Internatinal Assciatin f Insurance Supervisrs Organisatin fr Ecnmic C-peratin and Develpment Issues Paper n Crprate Gvernance July 2009
This dcument was prepared in cnsultatin with IAIS Members and Observers and the Gvernance and Cmpliance Subcmmittee and the OECD Insurance and Private Pensins Cmmittee This publicatin is available n the IAIS website (www.iaisweb.rg) and the OECD website, (http://www.ecd.rg/daf/insurance/gvernance) Internatinal Assciatin f Insurance Supervisrs and Organisatin fr Ecnmic C-peratin and Develpment 2009. All rights reserved. Brief excerpts may be reprduced r translated prvided the surce is stated
Issues Paper n Crprate Gvernance Table f Cntents Intrductin... 5 Summary... 9 Fundatin f crprate gvernance... 11 Gvernance structures... 11 Different bard structures... 11 One-tier and tw-tier bards... 12 Pwers, duties and respnsibilities... 13 Qualificatins f bard members... 13 Independence... 13 Delegatin f pwers... 14 Cmmittees f the bard... 14 Audit cmmittee... 16 Remuneratin cmmittee... 16 Nminatins cmmittee... 17 Ethics and/r Cmpliance cmmittee... 17 Grups and cnglmerates... 18 Mutuals and cperatives... 18 Functins f the bard f directrs... 20 Intrductin... 20 Surce f bard functins... 20 Specific bard respnsibilities... 20 Crprate gvernance... 20 Cde f ethics and standards f business cnduct... 21 Cnflicts f duty r interest... 21 Strategies and plicies... 22 Internal reprting system... 23 Remuneratin... 24 Fitness and prpriety f bard members... 24 Accuntability... 25 Cntrl functins... 28 Intrductin... 28 Risk management... 30 Risk management functin and risk management cmmittee... 31 Internal mdels... 33 Stress tests... 33 Cntingency plans business cntinuity... 34 Asset-liability management (ALM)... 34 The use f rating agencies in risk management... 34 Internal audit... 35 Internal audit functin... 35 Access and independence... 36 Written plicies... 36 Cmpliance... 36 Cmpliance functin and cmpliance cmmittee... 37 Issues Paper n Crprate Gvernance Page 3 f 64
Reprting/whistleblwing mechanisms... 38 Actuary... 40 Rle f the actuary... 40 Qualificatins f actuaries... 40 Access t infrmatin... 40 Adequate framewrks and prcedures... 41 Independence f actuaries... 41 Cnflicts f interest... 41 Reprting lines... 41 Rle f the bard and the actuary... 42 Perfrmance measurement, appraisal and dismissal... 42 Budget... 42 External auditr... 43 Rle f the external auditr... 43 Qualificatins f the external auditr... 43 Independence f the external auditr... 44 Cnflicts f Interest... 44 Appintment f external auditrs... 44 Reprting t the audit cmmittee... 44 Perfrmance measurement, appraisal and dismissal... 45 Disclsure and transparency... 46 Disclsure strategies and plicies... 47 Disclsures n gvernance... 47 Disclsure cmmunicatin channels... 48 Disclsure attestatin and assurance... 49 Relatinship with stakehlders... 50 Stakehlders... 50 Plicyhlders... 50 Participating plicyhlders... 51 Tailred disclsure fr stakehlders... 53 Redress... 53 Crprate scial respnsibility... 53 Definitin, interpretatin and issues... 53 Interactin with the supervisr... 55 Annex 1 - Definitins f key terms... 56 Annex 2 Other IAIS gvernance related wrk... 60 Annex 3 Other OECD gvernance related wrk... 63 Issues Paper n Crprate Gvernance Page 4 f 64
Intrductin 1. The Internatinal Assciatin f Insurance Supervisrs (IAIS) and the Organisatin fr Ecnmic C-peratin and Develpment (OECD) have agreed t issue a jint issues paper n the crprate gvernance f insurers. 2. Sme tpics cvered in this paper are als dealt with in ther IAIS and OECD papers. This issues paper is distinct in having an insurer crprate gvernance fcus and discusses a variety f tpics frm this perspective. Material n tpics discussed in ther IAIS papers is included in the issues paper in rder t prvide a cmplete picture f insurer crprate gvernance issues. Thrughut the paper relevant tpics are addressed in a manner which is cnsistent with existing IAIS and OECD wrk. Further detail and/r directin n ther aspects f these tpics are available in the ther papers 1. 3. The OECD published Guidelines fr Insurers Gvernance in 2005 as a cmplement t the OECD Principles f Crprate Gvernance 2. The guidelines prvide gvernments and the insurance industry with a radmap fr prmting insurer crprate gvernance, and thereby better prtecting plicyhlders and ther stakehlders. The OECD s tw main bjectives in drafting the guidelines were: t enhance the prtectin f plicyhlders and sharehlders beynd the prtectin already prvided by existing regulatin and supervisin 1 Other relevant IAIS dcuments (available n the IAIS website, www.iaisweb.rg) include: Supervisry Standard n Licensing (Octber 1998), Supervisry Standard n On-Site Inspectins (Octber 1998), Supervisry Standard n Asset Management by Insurance Cmpanies (December 1999), Supervisry Standard n the Evaluatin f the Reinsurance Cver (January 2002), Standard n Supervisin f Reinsurers (Octber 2003), Guidance Paper n Public Disclsure by Insurers (January 2002), The Use f Actuaries as Part f a Supervisry Mdel (Octber 