Sarbanes-Oxley Section 404 Internal Controls and Actuarial Processes

The passage and implementation of the Sarbanes-Oxley Act of 2002 was the most significant landmark legislation in securities regulation and corporate governance in the US since the SEC Act of 1934. In particular, Section 404 of the act requiring management assessment and assertion on the effectiveness of internal controls along with the requirement that the auditor attest to the assertion, has greatly impacted actuarial work processes for many actuaries. This paper discusses the implications of the Act for actuaries based on analysis of actuarial functions within insurance companies. Also discussed are the observed impacts within the industry to date. Based on these observations and experiences, and overview of a typical internal control framework is introduced. Impacts on Actuaries working in financial reporting are far reaching, as well are the risks created by the Act. On the other hand well designed and operated controls may serve to reinforce the professionalism of the Actuarial work product, reducing certain risks for Actuaries. In addition, there is an unrealized potential for the increased focus on controls and documentation to strengthen the integrity of results reported by insurers, leading to increased stability in loss reserve estimates.