Chubb Executive Risk
Chubb Group of Insurance Companies
Chubb Executive Risk
82 Hopmeadow Street
Post Office Box 2002
Simsbury, CT 06070-7683

September 25, 2000

Via Electronic Mail

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: SEC File No. S7-13-00: Proposed Revision of the Commission's Auditor Independence Requirements, Specifically Proposed Rule §210.2-01(c)(1)(ii)(F)

Dear Secretary Katz:

We are writing to comment on the Proposed Revision of the Commission's Auditor Independence Requirements, specifically the above-captioned proposed rule which, if adopted, will provide that an auditor's independence is impaired if, among other things, the audit firm has a "professional liability policy originally issued by an insurer that is an audit client or an affiliate of an audit client." 65 Fed. Reg. 43,148, 43,191 (July 12, 2000).

Let me begin by commending the Commission on its goal of enhancing investor confidence and protecting the public interest. As a leading provider of professional liability and executive protection insurance, Chubb Executive Risk relies daily on the audit opinions issued by the nation's accounting firms and the independence those firms maintain. In addition to relying on such opinions during its underwriting of countless corporate risks, Chubb Executive Risk also provides errors and omissions ("E&O") insurance to a significant number the nation's accounting firms, including four of the "Big 5" audit firms.1 At the same time, Chubb Executive Risk's parent, The Chubb Corporation, a publicly-traded company, receives its audit services from Ernst & Young LLP.

While we agree with the modernizing of much of the financial interest and family relationship rules, we respectfully object to the proposed rule regarding professional liability insurance for two principal reasons. First, the proposed rule is based on the mistaken belief that a Big 5 firm has compromised its independence by purchasing professional liability insurance from an audit client. Second, the proposed rule will have serious unintended consequences on insurers operating in this market.

I. The Proposed Rule is Based on an Incorrect Assumption

The proposed rule is premised on an assumption that if auditors know that they are insured by an audit client (or their affiliate) they will have an "interest in the continuing viability of the insurer" sufficient to potentially effect the conduct of their audit. 65 Fed. Reg. at 43,162. In short, the concern appears to be that auditors may take inappropriate steps during the audit process to make it more likely that their insurer will be in a financial position to cover the auditors' claims in the future. This assumption overlooks the complexity of the Big 5 insurance market and the typical structure of Big 5 insurance programs.

In reality, an audit team will be neither motivated nor able to adversely affect the outcome of their insurer's audit. Due to the extreme complexity and high-risk nature of Big 5 professional liability insurance, coverage is generally achieved through the use of large syndicated insurance programs. These programs are insured or reinsured by a distinct group of large insurance companies. Accordingly, the extent of any actual or perceived debtor-creditor relationship between any one participating insurer and the audit firm is greatly reduced. Moreover, the enormous size and exposure of a Big 5 firm requires that its risk be spread across many insurers thereby making it less dependent on the financial viability of any one insurance company. This financial connection is further diluted by the unique nature of Big 5 claims, which are difficult to predict, hard to value, and usually take a significant amount of time (as much as ten or fifteen years) to resolve. Given these facts and the sheer size of the participating insurers, it is unlikely that an auditor would be in a position to inappropriately effect the outcome of an audit so as to insure its carrier's financial ability to pay a future claim.

An insurance company is equally unlikely to be in a position to prejudice an auditor's independence. In general, syndicated programs are structured in such a way that the participants, like Chubb Executive Risk, follow a lead underwriter, who in essence controls many of the decisions. Under such a "follow-form" environment and with numerous insurers participating, the ability of any one insurance company to influence or impair the auditor's independence is extremely low. As discussed above, due to the nature of Big 5 claims and the general oversight afforded claims management, no single company or group of companies would be in a position to trade favorable accounting treatment for favorable claims treatment.

II. The Proposed Rule will have Serious Unintended Consequences

The proposed rule will have serious economic consequences for those insurers, like Chubb Executive Risk, providing professional liability insurance to the Big 5. Due to the complexity of Big 5 risks, there are only a limited number of large insurers in a position to participate on Big 5 syndicated programs. In an effort to properly spread their own risks, these insurers generally insure most, if not all, of the Big 5. Like The Chubb Corporation, these insurers also utilize the Big 5 for audit services. Under the proposed rule, companies such as The Chubb Corporation would be required to choose between continuing to compete in the Big 5 insurance market or continuing to rely on the Big 5 for audit services.2

From a practical standpoint, the scope of Chubb's operations, and the expectation of the capital markets, requires The Chubb Corporation to secure a Big 5 audit. While we have the utmost respect for the auditing abilities of firms outside the Big 5, in reality The Chubb Corporation has no practical alternative to a Big 5 audit. If we elected to continue to insure Big 5 firms, the proposed rule could force The Chubb Corporation to end its current audit relationship and undertake a new relationship outside the Big 5 environment. Other insurers of the Big 5 would have to make similar auditing changes. That type of disruption may adversely effect how investors view our company and other insurers, and may undermine public confidence in the U.S. securities market.

Even if we elected to withdraw from the Big 5 insurance market today, the years of ongoing claims exposure resulting from our prior participation on 4 out of the 5 Big 5 firms would limit our choice of auditors to just one. In essence, due to the time it takes to resolve outstanding claims, we would be a captive client for as much as fifteen years. Needless to say, locking us into one firm for audit services would severely undermine the relationship we could have with our auditors and could significantly effect the cost assessed for such services.

Finally, as discussed above, the professional liability risks presented by the Big 5 are unique, and the insurers positioned to provide this coverage are limited. We have, over the years, invested considerable time, energy, and resources in developing the expertise necessary to underwrite these risks. The proposed rule would require us to forego significant insurance business in order to procure required auditing services, rendering much of our investment in this area worthless.

The issue of auditor independence is a serious one for all public companies and the investing public and Chubb Executive Risk applauds the Commission's desire to set and protect standards of auditor independence. The proposed rule, however, is premised on a mistaken assumption regarding the Big 5 insurance market and will have serious unintended economic consequences on insurers like Chubb Executive Risk. For the reasons discussed above, we recommend the Commission not adopt the proposed rule.


David C. Robinson
Vice President & General Counsel
Chubb Executive Risk


1 In alphabetical order, the Big 5 firms consist of: Arthur Andersen, Deloitte Touche Tohmatsu, Ernst & Young, KPMG, and Pricewaterhouse Coopers. Chubb Executive Risk also insures a significant percentage of the top 100 accounting firms in the country, based on size. Although Chubb Executive Risk has limited its discussion to the Big 5 firms, which present unique insurance issues, many of the positions presented apply with equal force to the other national accounting firms outside the Big 5.

2 As a large provider of professional liability to the top 100 firms in the country, Chubb Executive Risk would be forced out of its chosen market in order to access the audit services of a Big 5 or other national accounting firm.