2003), Guidance paper n Stress testing by Insurers (Octber 2003) Guidance Paper n Investment Risk Management (Octber 2004), Standard n Disclsures cncerning Technical Perfrmance and Risks fr Nn-life Insurers and Reinsurers (Octber 2004), Supervisry Standard n Fit and Prper Requirements and Assessment fr Insurers (Octber 2005), A new framewrk fr insurance supervisin: Twards a cmmn structure and cmmn standards fr the assessment f insurer slvency (Octber 2005), Standard n disclsures cncerning investment risks and Perfrmance f Insurers and Reinsurers (Octber 2005), Standard n disclsures cncerning technical risks and perfrmance fr life insurers (Octber 2006), Standard n Asset-Liability Management (Octber 2006), Standard n enterprise risk management fr capital adequacy and slvency purpses (Octber 2008), Guidance paper n enterprise risk management fr capital adequacy and slvency purpses (Octber 2008), Principles n grup-wide supervisin (Octber 2008), Standard n the use f Internal Mdels fr regulatry capital purpses (Octber 2008), Guidance paper n the use f Internal Mdels fr regulatry capital purpses (Octber 2008), Standard n the structure f regulatry capital requirements (Octber 2008), Guidance paper n the structure f regulatry requirements (Octber 2008), Principles n Grup-Wide Supervisin (Octber 2008). Annex 2 prvides further detail n the mst relevant f these IAIS papers. See als ftnte 2. 2 The OECD Principles f Crprate Gvernance were endrsed by OECD Ministers in 1999 and have since becme an internatinal benchmark fr plicymakers, investrs, crpratins and ther stakehlders wrldwide. The Principles have advanced the crprate gvernance agenda and prvided specific guidance fr legislative and regulatry initiatives in bth OECD and nn-oecd cuntries. The Principles are ne f the twelve key standards fr sund financial systems f the Financial Stability Frum. The Principles als prvide the basis fr an extensive prgramme f cperatin between OECD and nn- OECD cuntries and underpin the crprate gvernance cmpnent f Wrld Bank/IMF Reprts n the Observance f Standards and Cdes. The Principles were revised mst recently in 2004. Annex 3 prvides further detail n relevant OECD papers. Issues Paper n Crprate Gvernance Page 5 f 64
t develp guidance specifically directed t the insurance sectr that wuld supplement crprate gvernance rules generally applicable t nn-insurer cmpanies. 4. The Insurance and Private Pensins Cmmittee (IPPC) initiated a review f the guidelines in 2008, as mandated by the OECD Cuncil. T this end and t facilitate crdinatin with the IAIS, an ad hc IPPC Task Frce n the Gvernance f Insurers (IPPC Task Frce) was frmed. 5. Similarly, since its inceptin in 1994, the IAIS has develped a number f principles, standards and guidance papers t help prmte the develpment, bth dmestically and glbally, f well-regulated insurance markets. Central t this bjective is the cmmn framewrk 3 fr insurance supervisin that establishes a structure within which standards and guidance may be develped. Gvernance is ne f the elements f the framewrk. 6. The IAIS Insurance Cre Principles and Methdlgy (Octber 2003) set ut essential principles that shuld be in place fr a supervisry system t be effective and serve as a basic benchmark fr insurance supervisrs in all jurisdictins. Insurance Cre Principle 9 states that The crprate gvernance framewrk recgnises and prtects rights f all interested parties. The supervisry authrity requires cmpliance with all applicable crprate gvernance standards. 7. In 2006-07 the IAIS Crprate Gvernance Task Frce reviewed existing crprate gvernance guidance, including material prepared by the IAIS, Basel Cmmittee n Banking Supervisin, Internatinal Organisatin f Securities Cmmissin, OECD and self-regulatry entities. This resulted in a dcument, Main Elements f Insurer Crprate Gvernance (Octber 2007). 8. In 2008 the IAIS and the OECD cnducted a jint survey n the crprate gvernance f insurers t btain infrmatin n current practices and views n what might cnstitute gd practices. The Wrld Bank cmpiled the respnses and prepared a survey reprt that prvides a high-level summary f the respnses. The survey reprt is available n the IAIS and OECD websites. The IAIS and OECD als held a rundtable n the gvernance f insurers in Paris n 5 December 2008. The rundtable prvided further insights int recent develpments in the gvernance f insurers, identified key issues and ffered the pprtunity t understand further the perspectives f different stakehlders. 9. This paper builds n the OECD Guidelines and the IAIS Main Elements f Insurer Crprate Gvernance, and is infrmed by answers t the IAIS/OECD survey and by the jint IAIS/OECD rundtable and by the supervisry experience f the members f the subcmmittee. It is als infrmed by the lessns learned in the cntext f the 2008-2009 financial crisis, including cmpensatin practices and their impact n gvernance related issues. 10. By describing essential cmpnents f an insurer s crprate gvernance framewrk, this paper aims t prvide a basis fr further wrk by the IAIS and OECD. T this extent, the paper als aims t cntribute t imprving regulatry and supervisry 3 A new framewrk fr insurance supervisin: Twards a cmmn structure and cmmn standards fr the assessment f insurer slvency, (Octber 2005) Issues Paper n Crprate Gvernance Page 6 f 64
