Insurance Companies Refocus Methods of Financial Reporting

August 10, 2007 ( - Though traditional reporting methods such as statutory and U.S. generally accepted accounting principles (GAAP) reporting still dominate both external and internal financial reporting methodologies, value-based measures have significantly increased for internal reporting and executive compensation performance measurement, according to a new survey of CFOs.

In a news release, the Tillinghast business of Towers Perrin said its survey of insurance company CFOs indicates that although companies have made significant strides in their risk reporting, many still have concerns related to their companies’ ability to effectively report risk, as well as the potential impact of such reporting on ratings and capital requirements. In addition, nearly 90% of CFOs said that though the quality and reliability of external reporting have improved, the cost of compliance with Sarbanes-Oxley (SOX) outweighs the benefits.

More than one-third (37%) of survey respondents use Embedded Value (EV) for executive compensation performance measurement – a 15 point increase from Tillinghast’s 2004 survey, the release said. Nearly half (45%) are now using EV for internal reporting – a 7 point increase from 2004. The survey found companies frequently rely on EV as a key tool when making daily business decisions and often use EV for M&A evaluations, incentive compensation and product pricing.

Nearly 40% of respondents reported they think fair-value accounting will become a standard by 2012, while an equal percentage said they believe it will happen later than that. More than 40% of survey respondents are not involved in any preparations for fair-value reporting.

For risk monitoring and reporting, the survey found companies use a wide variety of metrics, including earnings volatility, regulatory capital and rating agency capital. CFOs indicated they still have some concerns about inadequate resources and lack of sophisticated tools for internal risk management reporting, and the potential effects on perceived financial strength ratings and rating agency capital requirements were the top concerns for external risk management reporting.

Though the CFOs expressed dissatisfaction with the cost of SOX compliance, nearly three-quarters said external reporting has improved since SOX implementation, but only 8% said the improvement has been significant.

Respondents to the survey included 31 CFOs primarily from large and midsize North American life insurance companies.

For more information on this survey program, contact program leader Sarah Prevett at 212-309-3979 or .