Restoring confidence: over time, consistent appropriate behavior will slowly restore investor trust in financial institutions. (Life/Health).

Judging by the performance of their stocks through last October, life underwriters have not escaped the beating taken by other financial institutions or the overall market, even though they have not been subjected to the kind of negative headlines that routinely trigger market collapses--at least in North America. As of last fall, life stocks had underperformed the S&P by 20%, and insurers' relative price/earnings ratios had collapsed compared with their favorable level in 2001, widening the gap between life insurers' market valuation and that of other publicly traded companies.

In the context of recent events, it is tempting to attribute this increasing valuation penalty to the complexity and the general lack of transparency in insurers' reporting and disclosure practices. Investors have always discounted what they didn't fully understand, and this was never truer than today.

So what's an insurer to do to regain investor confidence? Complete elimination of the market discount may never be feasible for this heavily regulated, economically sensitive, and little-understood business, but surely we can do better than the nearly 30% discount carried by the sector today. A few suggestions:

Stay in Step With the Market. This is not the time to rely on our "uniqueness" as an excuse for not following the market's lead on matters such as audit committee roles and responsibilities, accounting for stock options and curbing excessive executive compensation. The same is true for the need to separate the roles of chairman and chief executive officer. The European market has sent strong signals about the desirability of splitting these roles. North American insurers could set a higher tone by following this example.

Eliminate Conflicts. In the end, the loss of public confidence in financial institutions will do far more damage than lingering economic distress or legislative or regulatory action. Rebuilding trust will likely take years and will require all market participants to take steps to eliminate the real or perceived conflicts arising from the following, all of which are now under scrutiny:

* analyst misrepresentations of a company's prospects;

* the symbiotic relationships between equity research and investment banking activities;

* potential "tying" involved in investment bank and corporate lending activities; and

* the links between investment banking, initial public offering allocations, and services to high-net-worth clients.

Assure Financial Flexibility. European insurers have raised more than $10 billion--and U.S. insurers twice that amount in 2002 alone--to replenish capital from equity investment and underwriting losses and to avoid breaking regulatory thresholds. Ratings downgrades throughout the world are common, especially among annuity writers.

Improve Disclosures About Risks. Transparency is an overused, but accurate, description of what is needed in the area of risk disclosures. Companies must provide more information about the risks they assume and which businesses create the exposures. Investors clearly need to know more about the allocation of capital to specific risks and business units based on risk and on what scenarios would trigger the risk. In addition to identifying risky scenarios, discussion of maximum loss potential and related controls and risk mitigation strategies would help investors make more informed valuation decisions.

Life insurers must carefully examine their risk profile and growth strategies, including their business mix, and ensure that they are maintaining capital levels that will allow for future expansion and provide the flexibility needed to respond to market conditions.

Improve Disclosures About Performance. The information provided to investors to help them assess a company's potential is woefully inadequate. Risk-adjusted return measures, the value of current production, and source-of-earnings analyses all would greatly improve investors' ability to evaluate a company's prospects. Also helpful would be measures of the value of intangible assets, such as deferred acquisition costs, distribution systems, technology capabilities, and the quality of customer relations.

Trust and confidence are fragile concepts, built largely on emotional and psychological bonds between investors and management. Once they are violated, no amount of objective information will likely be enough to rebuild the comfort level that existed previously. Unfortunately, many companies have been affected by the regrettable actions of a few. But over time, consistent, appropriate behavior will slowly restore investors' trust.

Companies that take the first bold steps to create truly informed investors may well see their honesty quickly rewarded by the market.

Robert W. Stein, a Best's Review columnist, is chairman of Global Financial Services for Ernst & Young, New York. He can be reached at [e-mail].