Insurers benefit from using Big 4 as auditors, report says

U.S. and Canadian insurance companies that use one of the so-called ‘Big 4’ auditing firms PricewaterhouseCoopers, Ernst & Young, Deloitte, and KPMG for auditing and actuarial services are more likely to receive a slightly higher financial strength rating than those that don’t, according to a special report by ratings agency A.M. Best.
“By Best’s Financial Strength Rating, the insurers using the large accounting firms averaged ‘A-‘ at year-end 2004, regardless of major business segment,” the report notes. “Among those companies using the other auditors, however, an average Best’s Rating of ‘B++’ was seen for [property and casualty] insurers, with an average Best’s Rating of ‘B’ for [life and health insurance] companies.”
The A.M. Best special report focuses on independent accountants that audit insurers’ annual financial statements and on actuaries that provide the annual statutory actuarial opinion regarding an insurer’s policy and claim reserves. Both are required by an insurer’s domiciliary regulatory authority in both the United States and Canada.
For the study, A.M. Best Co. examined 2004 year-end statutory filings for U.S. and Canadian insurance companies to identify accounting and actuarial individuals and firms used by life/health (L/H) and property/casualty (P/C) insurers.
“The top four auditing firms (PricewaterhouseCoopers, Ernst & Young, Deloitte and KPMG), collectively known as the Big 4, dominate both the audit and actuarial fields,” the report notes. “Audit clients of the Big 4 generated 98% of the 2004 insurance industry’s net premiums written.”
Life and health insurers were more likely to use an internal actuary than property and casualty insurers, the study found. In total, 1,745 (or 46%) of the companies in the study used internal actuaries.
“The remaining 2,016 companies were covered by 200 external actuaries, but not with quite the extreme concentration seen among the auditors,” the report notes.
New regulations resulting from the Sarbanes-Oxley Act in the U.S. “may open the door to additional opportunities for smaller firms,” the A.M. Best report observes.