, reduce lack of complete stakeholderaddress current asbestos uncertainty on the balance sheet consensus. As with tort reformchallenges: the significant increase and realize new opportunities to so far, insurers’ greatest hope forin unimpaired asbestos claim filings limit their liabilities. meaningful change in the existing1. Jardine Lloyd Thompson, ‘Insurance Market Overview,’ December 2003, citing AM Best report October 2003, p. 22.2. This PricewaterhouseCoopers estimate is based on a review of insurer data reported through mid-January 2004.3. A.M. Best, 2003. Insurance digest • PricewaterhouseCoopers 19
  • MANAGING INSURER ASBESTOS RISKS continued system for compensating PPG, and, most recently, Equitas’ defense verdict. The first plaintiff asbestos claimants may very $575 million settlement with verdict in an asbestos injury well lie with the states and local Halliburton are notable examples. lawsuit – Borel v. Fiberboard judiciary. Inactive dockets in Corporation – was returned in several states, including In turn, settling insurers look to 1973, also in Beaumont. Massachusetts and Baltimore, their reinsurers for have experienced some success reimbursement of asbestos claim By 1974, asbestos lawsuits had in prioritizing compensation costs. In the past insurers could been filed in many jurisdictions. Those insurers that for those claimants who are usually rely on reinsurers to By the early 1980s, more than functionally impaired. promptly pay asbestos losses 20,000 asbestos claims had recognize and Texas, Ohio, and Michigan with few, if any, questions asked. been filed. Asbestos claim filings are among the states that are Although reinsurers continue to decreased in the early 1990s, mitigate their risks pay valid asbestos losses, but sharply increased in the late pondering whether to establish through a consistent, inactive dockets for unimpaired reinsurance disputes are 1990s following several failed asbestos claims. becoming more common as attempts to reach global disciplined program reinsurers, experiencing ever asbestos settlements5. The 2002 of asbestos portfolio Given the high stakes of greater pain from their own Rand report estimated that more asbestos litigation, it is no small asbestos liabilities and increasing than 600,000 asbestos injury management... stand wonder that insurers and scrutiny from their own claims had been filed by 20006. defendant policyholders are reinsurers, are fine tuning their The majority of new asbestos the best chance of availing themselves of every claims practices, processes, and claim filings involve claimants weathering this reasonable means to limit their controls to minimize any possible who have no functional asbestos exposure. Inventory risk associated with the vetting of impairment7.‘Perfect Storm,’ which settlements with plaintiffs, sales cedant asbestos losses. of operations or business lines Increasingly, arbitration panels Figures 1 and 2 depict the asbestos litigation with asbestos liabilities, and so- and the courts are demonstrating evolution of asbestos litigation has become. called ‘pre-pack’ reorganization greater willingness to lend a from the 1970s through the plans are strategies used by sympathetic ear to reasonable present. Defense strategies and asbestos defendants to achieve reinsurer arguments that perhaps case management procedures this end. Defendants in formerly they should not be obliged to which appeared to be efficient robust traditional industries follow the fortunes of their and cost-effective in the early such as building products, cedants, whose loss presentation days of asbestos litigation petrochemical, and appears to be arbitrary and does ultimately led to an exponential manufacturing, who are now not mirror the terms and growth in asbestos claim filings fighting for their very survival, provisions of the policy contract and claim costs. The resulting often have nowhere to turn but or reinsurance contract wordings. increase in defendant liabilities to their historical insurance Continuing reinsurer insolvencies has triggered nearly 90 programs to fund the asbestos threaten to further slow down bankruptcy filings with the liability-related initiatives that and impair the level of likelihood of more to follow. may mean the difference reinsurance collections for More than 6,000 companies have between life or death. This has asbestos losses. been sued in asbestos injury increased the level of asbestos lawsuits8. The magnitude of insurance coverage disputes, Evolution of asbestos litigation defendant liabilities has not been which has ultimately led to lost on insurers (and their The first asbestos injury lawsuit a number of recent major reinsurers) who have steadily was filed in 1966 in Beaumont, settlements between defendants increased reserves to cover their Texas4; the case was tried to a and insurers. Western MacArthur, share of asbestos losses. 4. Stephen J. Carroll, et al., Asbestos Litigation Costs and Compensation: An Interim Report (2002), Rand Institute for Civil Justice, at 6. 5. Carroll, at 27. 6. Carroll, at 51. 7. Carroll, at 41. 8. Carroll, at 49.20 Insurance digest • PricewaterhouseCoopers
  • MANAGING INSURER ASBESTOS RISKS continuedFIGURE 1 Asbestos injury litigation through the late 1990s • Initially, defendants and their insurers aggressively litigated • In most circumstances, defendants no longer contested liability; asbestos lawsuits; • Matrix settlement agreements where claims are paid based • Litigation procedures were streamlined to create efficiencies on limited exposure and medical information according to a and reduce costs; disease-based schedule became the favored means to resolve asbestos injury claims; • Court decisions resolved most coverage disputes between insurers and defendants; • Plaintiffs conducted mass screenings of asbestos workers; • The Wellington Agreement, which created the Asbestos Claims • Pleural registries or inactive dockets were established in several Facility (later the Center for Claims Resolution), was executed jurisdictions; and by selected defendants and certain of their insurers in 1985. • Failure of global settlement attempts: Amchem Products v. The mission of the ACF was to ‘evaluate, settle, defend or pay Windsor, 521 US 591 (1997) and Ortiz v. Fibreboard, asbestos injury claims on behalf of defendants.’ The ACF was 527 US 815 (1999). dissolved in 1988; the CCR was dissolved in 2001. The Wellington Agreement, which governs how asbestos claims are paid and funded, is perpetual; Source: PricewaterhouseCoopersFIGURE 2 Current developments in asbestos litigation • Some legacy matrix settlement agreements remain in place, • Plaintiffs’ attorneys conduct mass screenings to identify but few new ones are being negotiated; individuals exposed to silica; a surge in silica claims in 2002 and 2003; many silica claimants are also asbestos claimants; • Defense is increasingly aggressive with an increase in trials; more recent comprehensive general liability policies, without • Growth in claim costs, i.e., average settlements and jury awards; silica exclusions, may be required to defend these ‘mixed dust’ (asbestos and silica) claims; • Insurers and defendants strengthen asbestos injury claim eligibility criteria, i.e., the Equitas policyholder Documentation • Decelerating and impaired reinsurance recoveries; more frequent Requirements (introduced in June 2001) and cedant reinsurance disputes, introducing greater uncertainty for cedants Documentation Requirements (introduced in November 2001); relative to recovery; • Continuing defendant bankruptcies; attempts to create 524(g) • Consolidations and mass trials (West Virginia and Virginia); asbestos claim trusts; • Mega-settlements between defendants and plaintiffs, • Targeting of peripheral defendants with increasingly tenuous defendants and insurers; and connections with asbestos; • The expansion of pleural registries, inactive dockets, and similar • Policyholder attempts to reclassify asbestos claims from docket control mechanisms into more jurisdictions reduces products to premises or completed operations, potentially the burden of the courts and costs for defendants, insurers, triggering insurer obligations under comprehensive general and reinsurers. liability policies;Source: PricewaterhouseCoopers Insurance digest • PricewaterhouseCoopers 21