efficiency. Gvernance ultimately influences an insurer s risk prfile. The way an insurer gverns itself can affect its decisins, practices and risk prfile. As shwn by the survey, weak insurer crprate gvernance is seen by supervisrs as a key reasn fr insurer failures. Thus, effective crprate gvernance can assist the supervisr, making it pssible fr the supervisr t have greater cnfidence in the wrk and judgement f an insurer s bard, senir management and cntrl functins. As such, it enhances the supervisr s ability t supervise an insurer effectively and prtect plicyhlder interests. T bring abut this increase in effectiveness, supervisrs must have the resurces and ability t assess the effectiveness f an insurer s gvernance framewrk. This paper will identify issues relevant in determining if an insurer s gvernance is sund and apprpriate fr the nature, scale and cmplexity f the business and its verall risk prfile and assess if it is being adequately implemented. 11. The quality f insurer crprate gvernance has generally imprved ver the last decade. In particular, imprvements have been made t: structure f the bards f directrs reprting t the bard public disclsure bard and management awareness f the imprtance f gd crprate gvernance, fr instance cntrl functins and cnflicts f interest. This can be attributed t many factrs, including develpments in laws and regulatins n gvernance in many jurisdictins and advancement f best practices acrss brders. There is, hwever, still cnsiderable rm fr imprvement, including in terms f the applicatin f gvernance principles. 12. This paper des nt prescribe any particular rules r framewrk but rather prvides backgrund and explres the main issues relevant t the crprate gvernance f insurers. Fr the IAIS, it will serve as the basis fr a supervisry paper and as input fr revising the Insurance Cre Principles. The OECD will use the reprt when reviewing its crprate gvernance guidelines fr insurers gvernance. 13. The IAIS and OECD are striving t develp harmnised guidance and prmte a cnsistent apprach amng regulatrs and supervisrs. In particular, these rganisatins want t avid duplicative r cntradictry requirements and reduce the pssibility f regulatry and supervisry arbitrage. 14. The tpics discussed in the issues paper shuld be interpreted in the light f the principle f prprtinality. This principle requires the prvisins f a supervisry regime t be applied in prprtin t the nature, scale and cmplexity f the insurer and t the risks t which the insurer is expsed. Supervisrs may find that it is apprpriate t establish minimum gvernance requirements fr all insurers and then use additinal practices fr mre sphisticated insurers, in line with the principle f prprtinality. Supervisrs may als find that practical applicatin f the crprate gvernance principles vary depending n, amng ther things, the specific legal and ecnmic circumstances in their jurisdictins and cnditins that prevail in their markets. 15. The paper addresses gvernance issues applicable t insurers n a sl basis as well as at the grup level. It is imprtant fr insurers belnging t a grup r a cnglmerate t cnsider the gvernance issues discussed in this paper nt nly at the parent cmpany level, but als at the grup level, taking int accunt the nature, scale and cmplexity f the risks held in each subsidiary and the grup as a whle. Issues Paper n Crprate Gvernance Page 7 f 64
Additinally grups may perate in jurisdictins with different legal requirements and therefre the gvernance structures may nt be cmpletely unifrm acrss the grup. 16. This paper refers t a crprate gvernance structure cmpsed f a bard f directrs, senir management and key cntrl related functins. The terminlgy bard f directrs and senir management is used in a functinal and nt a legal sense. The term cntrl functins indicates thse functins serving a cntrl r checks-andbalances functin frm a gvernance standpint. Gvernance as used in this paper refers t the verall framewrk under which an insurer gverns itself, including the insurer s activities in terms f risk management, cmpliance, audit, and actuarial matters. Issues Paper n Crprate Gvernance Page 8 f 64
