A changing role: chief financial officers must do more with less as they work to restore investor trust. (Property/Casualty: Loss/Risk Management Insight).

Corporate management in the United States is facing a classic dilemma, namely, the difficulty of seeing the forest and the trees. The severity and rapidity of disruption in business conditions caused by the Sept. 11 terrorist attacks, the global economic contraction, the technology-sector implosion, the plunge in equity prices and the headline-grabbing corporate fraud scandals have combined to obscure management's view of the real world. So much has happened in such a short span of time that it can be hard for business leaders to prioritize responses among competing courses of action.

Companies across the board are wrestling with these problems, but none more than those in the insurance industry. Recent events have created two management problems of major consequence for this sector: a shift from quantifiable risk to non-quantifiable uncertainty in financial and business decision making, and a diminution of investor trust owing to the industry's long-standing lack of financial transparency.

Before Sept. 11, no account was made for the possibility that terrorists would turn jetliners into missiles and as a result, many insurers were forced to suspend terrorism coverage. Similarly, the dramatic stock market collapse and its failure to recover despite reasonable economic conditions, has forced many changes in insurers' business strategies and has left many wondering how to build a successful business model in the face of such great unknowns.

These examples illustrate the importance of the need for financial managers to acquire a better understanding of exposures on the fringe of possibility and be able to measure possible effects of a wide range of "what if' scenarios. Beyond the shock of Sept. 11, few expected the recent fraud scandals, which sent the cost of directors and officers liability insurance skyrocketing, and most were surprised by the resulting aggregated impact of credit-triggered risk. Couple this with a dramatic drop in the equities market, the crisis in variable life product performance and asbestos-related corporate failures, and it becomes clear that development of new holistic and comprehensive risk measurement metrics are desperately needed.

Current circumstances portend significant change in the chief financial officer's management role. Not surprisingly, times of momentous change typically have been accompanied by increased reliance on CFOs. in the 1980s and 1990S, financial innovation, deregulation, global capital market expansion and technological change saw the emergence of what was termed the "super CFO," who was not simply an accountant but a deal maker, team builder, performance manager and fiscal disciplinarian rolled into one. What's dramatically different today is resource availability. During the boom years of the 1980s and 1990s, companies were often flush with cash, making business decisions easier. Today, CFOs are being asked to do more with less, especially as they strive to meet new demands created to calm investor angst.

New hurdles include the Sarbanes-Oxley Act requiring, among other things, certification of financial statements, as well as new Security and Exchange Commission rules that will reduce the amount of time most public companies have for periodic filings and require release of information about the most sensitive accounting estimates.

The quest for transparency is, of course, a means to the end of investment-led growth. Productivity rises with an increasing ratio of financial capital to human capital as new equipment and technology augments labor output. Financial capital flows freely, however, only when there is some surety that what investors see is what they get. The revelations about Enron, WorldCom and other firms destroyed investor confidence. This erosion of trust, coupled with a rise in uncertainty about the future, caused stock prices to fall and wreaked havoc on insurers' investment returns.

Under the circumstances, insurance CFOs will have to do more than simply comply with stricter regulations and new reporting requirements if they expect to restore investor trust. They will have to demonstrate a quasiautonomous fiscal guardianship in protecting and, at the same time, unlocking shareholder value.

Much more will be demanded of CFOs. Greater granularity of results will be needed to explain variances in divisions and lines of business. Disclosure will have to be more painstaking and more information released faster.

Historically, CFOs have been called on to offer financial support for operational decisions. Today, they must go the extra mile--advising when to get into a business and when to get out. By grounding performance management and reporting in risk-based financial information, and driven by modern techniques for analyzing risk levels, CFOs can help replace stifling uncertainty with acceptable business risk, restore trust through enhanced transparency and provide actionable information to steer the business forward.

Doug French is global director of actuarial services for Ernst & Young LLP lie can be reached at [e-mail].