  • MANAGING INSURER ASBESTOS RISKS continuedCurrent asbestos risks Oakland presiding over the AC&S limits. Insurers are appealing Swiss Reinsurance America bankruptcy proceedings agreed the award. A number of insurers Corporation, 2003 WL 1786863Defendant Bankruptcies with insurers, blocking AC&S’ previously settled with the (D. Mass. March 30, 2003) ruledClose to 90 asbestos defendants, proposed pre-pack. A federal Fuller-Austin pre-petition for that the cedant, in connectionincluding W.R.Grace, Armstrong bankruptcy judge in Pittsburgh $190 million. with its underlying settlementWorld Industries, Inc., and presiding over bankruptcy with insured, W.R. Grace, couldBabcock and Wilcox, have filed proceedings involving eight Actions against insurers not impose annualized limits onfor protection under Chapter 11 Halliburton subsidiaries took the reinsurer in excess of the per In Ohio and Texas, insurers haveof the Bankruptcy Reform Act of an opposing view, ruling on occurrence and aggregate limits been named as defendants in1978. Johns-Manville’s February 11, 2004, that insurers stated in the facultative lawsuits which allege thatbankruptcy filing in US of Halliburton and its subsidiaries certificate at issue. insurers concealed or negligentlyBankruptcy Court for the had no standing to object failed to disclose to appropriateSouthern District of New York in to a proposed pre-negotiated A federal court in Connecticut public health and safety1982 was the first attempt by a settlement of all of the recently held that Gerling Global, authorities the hazards ofcorporation to obtain relief from companies’ existing and one of Travelers’ reinsurers, was asbestos in their policyholders’its asbestos liabilities. future asbestos liabilities for not obliged to follow the fortunes products. In two separate class $4.17 billion in cash and stock. based on Travelers’ single- actions in West Virginia andA significant feature of a number occurrence allocation of its Massachusetts, insurers areof these asbestos bankruptcies, Pre-packs significantly raise the settlement of asbestos and accused of deceptive defensesincluding ABB, Ltd. (Combustion stakes for insurers. If pre-packs environmental claims with its on the basis that asbestosEngineering, Inc.), and certain become an accepted way to policyholder, which represented defendants purportedly did notdivisions of Halliburton, is the bring closure to a bankrupt a departure from Travelers’ know of the dangers of asbestospre-packaged reorganization plan asbestos defendant’s liabilities, original coverage position. until the 1960s. It is further(pre-pack) pursuant to 11 U.S.C. not only might they increase The underlying settlement alleged that as a result of§§ 524(g) and (h). The pre-pack insurers’ asbestos liabilities agreement did not specify how insurers’ defensive strategy,includes a pre-petition trust to but they also might accelerate the settlement was to be compensation to plaintiffs wascompensate the clients of certain insurers’ obligations, requiring allocated against the Travelers’ denied or reduced.plaintiffs’ lawyers. unexpected cash payments. policies. Travelers Cas. & Surety This would reduce the assets of In each instance, insurers are Co. v. Gerling Global Reins. Corp.Congress adopted §§ 524(g) and insurers available for investment of America, 285 F. Supp. 2d 200 disputing the merits of the(h) in 1994 to assist companies and potential investment income. (D. Conn. 2003) allegations. Plaintiff wins couldwith significant asbestos further expand the scope ofliabilities to reorganize. These Such is the specter raised by In Gerling Global Reinsurance insurers’ asbestos liabilities.provisions allow asbestos court rulings in connection with Corporation v. Ace Property anddefendants in Chapter 11 to be bankruptcy proceedings involving Casualty Insurance Company, Reinsurance recoveriesdischarged from present and Fuller-Austin Insulation Company. No. 01 CIV 7825 (S.D. N.Y. and disputesfuture personal injury and Fuller-Austin filed a pre-pack May 16, 2003), a federal juryproperty damage claims. bankruptcy plan in September As insurer asbestos-related risks in Manhattan found that the 1998 with the US District Court grow, reinsurers are refining their cedant’s failure to promptlyInsurers contend that the pre- for the District of Delaware. processes for validating cedant disclose its policyholder’spetition trust is fundamentally Although the court approved the asbestos losses. Three issues that asbestos exposures warrantedunfair because it favors known plan, Fuller-Austin’s insurers, frequently give rise to reinsurance rescission of various facultativeclaimants, many of them who were denied standing in the disputes related to asbestos certificates. The underlyingunimpaired, over future claimants bankruptcy, refused to indemnify losses are number of occurrences, claims involved a $40 millionwho may someday develop Fuller-Austin for its current and loss allocation, and prompt notice. payment made by the cedantdebilitating malignant asbestos- projected asbestos liabilities. The following are summaries of pursuant to the Wellingtonrelated disease. Insurers have Following a jury trial on breach recent court decisions that deal Agreement to resolve asbestoschallenged pre-packs in the ABB of contract and bad faith, with these issues: injury claims presented againstand AC&S bankruptcies. On Fuller-Austin was awarded A.P. Green RefractoriesJanuary 26, 2004, the judge in The US District for the District approximately $200 million Company, a former divisionthe US Bankruptcy Court for the of Massachusetts in Commercial in remaining liability insurance of US Gypsum.Northern District of California in Union Insurance Company v.22 Insurance digest • PricewaterhouseCoopers
  • MANAGING INSURER ASBESTOS RISKS continuedThese three decisionsunderscore the increased riskfaced by insurers relative to theirability to recover from theirreinsurers for asbestos losses.The prudent insurer mayeffectively mitigate this risk byensuring that reinsurer notice istimely, loss presentations arereasonable, thorough andconsistent from loss to loss,and responses to reinsurerenquiries are prompt andcomprehensive. As the pace ofasbestos settlements betweeninsurers and policyholdersquickens, insurers should takecare to avoid any inconsistenciesbetween the loss presentationand reinsurance contractwording, irrespective of thenature of the settlement whichmay have been reached withthe policyholder in the underlyingsettlement. In these ways,insurers may demonstrate therequisite good faith which mayform a solid foundation forprompt resolution of complex,high-exposure cessions on terms October 2003 when key on the state and federal courts; Individuals with occupationalwhich are at least acceptable, stakeholders were unable to reduce/extinguish the threat of asbestos exposure as well asif not favorable, to the insurer. reach consensus on several insolvency to businesses persons with ‘take-home’ fundamental issues, including exposed to asbestos liability; asbestos exposure, i.e.,National and state the level of compensation for achieve certainty and finality for individuals exposed to asbestosasbestos initiatives claimants suffering from the most these entities and the insurance from the work clothes of a familyThe impetus for the Fairness in serious asbestos diseases and industry as respects their member who worked withAsbestos Resolution Act of 2003 the size of the trust fund to be asbestos liabilities and related asbestos, and residents of(SB 1125), which Senate majority created to pay asbestos claims. costs; and ban the import and Libby, Montana, the site of aleader Bill Frist (R-Tenn.) has Lawmakers continue to modify manufacture of asbestos and former vermiculite mining andtargeted for a floor vote in early the bill. asbestos-containing products milling operation, would be2004, came from the Asbestos except where the use of eligible to seek compensationAlliance. The Alliance is a The goals of the FAIR Act are: asbestos would present ‘no from the Fund.coalition of employers, insurers, to replace the current fault-based unreasonable risk to health.9’and certain plaintiffs’ lawyers. system for compensating The Fund would be financed individuals injured by exposure The FAIR Act would create a through contributions fromThe proposed legislation had to asbestos with an equitable, national trust fund (the Fund) defendants, insurers, reinsurers,been stalled in the Senate uniform no-fault approach; of about $115 billion to pay and asbestos bankruptcy trusts.Judiciary Committee since relieve the administrative burden asbestos claim awards. Under an agreement between9. 108th Congress, Senate, The Fairness in Asbestos Injury Resolution Act of 2003: Report Together With Additional and Minority Views. (Washington, DC, July 30, 2003): 41. Insurance digest • PricewaterhouseCoopers 23