Summary 17. As indicated in the intrductin, the tpics discussed in this paper shuld be interpreted in the light f the principle f prprtinality and recgnising that there are differences amng jurisdictins. Cre elements f crprate gvernance discussed in this paper includes: gvernance structures: rle f the bard in setting strategies and plicies and verseeing senir management reliance n bard cmmittees fr delegated bard functins the definitin f fit and prper criteria fr executive and nn executive bard members independence f decisin making grups and cnglmerates. functins f the bard: setting f strategies and plicies, delegatin and reprting bard respnsibilities in the areas f crprate gvernance, ethics and business cnduct and cnflicts f interest remuneratin and pssible perverse incentives leading t unacceptable risk taking qualificatins and training f bard members bard accuntability. cntrl functins: risk management, cmpliance, internal audit and ther cntrl functins as an integral element f a sund gvernance system relatin f crprate gvernance with slvency issues (internal mdelling, stress testing etc) use f rating agencies staffing and independence f cntrl functins reprting t the bard and whistleblwing. the actuarial functin and auditrs: qualificatins and independence. disclsure and transparency: better develped disclsures n crprate gvernance. relatinship with stakehlders: insurer s key stakehlders include wners as well as plicyhlders, supervisrs and emplyees participating plicyhlders as a special class f stakehlders Issues Paper n Crprate Gvernance Page 9 f 64
insurers respnsibility t sciety crprate scial respnsibility. interactin with the supervisr: effective crprate gvernance can assist the supervisr, by making it pssible fr the supervisr t have greater cnfidence in the wrk and judgement f an insurer s bard, senir management and cntrl functins. This cntributes t the supervisr s ability t prtect plicyhlders interests. 18. In additin t several generally accepted crprate gvernance elements discussed in this issues paper, future IAIS papers will als address the evlving nature f crprate gvernance, especially the lessns learned frm the recent crisis in the financial markets: bard members need mre in depth knwledge, clearer respnsibilities and clser invlvement in the versight f the insurer and in setting its risk appetite. This issue addresses bth executive and nn executive bard members. Fit and prper criteria need t be addressed in this cntext the psitin f bard members needs t be further prfessinalised (ie clearer and higher standards f cnduct and practice). Bard members need t be mre aware f their respnsibilities and the effrt they need t make (including pssible training) t meet thse respnsibilities. This als has implicatins fr the functining f bard cmmittees the issue f remuneratin within insurers needs t be cnsidered. In the past, systems have been in place that did nt always prvide the right incentives fr management at all levels in the insurers the rle f cntrl functins needs t be enhanced frm a gvernance perspective. Their relative psitin in the balance f pwers f insurers needs t imprve insurers need t cnduct their wn due diligence and nt make investment r ther decisins r base their risk management slely n third party assessment, such as credit ratings Issues Paper n Crprate Gvernance Page 10 f 64
Fundatin f crprate gvernance 19. As the term suggests, crprate gvernance is the system by which an insurer gverns itself. This includes: crprate culture and envirnment (values, ethics, ease with which emplyees raise cncerns r reprt irregularities, etc.) crprate structures (bard f directrs, senir management, business area functins, etc.) essential gverning dcuments and plicies (by-laws, rganisatinal rules, cmmittee mandates etc.) strategies, plicies, prcedures and cntrls (cvering risks t which the insurer is expsed as well as risk management, cmpliance, audit, financial reprting, etc.) decisin making and actins linked t this culture, envirnment and framewrk f structures, plicies and cntrls. 20. Crprate gvernance defines rles, respnsibilities and accuntabilities. It clarifies wh pssesses the duty and the legal pwer t act n behalf f the insurer and under which circumstances. It sets requirements fr dcumenting decisins and actins, alng with their ratinale, and fr disclsing this t stakehlders. It prvides fr crrective actin fr nn-cmpliance r weak versight, cntrls and management. Thus crprate gvernance is abut the allcatin and regulatin f pwer and accuntabilities within an insurer, and includes aviding undue cncentratin f pwer. This is ften referred t as a system f checks and balances reflecting the fact that while an insurer has t be flexible and respnsive in rder t make timely decisins, it als has t be transparent and have apprpriate systems, cntrls and limits t ensure that pwer is used in the best interest f plicyhlders and the insurer as a whle. 21. The survey results shwed that the mst frequently identified gvernance issues assciated with the failure r near failure f insurers are pr gvernance (generally) and weak internal cntrls and risk management. A bard is respnsible, mre than ever, fr understanding and guiding the insurer s strategy and risk appetite with respect t cmplex risks and the financial instruments intended t prfit frm r hedge against that risk. Recent events suggest that, fr a variety f reasns, sme bards were nt well infrmed, did nt understand, r did nt have the apprpriate knwledge f the financial bligatins and risks faced by the insurer. In ther cases pririty was given t shrt term gains rather than plicyhlder s interests. Bards ften knw much less abut an insurer s financial cnditin than management. Cnsequently, due regard must be given t the qualificatins f individual directrs, their knwledge f the business, their nging training needs, the prmtin f ethical and respnsible behaviur and decisin making and their accuntability and independence. Gvernance structures Different bard structures 22. Gvernance structures fr insurers differ amngst jurisdictins. Despite the differences, there are tw key functins that cmmnly need t be carried ut: Issues Paper n Crprate Gvernance Page 11 f 64
