American Insurance Association
November 27, 2002
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Jonathan G. Katz
Re: Proposed Rules Implementing Section 407 of the Sarbanes-
Dear Mr. Katz:
The American Insurance Association (AIA) is a trade association of 410 property-casualty insurance companies that write policies throughout the United Stats and around the world. Most of our members are affiliates of publicly held groups that are registrants with the Securities and Exchange Commission (SEC).
AIA believes that it would be extremely helpful if the SEC were to provide a transition period that would delay the requirement to disclose whether a registrant has at least one member of its audit committee who is a "financial expert" until the filing of the 10K for fiscal year 2003.
Definition of "financial expert"
AIA is commenting at this time on one aspect of the proposed rule implementing Section 407, which relates to a "financial expert" serving on a company's audit committee. The proposed definition of "financial expert" includes one particular attribute of such a person that is of special interest to the property-casualty insurance industry. That requirement is that such person have ". . . experience applying such generally accepted accounting principles in connection with the accounting for estimates, accruals, and reserves that are generally comparable to the estimates, accruals and reserves, if any, used in the registrant's financial statements. . . ." (emphasis added) The reason for our special interest in this qualification is the distinctive features of the estimation and reserving processes within the property-casualty insurance industry and the limited number of persons who have expertise in these areas and also have the other attributes necessary to be a member of an audit committee.
Estimates and reserves of property-casualty insurance companies
The financial condition and operating results of property-casualty insurers are dependent, to a greater extent than most other industries, on the use of estimates, i.e., in determining the amounts that would liquidate all the insurer's liabilities remaining on incurred claims as of the valuation date. On average, loss reserves represent about two-thirds of an insurer's liabilities. These loss reserves include not only those claims that the insurer knows about, but also claims that have occurred and have not yet been reported. The estimation process includes the amount of dollars that will be paid on the reported claims and the number of claims as well as the dollar amount that will be paid for the unreported claims. These estimations also play a significant role in determining what prices insurers will charge on future policies. Accordingly, the estimation process is critical in evaluating the present and future financial condition and operations of property-casualty insurers.
AIA believes that the distinctive features of the estimation and reserving processes within the property-casualty insurance industry and the limited number of persons who have expertise in these areas and also have the other attributes necessary to be a member of an audit committee will make it difficult to find qualified candidates.
Need for a Transition Period
The proposed rule includes the following Request for Comment: "Should we [the SEC] provide companies with a transition period to find such a person? If so, what would be an appropriate transition period?" AIA believes that it would be extremely helpful if the SEC were to provide a transition period before requiring disclosure of whether a registrant has at least one member of its audit committee who is a "financial expert." The definition of the term "financial expert" in the proposed rule will make it difficult to find qualified candidates, especially for the property-casualty insurance industry, as explained above.
AIA would recommend that the transition period extend to a time that would allow the first disclosure relating to a "financial expert" to be required with the 10K to be filed for fiscal year 2003. This would allow registrants, including property-casualty insurance companies, the time to find qualified candidates.
Thank you for this opportunity to submit these comments. We would be pleased to respond to any questions.