  • MANAGING INSURER ASBESTOS RISKS continuedinsurers and defendants in The framework for asbestos improve the asbestos litigation company’s internal controlsmid-October 2003, insurers claims administration proposed environment.’ Established by procedures for financialwould contribute approximately under the bills resembles an property and casualty insurers, reporting. The company must$46 billion to the Fund, while inactive docket, which exists in a CAJ’s mission is ‘to encourage also exercise continuousdefendants would be responsible number of jurisdictions. However, fair and prompt compensation monitoring and testing of internalfor $57 billion and up to unlike the inactive docket, which to deserving current and future controls, implementing$10 billion in future shortfall we discuss below, the asbestos claimants by seeking appropriate improvements.contributions in the event the administrative system proposed to reduce or eliminate the abusesFund is unable to meet its under the bills would not require and inequities in the civil justice To support decisions relative toobligations under its original a claimant to file a claim in order system.’ CAJ accomplishes its disclosures about their asbestosfunding mandate. This funding to toll the statute of limitations. goals through litigation, judicial liabilities and establishment ofagreement is contingent on the education, public relations, reserves, insurers may wish toincorporation of certain insurance Inactive asbestos dockets may and legislative efforts. consider enhancing the qualityindustry requirements into the be the best chance for of claim, litigation, and insurancefinal version of the bill. These meaningful asbestos litigation Comprising of insurers, program data collected forrequirements include holding reform, at least in the short term. defendants, trade associations, individual asbestos accounts.non-US insurers and reinsurers The rules and procedures and others, the Asbestos Alliance This may include, but would notresponsible on the same basis as governing inactive dockets vary is another non-profit organization necessarily be limited to,domestic insurers and reinsurers by jurisdiction. In general, once seeking a legislative solution to historical data on asbestos claimand no insurer/reinsurer an asbestos claim is filed in a asbestos litigation. The Alliance severity, frequency, filing rates,responsibility for financing any jurisdiction with an inactive has been active in promoting and disease mix along withpotential Fund shortfalls. docket, the claim remains on the passage of the FAIR Act of 2003. informed insights into potential inactive docket until the claimant future asbestos claim trends andUS Senate Bill 413 (the Federal presents evidence of asbestos- The American Insurance litigation as well as legislativeAsbestos Act), introduced in related physical injury. At this Association (AIA) and the and judicial developments.February 2003, requires a point, the claim would be Reinsurance Association of Data sources may includeclaimant to provide evidence transferred to the active docket. America (RAA) are active on defense counsel, policyholders,of physical impairment to behalf of their members to help coverage counsel, and publiclywhich asbestos was ‘a The longest-established inactive bring about asbestos reform at available information. Insurerssubstantial contributing factor10’ dockets are Boston (1986), the federal and state levels. may use the data in connectionas a prerequisite to filing an Chicago (1991), and Baltimore with appropriately constructedasbestos claim or lawsuit. (1992). These jurisdictions have Maintaining shareholder models to refine their projectionsThe Act identifies specific enjoyed relative success in confidence of asbestos liabilities.objective medical criteria prioritizing payment to claimants The Sarbanes-Oxley Act of 2002by which a determination of who are physically injured. The potential benefits to insurers New York City and Seattle Sarbanes-Oxley, which applies of an enhanced approach tophysical injury would be made. implemented inactive asbestos to public companies only, asbestos data collection andThe House of Representatives’ dockets in late 2002. Several establishes new, enhanced analysis include:counterpart of this bill, states, including Texas, Ohio, standards for financial reporting,the Asbestos Compensation and Michigan, are considering while better defining • More informed decisionsFairness Act of 2003 (HB 158), establishing state-wide responsibilities for establishing about settlement andsimilarly seeks to prioritize the inactive dockets. the controls environment. litigation strategies;asbestos claims of those Company officers must certifyclaimants who can demonstrate The Coalition for Asbestos the company’s financial • Greater insight into claimactual physical injury related to Justice (CAJ), Inc. was formed statements and, along with the drivers, claim costs, andasbestos exposure. in 2000 as a nonprofit company’s external auditors, potential future claims; and association ‘to address and verify the adequacy of the10. Section 4.b. of the Federal Asbestos Act provides as follows: (b) Prima Facie Evidence of Physical Impairment – (1) In General – No person shall bring or maintain a civil action alleging a nonmalignant asbestos claim in the absence of a prima facie showing of physical impairment as a result of a medical condition to which exposure to asbestos was a substantial contributing factor.24 Insurance digest • PricewaterhouseCoopers
  • MANAGING INSURER ASBESTOS RISKS continued• Opportunities to leverage this • Account-based ground-up not fully owned up to their issues along with well-designed, greater knowledge to contain analysis of accurate and asbestos liabilities, but also that effective asbestos claims or reduce asbestos liabilities. complete claim, policy, reinsurers have not kept pace management practices, and other appropriate data with cedant reserve processes, procedures, andBased on our work with a number to support the estimation strengthening and may be internal controls and aof insurers with asbestos of asbestos liabilities; under-reserved. conservative approach toliabilities, we believe there is a reserving for asbestos liabilitiesstrong correlation between • Implementation of Cost- Insurer reserve actions do not should serve insurers well in theinsurer reliance on the following Sharing Agreements with always result in a positive quest to limit their asbestos-asbestos claims management other insurers and the response from the rating related risks.practices, processes, policyholder, as appropriate; agencies. A company that hasprocedures, and resources increased its asbestos reservesand a robust internal controls • Where appropriate, early, may be placed on a ‘Ratingsenvironment, which minimizes aggressive resolution of Watch’ with negative implicationsfinancial, operational, and asbestos account liabilities or even downgraded if the ratingregulatory risk: with the capping of insurer agency does not believe that the liability through Coverage-In- reserve action fully addresses the• Adequate numbers of Place agreements, insurer’s asbestos exposure. competent claim managers structured/annuity-type and staff who are experienced settlements, or other similar A ratings downgrade may in managing complex settlement facilities; impede an insurer’s access to asbestos defense and capital. Moreover, the insurer insurance coverage issues; • Prompt identification of may no longer meet the financial applicable reinsurance and strength requirements of current• A consistent, coordinated timely loss notification; and prospective policyholders, approach to asbestos which may reduce the insurer’s coverage issues; • Collaborative partnership cash flow. between Claims and Actuarial• To the extent feasible, to promote the continuous Conclusion a consistent approach sharing of claim data and While no immediate relief from to asbestos defense, other relevant information asbestos liabilities appears to including the development necessary to establish be in the offing for insurers, of medical defenses, as reserves for asbestos a combination of thoughtful appropriate; local and national liabilities; and legislative and judicial reforms; counsel may be used to gain collaboration among key insight into jurisdictional • Active participation in asbestos stakeholders; issues, while at the same time insurance industry efforts to coordinated insurance industry ensuring uniformity in effect asbestos reforms at the initiatives to educate the judiciary pleadings, document national and state levels. and the public on asbestos production, and testimony; Despite the proliferation in insurer• Joint asbestos defense asbestos reserve actions during AUTHOR arrangements where feasible; the past several years, analysts and rating agencies continue to Claire A. Louis• Internal task forces to monitor negatively view the insurance Senior Manager, Actuarial and Insurance and advise senior claims industry’s exposure to asbestos Management Solutions management on emerging losses. Not only are there Tel: 1 973 236 5636 asbestos litigation trends; concerns that insurers still have claire.a.louis@us.pwc.com Insurance digest • PricewaterhouseCoopers 25
  • Managing General Agents and the implications of Sarbanes-Oxley – Legislating good business practices AUTHORS: KEY COLEMAN, STEVEN SUMNER AND ANTHONY GRAZIANO26 Insurance digest • PricewaterhouseCoopers