verall strategy and versight executin and management. These functins can either be entrusted t a single bdy r spread ver separate bdies. 23. In many jurisdictins, the crprate bdy respnsible fr versight and verall strategy and plicy is the bard f directrs (the bard ). Other names fr the bard include the statutry bard, external bard, supervisry bard, administrative bard, r bard f gvernrs r verseers. 24. The bard relies n the bdy respnsible fr executing decisins made by the bard and fr managing the insurer n a day-t-day basis. In this paper this bdy is referred t as senir management. It is als knwn as the executive bard r executive cmmittee. 25. General crprate gvernance principles have a special applicatin t insurers because f the nature f their business and the special respnsibilities t plicyhlders and sciety as a whle. One-tier and tw-tier bards 26. Members f the bard are smetimes referred t as directrs. In sme jurisdictins an insurer s bard includes bth: inside directrs, ften referred t as "executive directrs", are managers and emplyees f the insurer utside directrs, smetimes referred t as external directrs r nnexecutive directrs, are independent r disinterested bard members. The latter are nrmally nt emplyees, wners r ther direct stakehlders in the insurer. In rder t prmte the independence f decisin making f the bard, utside directrs are independent f nt just the insurer but the grup t which the insurer belngs. 27. One-tier bards typically have verall respnsibility fr the insurer but are allwed, by law, t delegate the managing f the insurer t a designated president r chief executive fficer (CEO) r t a cllective f managers. 28. In sme jurisdictins insurers are required by general cmpany law r ther regulatin t spread the bard functin ver tw frmal bdies usually called a supervisry bard and a management bard. This bard structure is called a tw-tier system. In a tw-tier system the supervisry bard is respnsible fr verall strategy and versight whilst executin and management is carried ut by a management bard whse chairman smetimes is als referred t as CEO. Where pwers, duties, qualificatins, independence and respnsibilities f the bard are cncerned in this issues paper these features may apply t ne r bth bdies depending n the relevant subject (eg in a tw-tier system nly the supervisry bard may frm bard cmmittees and its members are drawn frm this bdy). 29. In recent years, these tw appraches have trended twards ne anther. Fr example, legislatin has been intrduced in jurisdictins with ne-tier bards prhibiting inside r executive directrs r limiting their number. Other jurisdictins with supervisry bards have changed the law t give these bards mre strategic respnsibilities. Issues Paper n Crprate Gvernance Page 12 f 64
Pwers, duties and respnsibilities 30. The exact rle f the bard is determined by the pwers, duties, and respnsibilities delegated t it r cnferred upn it by law r regulatin. These matters are typically specified in the insurer s by-laws and rganisatinal rules. Usually the insurer s by-laws specify the number f members f the bard, hw they are t be chsen, the frequency and mde f meeting and hw decisins are t be made. The bylaws primarily cntain what is prescribed in legislatin. The insurer s rganisatinal rules further specify the rles and respnsibilities f the bard, senir management and ther crprate bdies and functins. 31. Directrs must be individuals, in mst cases elected by the wners r sharehlders (r, in the case f mutuals, member-plicyhlders) f the insurer. In ther cases, directrs may be appinted. Typically the bard chses ne f its members t be the chair. 32. Members f the bard have a duty t act in gd faith and exercise their pwers in the best interest f plicyhlders, sharehlders and the insurer as a whle, in cmpliance with the law. Directrs may nt allw their wn persnal interests t cme befre r cnflict with the interest f the insurer. This is discussed in mre detail later under Cnflicts f duty r interest. 