New SEC rules will challenge insurers in 2003 financial filings. (Briefing: Highlights from BestWeek)).

In February, the U.S. Securities and Exchange Commission finalized some of the rules required by the Sarbanes-Oxley Act of 2002, which calls for the most sweeping changes to financial reporting by publicly traded companies since the stock market crashed in 1929.

Many insurers, along with other publicly traded companies, are adjusting to the new rules, which take effect this spring and will have a major impact on financial disclosure, the cost of directors and officers insurance and the use of auditing firms.

The SEC made the changes in reaction to highly publicized corporate-governance scandals such as those associated with Enron Corp., WorldCom Inc., Global Crossing Ltd., Tyco Inc. and others. In part because of the scandals, the stock market has taken a beating, and Sarbanes-Oxley is designed to bolster investors' confidence.

The most highly publicized change the Sarbanes-Oxley Act brought about is the requirement that chief executive officers and chief financial officers certify companies' financial statements.

Last August, the SEC ordered the executives of 947 companies--45 of them insurers--with revenue of more than $1.2 billion to certify the accuracy of their financial statements in writing and under oath. Several other insurers not listed volunteered to sign the documents as well. Although no criminal penalties were applied, any time an officer makes a statement to the public that is later deemed misleading, the signer is liable under the federal securities law.

Sarbanes-Oxley requires all publicly held companies, no matter what their size, to sign a similar certification when filing regular reports. Although the law applies only to publicly traded companies, smaller insurers can expect the National Association of Insurance Commissioners to apply many of the rules to insurers regardless of whether they're traded or not, said Jim Olsen, director of financial regulation for the Alliance of American Insurers.

Insurers are adjusting to the changes. "Clearly there's a desire and a practice of increasing disclosure," said Eric Speer, managing principal for the Americas region at Tillinghast-Towers Perrin. "Insurance companies aren't the easiest entities to understand from an investor's standpoint."

At the start, the higher level of disclosure will be more labor intensive. Executives are becoming much more involved in the financial reporting, and the financial-management departments are being asked to provide more information for additional assurance, Speer said, citing discussions with CFOs and other people in the financial-reporting functions of companies.

"There's a fair amount of inefficiency as (companies) try to make sure they're doing the right thing," he said. Finding a balance between additional effort and more information is part of the process.

As a result, insurers are focusing on risk management, something that's been getting more attention in recent years. Companies are being more diligent in understanding and controlling their aggregate and individual risks, Speer said. Most insurance companies have already hired chief risk officers, but Sarbanes-Oxley has accelerated the trend.

The line of insurance that might be impacted most directly by Sarbanes-Oxley is directors and offices. As a result of the new law, underwriters are likely to pay more attention to corporate-governance structures; might want to meet with the audit committee; and need to educate themselves about the types of frequently occurring accounting problems so they can better scrutinize those issues in the underwriting process, said Paul Horgan, PricewaterhouseCoopers' leader of the Global Risk Management Solutions practice for the insurance industry.

Another major change the act brings about has to do with auditing firms. In the past, such firms could perform audits and other non-audit services, such as consulting, for the same company. But the new rules say pre-approval is needed from the SEC for non-audit services, and companies are staying away from those services to avoid the pre-approval process, Speer said.

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Effective dates for the principal provisions in titles of Sarbarnes-Oxley and related SEC rules that directly affect public companies:

* July 30, 2002: Forfeiture by CEO and CFO of bonuses and profits from security sales in the event of a restatement of financial statements; prohibition of certain loans to directors and executive officers.

* Aug. 29, 2002: Required CEO and CFO certifications of quarterly and annual reports; reporting by executives, directors and principal stockholders within two business days of certain transactions involving company securities.

* Jan. 26, 2003: SEC issued final rules covering pension fund blackout periods; material off-balance sheet transactions and arrangements disclosure; pro farina financial information presentation; senior financial officers' code of ethics; audit committee financial expert.

* April 26,2003: SEC to issue final rules for dealing with securities exchanges and improper influence on the conduct of an audit.

* Jan. 26, 2004: SEC to complete its study of off balance sheet transactions.

* No Deadline Specified in Sarbanes-Oxley: Required internal control reports by companies; required "real-time" disclosure of information concerning material changes in the company's financial condition or operations.

Source: "The Sarbanes-Oxley Act of 2002: Strategies for Meeting New Internal control Reporting challenges: A White Paper" by Pricewaterhousecoopers