  • The Managing General Agent continues to act as an effective vehicle for thedistribution of products and services of its insurer partners. Yet the introductionof the Sarbanes-Oxley Act of 2002 has created significant requirements forinsurers to consider in their oversight of MGA relationships. In respondingto the requirements of Sarbanes-Oxley, insurers should pay added attentionto the MGA control environment without losing sight of what makes the MGArelationship work in the first place. MANAGING GENERAL AGENTS AND THE IMPLICATIONS OF SARBANES-OXLEY – LEGISLATING GOOD BUSINESS PRACTICESIntroduction and background best, it operates as a virtual company (including the company’s ‘partnership’ where each partner outside vendors and administratorsManaging General Agents (MGAs) shares information and operates as they affect financial reporting).continue to operate as an efficient for the partnership’s collective It necessitates publicly tradeddelivery system of insurance best interests. (Figure 1 summarizes insurers formalize their oversightproducts and services for many the benefits of the MGA distribution of the activities of their MGAs.insurers. MGAs are agencies that system). It is when this partnershipact as outside administrators of breaks down that problems are apt The MGA business model dictatesunderwriting and/or claims to arise. The Sarbanes-Oxley Act that an insurer entrust some, or inservices for the insurance of 2002 (‘Sarbanes-Oxley’) has some cases, essentially allcompanies that they represent1.As administrator, marketer, created significant requirements business processes to an outside Managing General for insurers to consider in their administrator. While many suchunderwriter and claims adjuster, oversight of MGA relationships. relationships have functioned Agents (MGAs)the MGA performs the servicesof an insurance company without smoothly for years, Sarbanes-Oxley continue to Sarbanes-Oxley expands the level mandates a level of formalizedthe regulatory requirements of operate as an of management responsibility, control, as it affects financialadmitted insurers. When the accountability, controllership and reporting, that has not beenMGA/insurer relationship works oversight of a publicly traded customary in the industry. efficient delivery system of FIGURE 1 Who benefits from the MGA distribution system? insurance products and services... Insurers MGAs/Sub-producers Consumers • Immediate access to MGAs’ • Ability to seize underwriting • Insurance knowledge and marketing network; opportunities without a large expertise that their agent may capital commitment; not possess; • Expertise, skill and knowledge from the MGA; • MGAs can build expertise in • More competitive pricing and certain insurance products broader coverage offerings; • Rapid premium growth; and services; • Safety programs that are • Variable expense structure • Sub-producers given access tailored to the specific industry (fees and commissions) based to markets and products that segment; and on premiums; they may not normally have • Dedicated claims and claims • Rapid exodus if insurer’s access to. expertise in the industry. business focus changes; and • Fixed costs that are minimal since most staffing considerations are with the MGA. Source: PricewaterhouseCoopers1. MGAs are actually defined under the NAIC MGA Model Law. It should be noted, however, that many agencies and program managers are commonly referred to as MGAs but do not meet all of the NAIC criteria. According to Bernie Heinze, Executive Director of the American Association of Managing General Agents (AAMGA), even some AAMGA members do not meet all of the criteria (although they undergo scrutiny to become members, which is perhaps more relevant to insurers). Insurance digest • PricewaterhouseCoopers 27
  • MANAGING GENERAL AGENTS AND THE IMPLICATIONS OF SARBANES-OXLEY – LEGISLATING GOOD BUSINESS PRACTICES continuedCritical success factors for • The process should allow in underwriting, marketing and 9. Documentation ofSarbanes-Oxley compliance the insurer to conclude that sales in order to be successful. proceduresand a successful MGA business relationships are • MGAs and insurers generate arelationship compliant with management’s • On behalf of the retail agent, great deal of paper in documented diligence criteria. MGAs must be able to offerThe ideal MGA relationship has communicating with insureds, a level of service, productalways depended upon trust agents and each other. 2. Contract terms and knowledge and technicaland communication. According to Procedures that are poorly conditions expertise that is otherwiseBernie Heinze, members of the documented and adhered to found in an insurance company.American Association of Managing • Carefully monitored and can lead to miscommunicationGeneral Agents (AAMGA, which crafted contractual and potentially constitute an 5. Track recordcomprises roughly 25% of US agreements and underwriting errors and omissions exposure.MGAs), actually welcome any guidelines between the MGA • Thriving MGAs have a recordenhanced communication with and insurer are essential. of past performance that is • Maintaining a successfulinsurers, even if it means more evidenced in both the profits insurer/MGA relationshipfrequent audits. It is possible • Specific service standards, they generate for insurers and as well as compliance withSarbanes-Oxley will be viewed as consistent with those of the the relationships they build Sarbanes-Oxley requires gooda pivotal opportunity to enhance insurers, should be with retail agents. documentation of all significantthe MGA/insurer relationship by contractually agreed. processes and controls at theimproving the quality of 6. Management information MGA level. Documentationcommunication and clarification 3. Controllership • The ability to monitor financial and effectiveness of controlsof expectations. It should also • Increasingly, insurers are performance, track premium should also be validated by thebe viewed as an opportunity to required to demonstrate a collections and claims activity, insurer or MGA managementenforce and practice the basic high degree of controllership and even remotely audit prior to the audit by thefundamentals of good business. over the MGA; MGAs should underwriting files and financial insurer’s external auditors. embrace this closer relationship information will improve thePublicized situations from as an opportunity to work level of controllership and • Some MGAs have gone as farUnicover to Fortress Re seamlessly with the insurer. oversight capabilities of as to document their internaldemonstrate that the risks of the insurers. controls and processes andpoor selection and controllership • The appropriate levels of have received specialof MGAs can be enormous. control and authority based 7. Technology recognition in the form ofThe following 10 critical success on skills and expertise should ISO 9000 certification. • Increasing the connectivityfactors should be considered by be instituted and must be between the MGA, TPA 10. Appropriate profitabilityinsurers and MGAs alike in order documented. and the insurer will help measurementto establish and strengthen the to improve the level ofMGA relationship and thereby • Controllership includes • All parties must understand controllership and theincrease the sustainability of an frequent company and MGA how profitability will be exchange of critical informationeffective control environment: meetings, periodic company measured. while simultaneously reducing audits, good communications, the paper flow, and increasing1. MGA due diligence effective correspondence and • Sliding Scale commissions the level of data quality. and selection MGA letters of authority. allow MGAs to share in the• A comprehensive due 8. Communications profitability of the business • MGA implementation of they write while giving the diligence process with cross self-assessment and quality • As fundamental as it sounds, insurer comfort that the MGA functional teams (finance, assurance programs. communications between the is also vested in any losses. operations, actuarial and tax). MGA and the insurer may be Some insurers now require 4. Expertise the most important success that any deposit commission• A due diligence check list factor in the relationship. in excess of the minimum be expanded to include • On behalf of the insurer, consideration for the level MGAs must be experts in their placed into escrow or backed of internal controls over the particular niche and they must by a letter of credit. financial reporting process. possess the requisite skill sets28 Insurance digest • PricewaterhouseCoopers