33. The legal respnsibilities f bards and bard members vary with the nature f the insurer and with the jurisdictin in which it is incrprated r perates. Fr publicly listed cmpanies, these respnsibilities are ften mre rigrus and cmplex due t specific additinal gvernance cdes r requirements, and include cntinuus reprting bligatins. The wnership structure f the insurer als has implicatins fr directr appintments, directr independence, and the peratin f bard cmmittees. Qualificatins f bard members 34. Tday s bards need t understand cmplex issues related t insurance business, actuarial science, accunting, law, cmputer mdels and management cmpensatin. The recent financial market crisis has highlighted the need t have gd quality bard members with integrity, relevant knwledge and expertise. The quality f individuals and their behaviur, as well as effective verall grup dynamics f the bard, are as imprtant t gd gvernance as having apprpriate structures and practices in place. Insurers place cnsiderable emphasis n recruiting suitable bard members frm as large a pl as necessary t ensure bard members are apprpriately qualified t undertake their rle. In additin, nging training f thse wh are appinted is gd practice. See als the sectin n Functins f the bard f directrs belw. Independence 35. Bard members are expected t exercise bjective, independent judgement in the affairs f the insurer. The gvernance structure can, in additin t ther pssible measures (see Cnflict f duty r interest and Qualificatins f bard members, belw), serve t supprt independent decisin making by the bard and reduce the risk f cnflicts f interest. Specifically, prmting the independence f certain elements f the gvernance structure may enhance the verall system f insurer gvernance. 36. Ensuring that there are a sufficient number f utside directrs (ie, nn-executive and independent f the insurer and f the grup t which the insurer belngs r f cntrlling sharehlders) n the bard cntributes t its independence. Recruiting a Issues Paper n Crprate Gvernance Page 13 f 64
sufficient number f apprpriately qualified individuals, wh are als independent, can be an issue in sme cases. Outside directrs are particularly imprtant fr bard cmmittees dealing with issues where cnflicts f interest are mst likely t arise (eg, financial and nn-financial reprting, reviewing intra-grup transactins, nminatins f bard members and senir management and remuneratin). 37. In additin, the bard may separate the psitins f the chair f the bard f directrs and the chief executive fficer, and undertake ther measures t establish a clear separatin f duties between the bard and management. 38. Clear, specific criteria may als be develped t define mre precisely an utside r independent directr. Additinally, regulatin may set ut a definitin f independence and requirements t prmte independence within the gvernance structure; fr instance, audit cmmittees may be required t be cmpsed entirely f utside bard members. In the case f mutuals and cperatives, merely being a plicyhlder des nt prevent a bard member frm being independent. 39. A bard renewal plicy may help t ensure that the bard remains pen t new ideas and maintains independent thinking, while retaining adequate expertise. Delegatin f pwers 40. Sund gvernance requires a bard t clearly define its decisin making prcesses and delegatin f pwers. The definitin is smetimes fund in legislatin r the by-laws but mre cmmnly in internal prcedures. The delegatin f pwers defines the rles and respnsibilities f each crprate bdy r functin, including the cntrl functins such as risk management, internal audit, cmpliance and thers. It can als describe tasks delegated t cmmittees f the bard. 41. It shuld be nted that even if sme duties are delegated, the bard is still ultimately respnsible fr the success r failure f the insurer. Thus bard members need t ensure that they have regular and rbust interactin with management and with the cntrl functins and recgnise it is part f their duty t practively request infrmatin and questin and challenge this infrmatin when necessary. Cmmittees f the bard 42. In many jurisdictins, the bard may delegate sme f its tasks t cmmittees. By allwing a small grup f bard members t fcus n and specialise in specific areas, bard efficiency can increase. Hwever, whether a bard uses cmmittees depends n many factrs, including its size. Sme jurisdictins may require the establishment f certain cmmittees (eg an audit cmmittee). Under mst legal systems, the bard retains ultimate respnsibility fr matters delegated t a cmmittee, including the right t make the final decisin. Thus cmmittees ften make recmmendatins which the full bard must apprve. 43. Members f bard cmmittees are nrmally drawn frm the full bard. The chair f the cmmittee can be selected by the full bard, by the chair f the bard r by the cmmittee members. In sme jurisdictins, emplyees are als represented in bard cmmittees, althugh certain jurisdictins discurage this practice, as they believe it increases inefficiencies. Membership in sme cmmittees may be established ex ffici under general bard prcedures. Nminatin cmmittees, where they exist, may carry Issues Paper n Crprate Gvernance Page 14 f 64
