Keeping tabs on transparency

“In life there are lines that shouldn’t be crossed — but when they are, great drama is born.”

Quoting from the “Desire Under the Elms” playbill at the Lesher Regional Center for the Arts in Walnut Creek, Calif., Paul Sachs, managing director for the Los Angeles office and Pacific Southwest region for Protiviti, told insurance agents that the line from the play “speaks well to what is going on in corporate America.”

As one of the featured speakers at the 7th Annual Educational Forum, “Forecasting the Future,” presented by the Insurance Educational Association and Mt. Diablo Chapter of Chartered Property Casualty Underwriter Society, Sachs discussed how transparency is changing the insurance industry.

“Clearly, in the past couple of years, the spotlight has come to the insurance industry,” he said. Accounting failures such as with Enron, and financial services industry failures, such as with Merrill Lynch or that involve brokerage advice, insure bid rigging and contingent commissions “have cascaded.”

But what has “clearly come out in time is a loss of investor and consumer confidence, and a need for greater accountability among companies,” he said.

The Sarbanes-Oxley Act was supposed re-establish trust in corporations and create financial transparency and management ethics — at least in public companies, Sachs said. It expanded reporting requirements and ac-countabilities; prohibited certain activities; empowered audit committees; increased penalties for wrongdoing; created public company audit oversight boards; and increased the oversight of the Securities and Exchange Commission, he said.

“But after three years of SOX, what’s changed?” Sachs asked. “Some would say disclosures have improved; others say it’s more cumbersome, and others say it hasn’t gone far enough. No one has been prosecuted, but it has received a lot of people’s attention and introduced rigor into the system.”

In the meantime, the insurance industry has been voluntarily disclosing more information to customers, Sachs said. The National Association of Insurance Commissioners introduced a compensation disclosure model, but more voluntary disclosures are taking place. “It’s a lot better to lead than to be pushed,” he said.

The federal government continues to debate whether federal oversight is necessary, Sachs added, noting that the State Modernization and Regulatory Transparency (SMART) act has been on the docket for more than a year. And California’s insurance commissioner initially took a “heavy start” to impose fiduciary duties on agents and brokers, but publicly withdrew the proposal last fall. “Commissioner Garamendi said if the industry is reforming itself, he would hold off” on imposing regulations, Sachs said.

With all the actions taking place by the industry itself, as well as governments, “disclosure, for consumers, is heightened, but I’m not sure what they think about it,” Sachs said. Nevertheless, he believed the industry has learned that transparency overall is good, although “the jury is still out on how good,” he said. “Change is still out there and will continue to evolve. Regulatory-drive transparency is expensive.” Furthermore, Sachs added, “When it comes to global transparency, I’m not sure how you get the same compliance globally.”

Sachs is a member of Protiviti’s corporate governance committee. His speech, “Transparency in the Insurance Industry,” was one of several topics discussed at the Insurance Educational Association “Forecasting the Future” forum. The program benefited the Child Abuse Prevention Program of the Insurance Industry Charitable Foundation. For more information, visit www.iicf.org.

Topics Legislation Market