  • MANAGING GENERAL AGENTS AND THE IMPLICATIONS OF SARBANES-OXLEY – LEGISLATING GOOD BUSINESS PRACTICES continued• Profits go beyond the 1. Tests of the company’s accounting scandals involving report on the completeness commission rate in the controls over such information some of the most prominent and accuracy of the contract, and include both (i.e., test of data sent to the companies in the world. information contained in the express and implied duties. company by the MGA), Sarbanes-Oxley establishes new reports as well as to report and enhanced standards for on the effectiveness ofPractices prior to 2. Review of an MGA’s report on corporate reporting, while better internal controls.Sarbanes-Oxley its own controls (rarely exists defining responsibilities for in practice), and/or establishing the control • Board of directors andIn order to understand today’s environment itself. The legislation audit committeesenvironment, it is necessary to 3. Tests performed by the contains 11 titles, ranging from The Act stipulates that thereunderstand the environment just company being audited, additional responsibilities for are new responsibilities forprior to Sarbanes-Oxley. but performed at the MGA. audit committees, to tougher the Audit Committee and thatMonitoring the control criminal penalties for white-collar the external auditor nowenvironment at MGAs is not In practice, auditor tests are crimes such as securities fraud. reports into the Committee.necessarily a new concept with designed and executed in a Title III, Section 302 – Corporate It also stipulates that thethe advent of Sarbanes-Oxley. manner that is consistent with Responsibility for Financial Audit Committee must pre-In recent years, many insurance the financial statement audit risk Reports and Title IV, Section 404 approve all services providedentities have increased their assessment. The audit of control – Enhanced Financial by the external auditor,focus on MGA relationships risks and activities associated Disclosures, Management regardless of their nature,for various reasons such as with MGAs is typically treated Assessment of Internal Controls, and that at least one membersafeguarding of economic with due reverence, as auditors each have specific implications of the Audit Committee mustinterests, obtaining more are quite aware that MGA’s short- for insurers that use MGAs. be a financial expert.accurate and timely financial term incentives may be in conflictand actuarial data, and to ensure with the interests of the insurer. The requirements of Sarbanes- • External auditorpreservation of reputation. Absent from the former Oxley can be felt on the entire The external auditor is stillMany insurers and reinsurers environment is a requirement for corporate reporting supply chain. required to report on thehave self-imposed processes publicly traded insurers to In particular, the following areas fairness of the presentationaround all aspects of the MGA explicitly address the risks and may be the most significantly of the company’s financialrelationship ranging from due associated controls relative to impacted by this new legislation: statements in accordancediligence, contract negotiation, financial reporting. with Generally Acceptedrisk assessment, monitoring and Management’s requirement • Company executives Accounting Principles (GAAP)on-site reviews, culminating to evaluate the design and The CEO and CFO carry and the Act reaffirms thewith termination of the MGA operating effectiveness of primary responsibility for a auditor independencerelationship. Although many internal controls now extends company’s reports filed with requirements. Furthermore,insurers possess robust to relevant activities that support the SEC. Section 302 requires the auditor’s reportingprocesses over MGAs, there are significant financial statement the issuer to maintain and responsibility is expandedmany that have less rigorous, accounts, even if such activities regularly evaluate the to an attestation of the newlyinformal controls. occur outside of the insurance effectiveness of its disclosure required management organization for all entities controls and procedures. assertion on internal controls.Prior to Sarbanes-Oxley, subject to Section 404 of In turn, the principal executivean auditor’s consideration of Sarbanes-Oxley. and financial officers mustcontrols relative to outsourced certify that they areoperations and control The Sarbanes-Oxley Act responsible for establishing,environments required the auditor of 2002 maintaining and evaluating theto assess such control risk by The Sarbanes-Oxley Act of 2002 effectiveness of internalobtaining evidential matter in one is largely in response to a controls. Section 404 requiresof the following ways: number of major corporate and that these same officers Insurance digest • PricewaterhouseCoopers 29
  • MANAGING GENERAL AGENTS AND THE IMPLICATIONS OF SARBANES-OXLEY – LEGISLATING GOOD BUSINESS PRACTICES continued Section 404 requirements • Information about how significant transactions are In its simplest interpretation, initiated, recorded, processed Section 404 stipulates that and reported; management must assert to the effectiveness of internal controls • Enough information about annually and that the internal the flow of transactions to control report must state: identify where material misstatements due to error • Management’s responsibility or fraud could occur; (written assertion) for establishing and • Controls designed to prevent maintaining internal control or detect fraud, including who over financial reporting; performs the controls and the related segregation of duties; • The framework used by management to evaluate • Controls over the period-end the effectiveness of internal financial reporting process; control2; and • Controls over safeguarding • Management’s assessment of assets; and of the effectiveness of the internal control over • The results of management’s financial reporting. testing and evaluation. • Lastly, the company’s external Implications on the MGA auditors must attest to business model management’s assertions of effective internal control over The intent of this article is to financial reporting. point out the potential implications of Sarbanes-Oxley Compliance under Section 404 on insurers that utilize MGAs and not to single out MGAs for Compliance under Section 404 greater scrutiny. While it is goes beyond management important not to overlook merely asserting that the controls MGAs as they relate to the Act, are in place. It requires that the the ramifications of the Act on assertions by management be the insurance industry go far auditable by its external auditor; beyond MGAs. but in order for these assertions to be attested to by the auditor, In keeping with this theme, they must first be documented. insurers need to explore the Documentation is required in risk and control considerations areas such as: that MGA relationships pose to the organization. • The design of controls over Illustrative considerations are relevant assertions related included (see Figure 2), mapped to ALL significant accounts to relevant components of the and disclosures in the COSO framework. financial statements;2. For example, the Committee of Sponsoring Organizations (COSO) of the Treadway Commission’s report, Internal Control-Integrated Framework (the COSO criteria), provides suitable criteria against which management may evaluate and report on the effectiveness of the entity’s internal control.30 Insurance digest • PricewaterhouseCoopers
  • MANAGING GENERAL AGENTS AND THE IMPLICATIONS OF SARBANES-OXLEY – LEGISLATING GOOD BUSINESS PRACTICES continuedFIGURE 2 COSO Component and MGA Control Considerations COSO Component MGA Control Considerations Control environment What is the composition of the control environment at the MGA? Sets the tone of the organization and • Board of Directors/Audit Committee establishes the foundation for all other elements on internal control by • Management’s Philosophy and Operating Style providing discipline and structure. • Organizational Structure • Ethics/Code of Conduct • HR Policies and Procedures Is the control environment and tone consistent between the Insurer and its MGA? Risk Assessment What is the relevance of MGA operations to initiating, processing and recording Involves the identification and analysis transactions that affect financial reporting? by management of relevant risks to Are insurance company and MGA level risk assessments performed which consider achieving pre-determined objectives, external and internal factors that could impact the achievement of objectives? forming a basis for determining how those risks are managed. What are the risks and controls in place in regard to safeguarding of assets and fraud relative to significant MGA relationships? Control Activities What are the process level internal controls at the MGA? Refers to the policies and procedures Are activities such as approvals, authorizations, verifications, reconciliations, reviews to ensure management objectives are of operating performance, security of assets and segregation of duties considered? achieved and risk mitigation strategies are carried out. Information & Communication Are reports available for individuals to make decisions and take appropriate action which Supports all other control components include adequate detail and summarize pertinent information? by communicating control responsibilities Does internal communication and training occur at the MGA level? Are MGA employees to employees and providing information made aware of insurer compliance and training requirements that affect in a form and time frame that allows transacting/financial reporting? people to carry out their duties. Do formal job descriptions including roles and responsibilities exist? Does effective communication occur up, down and across the insurer, MGA relationship? Monitoring What are the monitoring controls in place at the MGA and insurance company level? Covers the oversight of internal controls Does the MGA review exception reports, overall production results, and financial by management or other parties outside results to ensure internal controls are operating as designed? the process or the application of independent methodologies such as How are the internal controls designed and how does the insurer know that they customized procedures, standard check operate effectively? lists by employees within a process.Source: PricewaterhouseCoopers Insurance digest • PricewaterhouseCoopers 31