ut the respnsibility f nminating members t cmmittees. In a few cases, the general assembly has a rle in apprving nminatins t cmmittees. 44. Bard cmmittees may include any f the fllwing r any cmbinatin f the fllwing: audit cmmittee remuneratin cmmittee nminatins cmmittee ethics and/r cmpliance cmmittee risk management cmmittee investment cmmittee disclsure cmmittee gvernance cmmittee human resurce cmmittee strategic develpment cmmittee asset-liability management cmmittee a cmmittee fcused n participating plicies. 45. The survey results indicate that the establishment f an audit cmmittee is generally seen by supervisrs and insurers as being necessary fr a sund and effective system f crprate gvernance. The respnses als indicate that bth supervisry expectatins and industry practice regarding the establishment f bard cmmittees generally exceed regulatry requirements and that the establishment f cmmittees beynd thse legally mandated is seen as necessary t assist the bard in ensuring effective versight and t imprve the efficiency f gvernance. Glbalisatin, increased crss-brder insurer wnership, and a desire by insurers t meet market best practice were cited by insurers as the main reasns (besides new legal requirements) fr the establishment f new cmmittees. 46. The rle and bligatins f bard cmmittees are typically described in a cmmittee mandate, which in sme jurisdictins is made public (eg by psting it n the insurer's website). It is gd practice fr the bard t review each mandate regularly. The survey results indicate that supervisrs see the rle f bard cmmittees as enhancing versight f the insurer s gvernance and including, in sme cases, specific supervisry sign-ff r whistleblwing bligatins. By cntrast, industry respnses emphasise the rle f cmmittees in ensuring a greater and clser review f management plicies, supprting the verall wrk f the bard, and dealing with specific mandates frm the bard t g int specified matters in greater detail. Industry respnses als highlight the rle f cmmittees in enhancing the transparency f gvernance. 47. The cmmittees the bard establishes t prmte effective gvernance depends n the size, nature, cmplexity and risk prfile f the insurer, as well as lcal requirements and accepted practice. A descriptin f sme typical cmmittees is fund belw. The list is nt exclusive r ranked by pririty. Issues Paper n Crprate Gvernance Page 15 f 64
Audit cmmittee 48. Respnsibilities f the audit cmmittee may include: verseeing financial statements, financial reprting and disclsure prcesses mnitring accunting plicies and practices verseeing the audit prcess (external and internal), including reviewing the auditr s plans and material findings verseeing hiring, remval, perfrmance and independence f the external auditrs, including prhibiting r regulating the prvisin by the external auditrs f nn-audit services t the insurer (in sme jurisdictins the apprval and remval f external auditrs must be apprved by sharehlders) verseeing the hiring, remval, perfrmance and independence f the internal audit functin reviewing intra-grup transactins if there is n separate cmmittee fr functins such as cmpliance, risk management, gvernance r internal cntrls: versight f gvernance, regulatry cmpliance, ethics and prcesses fr the reprting f ptential breaches r vilatins (including whistleblwer htlines, etc.) versight f risk management and internal cntrl prcesses. Remuneratin cmmittee 49. Respnsibilities f the remuneratin cmmittee may include: prpsing a remuneratin apprach and related plicies fr the insurer usually cvering: remuneratin plicy remuneratin gvernance and structure, including the apprval plicy fr the level and cmpsitin f cmpensatin cmpnents f cmpensatin, such as the amunt f the fixed remuneratin, shares r ptins, ther variable remuneratin, pensin rights, redundancy pay and ther frms f cmpensatin and benefits, as well as the perfrmance criteria and their applicatin preparing a remuneratin reprt r ther required r vluntary disclsures n cmpensatin practices reviewing and making recmmendatins regarding the specific remuneratin f bard members, the chief executive fficer, members f senir management and smetimes f ther high earners (even if they are nt members f senir management). Increasingly the remuneratin cmmittee (r the audit cmmittee) als apprves r prvides versight fr the cmpensatin f cntrl functins, such as the internal auditr ensuring that the remuneratin apprach is cnsistent with perfrmance and the risk management framewrk f the insurer Issues Paper n Crprate Gvernance Page 16 f 64
Nminatins cmmittee 50. Respnsibilities f the nminatins cmmittee may include: implementing the bard s plicy n bard renewal s that the bard individually and cllectively cntinues t maintain target skill levels and independence making recmmendatins t the bard with regard t the nminatin fr appintment r reappintment f members f the bard cnsistent with apprpriate criteria established in their prfiles and any successin plan ensuring prper rientatin f bard members in respect f their respnsibilities and cmpleting jb descriptins and respnsibilities fr each bard member establishing a mechanism fr the frmal assessment f the effectiveness f the bard as a whle as well as the cntributins f individual members making recmmendatins t the bard fr dismissal and retirement f members f the bard and senir management making recmmendatins t the bard with respect t successin planning fr the chief executive fficer and ther members f senir management and with respect t management develpment principles making recmmendatins t the bard n nminatins f