An underwriter's perspective on audit committee financial expertise
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Volume 3 Number 2
An underwriter’s perspective on audit committee financial expertise William C. Redington Received: 19th March, 2006 American Re, 555 College Road East, Princeton, NJ 08543-5241, USA; Tel: +1 609 243 4814; E-mail: [email protected]
William C. Redington is Senior Vice President and Chief Underwriting Officer of Professional Liability at American Re (a member of the Munich Re Group). He leads the underwriting of all professional lines of insurance and reinsurance at American Re. William is a Chartered Property and Casualty Underwriter, holds a Masters of Business Administration in Corporate Finance from the University of Dayton and a Bachelor of Science in Business Economics and Accounting from Marion College. He has 30 years of underwriting experience with various insurance and reinsurance companies including American Re, American Financial Corporation, and General Reinsurance Corporation. He is the author of numerous articles and papers dealing with professional liability.
ABSTRACT KEYWORDS: D&O, Sarbanes–Oxley Act, SLAP, Gordon Dividend Model (GDM), audit committee This paper discusses the ways and means employed by Director and Officer Liability Insurance underwriters in the assessment of the financial statements of public companies. The techniques described are offered for the instruction and edification of corporate directors, particularly audit committee members. Additionally, the paper offers a proposal for the ongoing dialogue of underwriters, risk managers and corporate directors for the end purpose of developing improved corporate risk management practices and procedures.
INTRODUCTION The provisions of the Sarbanes–Oxley Act and subsequent rules issued by the Securities
and Exchange Commission (SEC) make it necessary that at least one ‘audit committee financial expert’ is a member of the registrant’s audit committee.1 Director and officer (D&O) liability underwriters have long recognised the high correlation between financial performance of a company and the probability of D&O claims and losses. The underwriting techniques used by D&O underwriters in the risk selection element of underwriting such as financial statement analysis, employing concepts and practices of corporate finance and reflecting upon common financial characteristics of D&O claims will prove useful instruction to audit committee members. In addition to financial analysis, underwriters will attempt to gauge the effectiveness of directors and various standing committees of the board including the audit committee. Although underwriters and directors are engaged in diverse vocations, nevertheless there exists common reason for mutual endeavours that lead to better corporate risk management as proposed in this paper. UNDERWRITING FUNDAMENTALS ‘SLAP’ D&O insurance underwriting practices and techniques vary by insurance company and by type or ‘line’ of business. Across many lines, however, certain fundamentals are applied; these have often been expressed by
International Journal of Disclosure and Governance, Vol. 3, No. 2, 2006
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