  • MANAGING GENERAL AGENTS AND THE IMPLICATIONS OF SARBANES-OXLEY – LEGISLATING GOOD BUSINESS PRACTICES continuedMGA processes and management’s scoping process. MGA transaction level control deficiencies relative tocontrol activities To the extent that an activity information would include MGA activities that are significant performed by an MGA is integral monitoring of receipt and to the insurer’s operations may MGA controls are typically to effective control over financial processing of MGA-derived data affect management assertions intended to manage certain reporting for the insurer, such an and funds in the insurer’s general over effective internal control processes or ‘cycles.’ activity will be in scope for ledger as well as analytical and the auditor attestation if The most relevant MGA cycles management evaluation of procedures over business such control deficiencies are that affect financial reporting design and tests of operating produced by MGAs (volume, not remediated. include the following: effectiveness. Effectively profitability, class) to ensure that designed controls will likely results are in accordance with Conclusion Underwriting include controls in place at both expectations. Failure to ensure Sarbanes-Oxley has come at the MGA processing level as well an appropriate level of preventive a critical time for insurers who Premiums as the insurer level in the form of and detective controls at both work with MGAs. For years, monitoring controls. As an the MGA and the insurer level MGAs have complained of Claims example, control activities may can result in control deficiencies out-of-touch insurers that were be in place at an MGA related to either design or only interested in premium Commissions transaction level that are operating effectiveness. volume. On the other hand, designed to prevent financial Such control deficiencies may insurers have complained that Ceded Reinsurance statement errors. Such controls affect financial balances such MGAs’ procedures were often typically include segregation of as premiums or the actuarial shrouded, causing bad practices Policy Administration duties, safeguarding of assets reserving process, as actuaries to be discovered, only too late. such as premium receipts, and rely on a certain level of premium Sarbanes-Oxley affords a Treasury automated or manual controls exposure information in the genuine opportunity to get it Financial Reporting to ensure complete and accurate reserving process. right. With the renewed attention application of receipts to on controls, however, there is General Computer Controls insurance polices or treaties. Prior to Sarbanes-Oxley, a danger that blind reliance on Reconciliation controls may also the failure to ensure documented procedure could be seen as be in place at the MGA level to and tested controls for relevant the cure itself. It is, instead, ensure that the insurance process presented a risk of aInsurers and MGAs should a communicative insurer/MGA administration system completely control breakdown that mightidentify each cycle in their own relationship that is the foundation and accurately feeds the ledger manifest itself through cash orsupply chain and assess the of a proper MGA control for financial reporting. At the financial errors. In today’srelative materiality of each cycle environment. insurer level, controls over the environment, design or operatingas a component of AUTHORS Key Coleman Steven Sumner Director, Insurance Advisory Services Senior Manager, Actuarial and Insurance Tel: 1 312 298 3413 Management Services key.coleman@us.pwc.com Tel: 1 646 471 8117 steven.w.sumner@us.pwc.com Anthony Graziano Senior Manager, Insurance Systems and Process Assurance Services Tel: 1 646 471 3187 anthony.m.graziano@us.pwc.com32 Insurance digest • PricewaterhouseCoopers
  • MANAGING GENERAL AGENTS AND THE IMPLICATIONS OF SARBANES-OXLEY – LEGISLATING GOOD BUSINESS PRACTICES continued Insurance digest • PricewaterhouseCoopers 33
  • Supervision in insurance-affiliated broker dealers: Yesterday’s leading practices are today’s expected practices AUTHORS: ELLEN WALSH AND STEPHEN KOSLOW34 Insurance digest • PricewaterhouseCoopers
  • A finding of ‘failure to supervise’ has become the modern equivalent of the‘scarlet letter.’ Imposed by the National Association of Securities Dealers (NASD),the securities industry’s self-regulatory organization, it remains a permanent partof the record, possibly affecting more than how the investing community viewsyour management abilities. This finding could very well tarnish the reputation andraise questions regarding the governance of your entire company. SUPERVISION IN INSURANCE-AFFILIATED BROKER DEALERSIt has been five years since system, while adequate several in light of the particular factsthe NASD released its Notice years ago, may be outdated and and circumstances’.to Members (NTM) 99-45, in need of a comprehensivewhich specifically addressed overhaul to make certain you have Consequently, an evaluation ofinsurance-affiliated broker dealers. reasonable controls in place. whether your supervisory controlsThis critical notice provides are reasonable is not a static,comprehensive guidance for Just as it is important to look one time event. Rather, it is a fluidNASD Rule 3010, which back and make certain you are standard requiring a continualestablishes the regulatory still in compliance with existing analysis of your company’sexpectations surrounding regulatory expectations, it is supervisory program. It is importantthe supervision of registered also prudent to look forward to make certain that key controls With theserepresentatives. After its with anticipation to pending remain suitably designed andrelease five years ago, most new regulatory requirements. effectively implemented given changes havebroker/dealers developed This past June, the NASD issued your company’s changing product come new risks.comprehensive supervisory Special Notice to Members lines, distribution channels andprograms to address 99-45. NTM 03-29, discussing a organizational structure. In addition,However, since that time, proposed amendment to NASD this examination requires anmany companies have Rule 3010. If enacted, this rule will external analysis of compliancesignificantly modified their require that each member’s Chief controls being implementedproducts and services, their target Compliance Officer and Chief throughout the industry.markets, their distribution Executive Officer certify annually Controls considered to bestrategy, and their supporting that the firm has reasonable and reasonable by industry standardsoperational structure. Often this effective compliance and evolve over time as changing riskshas occurred through mergers supervisory controls in place. create the need for increasedand acquisitions of product lines, controls. It is a well-known axiomagencies or, in certain cases, Before going further, it is in the insurance industry thatentire companies, resulting in both important to re-establish the base yesterday’s leading practicessubstantive and cultural changes. guidelines regarding the concept are today’s expected practices.With these changes have come of ‘reasonableness.’ Rule 3010 Consequently, your companynew risks. Insurance companies specifies that a firm’s supervisory needs to assess how the industrynow offering general securities, system be ‘reasonably designed at large, and your peers ininvestment advisory services to achieve compliance with particular, design and implementand banking products have an applicable securities laws and essential supervisory controls.increased range of supervisory regulations’. According to This assessment will helprisks and responsibilities. guidance provided in NTM 99-45, determine whether your supervisory this means that supervisory system is reasonable relative toIf this applies to your insurance controls should be the ‘product general industry standards.company, and if you have of sound thinking and withinnot completed a thorough the bounds of common sense, While growth-related changere-evaluation of your supervisory taking into consideration the to your company’s products,system since just after the release factors that are unique to the services, structure and distributionof NTM 99-45, then there is a high member’s business’ and that will affect most aspects of yourprobability that your supervisory ‘reasonableness is determined supervisory system, there are Insurance digest • PricewaterhouseCoopers 35
