The Issue
Sarbanes-Oxley has dramatically changed corporate governance and
financial reporting for all businesses. Among the most challenging
requirements of this legislation for management is Section 404 relating
to internal controls which are those processes which manage and mitigate
risk. In 2004, Section 404 will require the CEO and CFO to sign off on
the internal controls related to their financial reporting process.
For a property/casualty insurer, the largest and most uncertain
items on its balance sheet are the loss and loss adjustment expense
reserve estimates. Most industry experts agree that the traditional
“snapshot” approach to determining whether carried reserves are reasonable
as of a particular date will no longer be sufficient under Sarbanes-Oxley.
Senior management must develop a better understanding of the quality of the
process and controls involved in reporting loss reserve estimates and the
inherent variability of loss reserve estimates. Today there is a greater
need than ever for professional support from independent advisors.
How Can Pinnacle Help?
Pinnacle’s consultants have vast experience in loss reserving issues
and they understand the reserving process in depth. Pinnacle is an
independent firm of actuarial consultants specializing in property/casualty
insurance. It is among the ten largest consulting organizations in the U.S.
in number of casualty actuaries employed. Pinnacle is wholly owned by its
consultants and has no ties whatsoever to insurance carriers or auditors.
Our home office is in Bloomington, Illinois, with two additional offices
in Chicago and one each in New York and San Francisco.
The Reserving Process Checklist (RPC)
In response to emerging needs, Pinnacle has developed a detailed
checklist for a company’s loss reserving process. The “Reserving Process
Checklist” will help senior management evaluate whether the procedures
and practices used to record loss reserve estimates represent effective
internal controls. RPC is based on accepted actuarial principles and
considerations which affect the process for recording property/casualty
loss reserves. RPC provides senior management with guidance regarding
risk factors which affect loss reserves including:
- Operational Changes
- Data Accumulation and Credibility
- Organization of Analysis/Business Segmentation
- Application of Methods
- Basis for Assumptions
- Measurement of Risk
RPC outlines the responsibilities of the company by providing a
comprehensive set of considerations for the reserving process. RPC
includes on-site inquiries of company management in order to assist
Pinnacle consultants in gaining clearer insight as to the various
business and operational issues affecting the loss reserve process.
Also part of RPC, an interim analysis is carried out at second or
third quarter in advance of a year-end study. This assists the company
by enabling an early flow of information between company management
and Pinnacle. It sets expectations for year-end reserve estimates and
helps in avoiding last minute surprises.
For more information on how we can assist you with Sarbanes-Oxley
Section 404, please contact Shawna Ackerman.
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