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Post-Enron, Insurers Analyze Partners

Far-reaching aftershocks could change financial reporting requirements, ultimately impacting IT systems.

Amid a swirl of unanswered questions related to the collapse of Enron (Who authorized the shredding of documents? Was Enron's top brass really that out of touch?), some new realities already have become evident.

Undoubtedly, there will be more scrutiny from government regulators (both federal and state), institutional investors and the investing public of the operations, finances and reporting practices of companies—both public and private. Whether or not the scrutiny will turn into stricter reporting and accounting regulations remains to be seen. But insurance companies, generally a more cautious bunch to begin with, are already examining their own practices and those of their partners.

"Companies are starting to look more at what their business partners are doing," says Scott Ferrante, COO at Princeton Financial Systems (PFS, Princeton, NJ). "For instance, Arthur Andersen is going to suffer much more than Enron in the long run."

And in the new trust-no-one-but-yourself business environment that the Enron debacle has created, all players are under the microscope, says Bill McCloskey, PFS's managing director, quality assurance. "We are getting many more requests from clients to come in and look under the hood," McCloskey says. "We had a long-time insurance company client come in here for three days recently. They were trying to get a sense of how mature a development shop we are. They were asking about our standard operating procedures, how we enforce it and who audits our operations. They wanted to make sure there were checks and balances."

Unfortunately, points out Ed Morrow, chair, National Association of Insurance and Financial Advisors (NAIFA, Falls Church, VA), other types of checks and balances were not taking place prior to the collapse of Enron. "Stock pickers, including the ones who were running mutual funds and other investment portfolios for insurance companies, were not doing their jobs," Morrow says. "Not a single mutual fund dumped Enron before the collapse, although many had large percentages in Enron stock.

"I guess no mutual fund managers did a site visit and came back to their company and said, 'I don't trust Enron, their partnerships don't make sense,'" Morrow adds. "That tells me that not a single mutual fund was doing due diligence on Enron. The consumer has a right to be angry."

The anger and backlash—coming from the average investor and from elected officials—will probably result in accounting, reporting or other regulatory changes, some of which may impact IT. For instance, since many e-mails were deleted and records shredded during initial phases of the Enron investigation, the Securities and Exchange Commission may consider requiring public companies to archive more e-mails for a longer period of time—resulting in a huge demand for storage and data archiving technology. Currently, the SEC only requires that securities firms and broker/dealers maintain a "text-searchable" archive of all incoming and outgoing e-mails for five to six years.

Additional e-mail storage requirements "would be a huge boon for the storage technology industry," says James Bisker, director of financial services at TowerGroup (Needham, MA). "I imagine that distributed storage platforms would come into favor, especially for insurance companies that operate nationwide."

50 E-mail Storage Regulations?

Charlie Weeden, president of 17a-4 (New York), an e-mail and electronic document archiving services provider (whose name refers to the SEC rule 17a-4 that stipulates the e-mail archiving requirements), says the insurance industry differs from other financial services segments because it is in a different regulatory environment. "Every state has a different insurance record-retention requirement," according to Weeden.

"Typically, the insurance company is required to maintain records and have records available for examination," generally for seven years, but many carriers keep records for much longer, Weeden adds. "However, there is no requirement for searchable text. As carriers move to more electronic forms of communication, searchable messages becomes more important."

Adding regulations that would require insurance companies to archive e-mail in a searchable format would require many terabytes of additional storage space, Weeden adds. But by doing so, insurers could help uncover and expose corrupt activities. However, others don't see a change in regulations as the major consequence of Enron for the insurance industry. Rather, that will be how companies set their internal policies and procedures. Other technologies, for instance, that could help insurance companies to avoid an embarrassing Enron-like situation or to avoid exposures to unsound companies are already in existence, says Bill Stone, president and CEO of SS&C Technologies (Windsor, CT), an investment and financial management software and related services provider. "Insurance companies already have the technology to make sure that they aren't over-exposed in certain investments," he says, referring to investment and portfolio management software. "The technology is there, but how they employ it and correlate it is the key."

Adds TowerGroup's Bisker, "The portfolio management technology is there, it is just a matter of turning the dials and twisting the knobs."

One change that SS&C's Stone is seeing is an increase in the practice of outsourcing financial reporting to a specialist. "We are seeing a growing trend to outsourcing investment reporting and accounting," he says, noting that SS&C's outsourced contracts have grown from three percent in 1999 to close to 20 percent today.

"There is a lot of training and high turnover in the investment accounting area," according to Stone. "Companies would rather focus on their core competencies. Also, there isn't the bull market anymore, so people are looking to cut costs where they can."


It's in the Mail

Illustrating the importance of electronic communications, e-mail and electronic records have uncovered the following tidbits of historical data:

— David Duncan's (partner at Arthur Andersen) assistant: "Stop the shredding." (Nov. 9, 2001)

— Bill Gates: "Do we have a clear plan on what we want Apple to do to undermine Sun?" (December 1998)

— Oliver North: "You will recall that over the years Manuel Noriega and I have developed a fairly good relationship." (August 1986)

— John Poindexter to Oliver North: "I have nothing against him Noriega other than his illegal activities." (August 1986).

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio

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