  • SUPERVISION IN INSURANCE-AFFILIATED BROKER DEALERS continued A firm shall take ‘reasonable certain areas that require plan contains lofty supervisory It is not effective to hire efforts to determine that all particular attention. Based on objectives only to have these registered principals with the supervisory personnel are recent findings by the SEC and objectives assigned to individuals requisite knowledge and qualified by virtue of experience NASD, as well as our experience who do not possess the experience and then fail to vest or training to carry out their in this area, it appears that many appropriate knowledge and these individuals with the assigned responsibilities.’ insurance-affiliated broker/dealers experience to sufficiently authority to adequately exercise NASD Rule 3010 (a) (6) would be well served to carefully exercise this responsibility. their supervisory discretion. consider the following: It is not uncommon for branch Often these individuals occupy managers who are only fairly low-paid positions and are ‘A supervisor with a qualification 1. Assign supervisory experienced in supervising the housed in a branch or regional limited to investment company responsibility to individuals sale of variable products to be office with reporting responsibility products and variable contracts who possess sufficient given the responsibility for up to the sales line supervisor. cannot supervise a registered knowledge, experience and supervising representatives It is imperative for field person conducting general authority to adequately selling general securities, or compliance personnel to be securities activities.’ exercise their discretion investment advisory services. given full authority to take action NASD Rule 3010 clearly states These principals usually have far when needed to uphold the firm’s NASD NTM 99-45 that each member should less knowledge and experience supervisory obligations. establish a supervisory structure in these areas than the individuals they are supervising. In addition, many broker/dealers ‘Passing the appropriate that assigns each representative Consequently, these principals are fail to institute a supervisory licensing examination does to a supervisory principal who unable to adequately evaluate the chain that provides for sufficient not, in and of itself, not only has the knowledge sales approach being used or the oversight of the registered qualify a supervisor.’ and experience to perform this suitability of the recommendations principals. Where the registered supervision, but also the NASD NTM 99-45 being offered. principal is a high-profile branch authority to carry out this manager there may be an supervision. Too often, an While the above is problematic, insufficient review of the insurance-affiliated ‘Having the requisite authority ... a short-sighted fix may be worse. principal’s supervisory decisions. broker/dealer’s supervisory means that the person charged with the responsibilities can exercise power to affect the Key recommendations: conduct of a person whose • Establish clear roles and responsibilities: behavior is at issue.’ Map out, in writing, the specific registered principal assigned to supervise each registered NASD NTM 99-45 representative. Where more than one principal is assigned supervisory responsibility over a representative, identify the specific areas (products, services, etc.) of responsibility. At no time should there be any ambiguity as to which principal has primary responsibility for the supervision ‘It is essential that advisers over a particular activity of the representative. implement policies reasonablydesigned... to detect and prevent • Empower registered principals with sufficient authority:violations of the federal securities Registered principals who are operationally subordinate to branch managers should have an law by even their most alternative means for communicating the results of their supervision. Examination reports should be experienced employees.’ reviewed by individuals who are completely outside of the operational chain of command. In Re Robert T. Little and Wilfred Meckel, Exchange • Institute a supervisory hierarchy of oversight for principal decisions: Release No. 2203/ Key decisions by a registered principal should be reviewed by senior level members of the firm. (December 15, 2003). This oversight should be a formal and rigorous part of the firm’s written supervisory program.36 Insurance digest • PricewaterhouseCoopers
  • SUPERVISION IN INSURANCE-AFFILIATED BROKER DEALERS continued2. Institute robust and insurance products and services. In addition, the branch and ‘Each member shall conduct meaningful reviews With an increasing number of detached office review programs a review... reasonably designed of your branch and insurance companies seeking being used by many to assist in detecting and detached offices growth through the acquisition broker/dealers are insufficient preventing violations of and of existing agencies and clusters in detecting potentially achieving compliance withBranch and detached office of experienced agents, this non-compliant activity. Most applicable securities laws andreviews continue to be one of the challenge is only becoming more programs rely heavily on broad, regulations and with the Ruleskey supervisory tools in helping difficult. Existing compliance open-ended questionnaires that of this Association.’firms maintain compliance. resources are being thinly are not ‘refreshed’ periodically to NASD Rule 3010 (c).However, there remains a stretched and many detached address timely high-risk issues.continuing challenge to supervise office reviews are being handled,the operations of branch and if at all, by peer agents who also ‘In determining the inspectiondetached offices that have, as happen to be registered principals. cycle for a branch office, atheir primary focus, the sale of member must consider the nature and complexity of the Key recommendations: securities activity for which the • Take a risk-based approach to detached office reviews: branch office is responsible...’ Regular, periodic visits should be the minimum schedule for office reviews. Companies should, NTM 99-45 however, maintain a list of indicators that will trigger more frequent reviews. Some indicators that may warrant an interim review might include: – A significant change in volume or type of business; With regard to unregistered – Change in management personnel; detached offices, ‘supervision – Red flags – e.g. complaints, unusual blotter activity; must be designed to monitor – Newly acquired experienced agents; securities-related activities and to detect and prevent regulatory – Unusual replacement activity; and compliance programs.’ – An inherently risky target market (e.g. seniors); or NTM 99-45 – A high volume producer working alone. • Complete unannounced visits: The rationale for pre-announcing all reviews is that geographically dispersed representatives are often out of their offices on sales calls. Unfortunately, notwithstanding the logic, the NASD made it clear in NTM 99-45 that ‘unannounced visits may be appropriate.’ Even when the representative may be out of the office, files, advertising material and associated persons should be available for inspection. • Interview associated persons: When completing a branch and detached office visit, spend time talking to individuals providing support to the representative. Verify that these individuals are not engaged in activities that require registration and use the time to help educate the associated person in what activities are and are not allowed. • Implement a tailored and specific inquiry: It is important to tailor the review to the business being conducted by that branch or detached office. Many small offices target niche markets with specialized products that have unique and inherent risks (e.g. investment advisory services). An appropriate review will seek information that is relevant to that office’s business model. Insurance digest • PricewaterhouseCoopers 37
  • SUPERVISION IN INSURANCE-AFFILIATED BROKER DEALERS continued The supervisor ‘failed to 3. Recognize and respond an unacceptably high level Finally, even where companies investigate adequately red flags to ‘Red Flags’ of complaints. identify and recognize a red flagraised by the numerous switches situation there is a challenge in Over the past five years, the of variable annuities and, thus, In addition, surveillance focused adequately responding to the NASD has made it clear that failed to detect and prevent his on the marketing and sale of situation. Many companies have effective supervisory programs fraudulent conduct’ insurance related products will not failed to institute a formal need to recognize and respond In Re Donna N. Morehead, pick up red flags associated with escalation and review process to ‘red flag’ situations. There are SEC Release No. 46121 the marketing and sale of general that results in identified countless situations that could, (June 26, 2002). securities and advisory services. individuals and offices being and should, raise a flag warranting Many insurance companies that subject to higher scrutiny or closer inspection and scrutiny. have expanded their products and enhanced supervision. For example, your firm might Supervisors must respond not services beyond life and annuity have a single representative who only when they are ‘explicitly products have not expanded their continually pushes the suitability informed of an illegal act’ but formal analysis of corresponding envelope or an entire office with also when they are ‘aware only red flags. of ‘red flags’ or ‘suggestion’ of irregularity.’), Ibid, citing Key recommendations: In re John H. Gutfreund, • Use effective surveillance to identify ‘Red Flags’: Exchange Act Release No. While most companies compile a significant amount of data on their representatives’ activities, 31554 (Dec. 3, 1992). there are still many companies that fail to turn this data into meaningful information. For example, replacements, blotters, lapse, and ‘not takens’ need to be tracked, by representative and office, so that unusual trends can be identified long before questionable activity turns into complaints or regulatory investigations. • Establish a process for responding to ‘Red Flags’: Supervisory programs need to establish a formal process for responding to identified red flags. This should include enhanced scrutiny or heightened supervision, and an escalation process that elevates the supervision of representatives, and possibly the immediate supervising principal, to a more senior level principal who is not in the direct line of operation and would not be financially affected by any adverse actions that may need to be taken.38 Insurance digest • PricewaterhouseCoopers
  • SUPERVISION IN INSURANCE-AFFILIATED BROKER DEALERS continued4. Put ‘teeth’ into your strong enforcement function. assess whether individuals who ‘Each member shall establish,supervisory program While this is linked to the have failed to fully follow and maintain, and enforce written concept of imbuing supervisory enforce the policies and procedures to supervise theClearly, an effective supervisory personnel with sufficient procedures of the supervisory types of business in whichprogram must have meaningful authority, it generally goes well program have faced appropriate it engages...’enforcement. Many supervisory beyond the individuals consequences. If your firm NASD Rule 3010 (b).programs have exemplary written performing supervisory functions, functions on a ‘case-by-case’procedures, supervision being beginning and ending with the basis, with a liberal grantingperformed by individuals with culture of the broker/dealer. of exceptions and meaningless The firm ‘was often unableadequate knowledge and ‘slaps’ on the wrist, it is time or unwilling to take effectiveexperience, and a clear means of It is important for the to overhaul your disciplinary supervisory action in theidentifying red flags, only to have broker/dealer to look back over policies and procedures. face of red flags indicatingthe program fail because the the past five years and honestly abusive sales practices bybroker/dealer does not have a the registered representatives.’ Key recommendations: Metropolitan Investment Securities, NASD News • Track and trend disciplinary procedures: Release (Dec. 12, 2003). When a high producing representative engages in questionable activity that falls within the ‘grey’ area between legal and unethical, it is often easy to excuse the activity as an aberration. Unfortunately this is a dangerous slippery slope. Companies should carefully track which representatives continually fall into this area and whether the company deals with these situations on a consistent and comprehensive basis. • Establish a clear escalation of consequences: Companies serious about enforcing ethical conduct should establish clear disciplinary guidelines that contain escalating consequences for both the representative as well as the principal. • Require consultation on disciplinary actions: It is tempting for a principal who is close to the representative to find reasons to excuse questionable behavior. As such, the disciplinary guidelines should require mandatory consultation with a more senior principal for certain identified activities.Maintaining a reasonable supervisory system is an essential element in managing the risks associatedwith a growing and evolving insurance operation. This requires a continual assessment of your controlenvironment with particular focus on those key areas that may need significant modification due to theintroduction of new product offerings, target markets, distribution channels and operating platforms.Staying abreast of how these changes may result in a need for modified controls will help in avoidinga ‘failure to supervise’ finding. AUTHORS Ellen Walsh Stephen Koslow Partner, Insurance Regulatory and Senior Manager, Insurance Regulatory and Compliance Solutions Compliance Solutions Tel: 1 646 471 7274 Tel: 1 312 298 3829 ellen.walsh@us.pwc.com stephen.w.koslow@us.pwc.com Insurance digest • PricewaterhouseCoopers 39
  • Further information Insurance digestFor further information about PricewaterhouseCoopers Americas Insurance Group, please call your usual contact atPricewaterhouseCoopers or one of the following: Global Insurance GroupJohn S. Scheid*Global Insurance Assurance and Business Advisory Services Leader and Chairman, Americas Insurance GroupTel: 1 646 471 5350 E-mail: john.scheid@us.pwc.com US Insurance GroupJames Scanlan* Paul L. Horgan*US Insurance Leader, Philadelphia, PA Audit Business and Advisory Services, New York, NYTel: 1 267 330 2110 E-mail: james.j.scanlan@us.pwc.com Tel: 1 646 471 8880 E-mail: paul.l.horgan@us.pwc.comJ. Timothy Kelly* Richard I. FeinTax Services, New York, NY Actuarial and Insurance Management Solutions, New York, NYTel: 1 646 471 8184 E-mail: timothy.kelly@us.pwc.com Tel: 1 646 471 8150 E-mail: richard.i.fein@us.pwc.comMichael MarkmanFinancial Advisory Services, Chicago, ILTel: 1 312 298 2858 E-mail: michael.s.markman@us.pwc.com BermudaRichard Patching*Bermuda Insurance LeaderTel: 1 441 299 7131 E-mail: richard.patching@bm.pwc.com CanadaBill BawdenCanadian Insurance LeaderTel: 1 416 947 8970 E-mail: bill.bawden@ca.pwc.com South AmericaLeslie HemerySouth Americas Insurance LeaderTel: 56 2 940 0065 E-mail: leslie.hemery@cl.pwc.com* Member of the Global Insurance Leadership Team
  • Insurance digestAs part of our insurance publications portfolio, we also publishan Asia Pacific and a European edition of Insurance digest.If you would like to receive copies of one or more of these editions,please contact one of the following, or alternatively visit us on-line atwww.pwc.com for electronic copies. Americas Insurance digestPauline Wilson1 646 471 5159pauline.wilson@us.pwc.com Asia Pacific Insurance digestIrene Cai86 21 6386 3388irene.cai@cn.pwc.com European Insurance digestAlpa Patel44 20 7212 5207alpa.patel@uk.pwc.comPricewaterhouseCoopers (www.pwc.com) is the world’s largest professional servicesorganization. Drawing on the knowledge and skills of more than 120,000 people in 139countries, we help our clients solve complex business problems and measurably enhancetheir ability to build value, manage risk and improve performance in an Internet-enabled world.The Americas Insurance digest is produced by experts in their particular field atPricewaterhouseCoopers, to address important issues affecting the insurance industry. It isnot intended to provide specific advice on any matter, nor is it intended to be comprehensive.If specific advice is required, or if you wish to receive further information on any mattersreferred to in this publication, please speak to your usual contact at PricewaterhouseCoopersor those listed in this publication.PricewaterhouseCoopers refers to the member firms of the worldwidePricewaterhouseCoopers organization. If you would like any of your colleagues addedto the mailing list, or if you do not wish to receive further editions, please contactPauline Wilson on 1 646 471 5159 or e-mail at pauline.wilson@us.pwc.comFor information on the PricewaterhouseCoopers Global Financial Services and Insurancecollateral please contact Áine O’Connor, Director, Head of Global Financial Services Marketing,on 44 20 7212 8839 or e-mail at aine.r.oconnor@uk.pwc.com© 2004 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to thenetwork of member firms of PricewaterhouseCoopers International Limited, each of which isa separate and independent legal entity. *connectedthinking is a trademark ofPricewaterhouseCoopers LLP. Designed by studio ec4 16249 (04/04)
  • www.pwc.com