members fr bard cmmittees reviewing the management develpment status and successin plans fr key psitins, as well as general talent management f the insurer (als see the sectin, Bard accuntability fr management, belw) ensuring that all directrs receive apprpriate nging training as required fr them t fulfil their rle requirements. Ethics and/r Cmpliance cmmittee 51. Respnsibilities f this type f cmmittee (r, where ethics matters are dealt with separately frm cmpliance, as separate cmmittees) may include: mnitring the cmpliance functin and the insurer s risk prfile in respect f cmpliance with external laws and regulatins and internal plicies, including the insurer s cde f ethics r cnduct receiving reprts n the abve and n practive cmpliance activities aimed at increasing the insurer s ability t meet its legal and ethical bligatins (such as cmmunicatins and training f the bard, senir management and ther emplyees n cmpliance), as well as reprts n identified weaknesses, lapses, breaches r vilatins and the cntrls and ther measures in place t help detect and address the same supervising and mnitring matters reprted using the insurer s whistleblwing r ther cnfidential mechanisms fr emplyees and thers t reprt ethical and cmpliance cncerns r ptential breaches r vilatins advising the bard n the effect f the abve n the insurer s cnduct f business and helping the bard set the crrect tne at the tp by cmmunicating, r supprting the cmmunicatin, thrughut the insurer f the imprtance f ethics and cmpliance Issues Paper n Crprate Gvernance Page 17 f 64
apprving cmpliance prgrammes, reviewing their effectiveness n a regular basis and signing ff n any material cmpliance issues r matters. Grups and cnglmerates 4 52. The gvernance structure f an insurer will be influenced by whether r nt it is a part f an insurance grup r a larger financial cnglmerate. Insurers that are a part f a financial grup are likely t be subject t gvernance plicies and practices that are established at the grup level and implemented unifrmly acrss the grup. Insurers belnging t a grup seek ways t maintain cnsistency in plicies and practices acrss the entities in the grup in rder t reinfrce cnsistent practices and cntrls acrss the grup. 53. That said, the gvernance practices f insurers within a grup may differ. Fr instance, different bligatins may apply t bard members f a specific insurer, including requirements fr independent decisin making and cntrl f the insurer. Als, an insurer s bard will need t cnsider the apprpriateness f any grup gvernance practices t the business and risk prfile f the insurer. Thus, grup practices may have t be interpreted differently r amended in light f circumstances (including applicable laws and regulatin) specific t an insurer within a grup. T the extent that a grup manages itself ther than n a legal entity basis, it still needs t ensure that it des s cnsistent with the gvernance bligatins f each legal entity. Sme insurers belnging t a grup may nt have glbally unifrm gvernance practices, reflecting either a desire fr flexibility in gvernance practices r a pssible matter f wrk in prgress. Ultimately, the bard f insurers belnging t a grup remain respnsible and accuntable fr the management f the insurer. Mutuals and cperatives 54. Crprate gvernance f mutual insurers, and als t a certain extent insurers rganised as cperatives, is different in sme ways frm that f stck cmpany insurers. Hwever, the verall cncepts described in this paper apply t all insurers including mutual and cperative insurers. Mutual insurers are cllectively wned (r cntrlled) by their members; sme mutuals may als enter int business with third parties that are nt members f the mutual. Similarly, cperative insurers are cmmnly wned by a large number f plicyhlders. Mutuals are nt cmmnly managed with the prime bjective f maximising prfit. 55. With a mutual insurer having n external capital r sharehlders in the traditinal sense, each plicyhlder-member is de fact an wner in the mutual. In sme insurance mutuals, plicyhlders participate in general meetings indirectly thrugh member representatives. 56. In mutual insurers, the gvernance framewrk prtects the rights f plicyhldermembers as wners. As nted in the OECD Guidelines, members f mutual insurers are able t: 4 See als IAIS Principles n Grup-Wide Supervisin (Octber 2008), and Annex 2. Issues Paper n Crprate Gvernance Page 18 f 64
waive their interests in the mutual insurer by ending their insurance cntract, subject t the terms and cnditins f that cntract participate and vte in general meetings, whether directly r indirectly (thrugh a meeting f member representatives) btain relevant infrmatin n the mutual insurer n a timely and regular basis typically elect members f the bard apprve prpsals f the bard in respect f rebates, supplementary cntributins and the distributin f surplus earnings. 57. Effective plicyhlder participatin in the gvernance structure f the mutual insurer requires bth effective turnut and active participatin at the general meetings f member plicyhlders r representatives. The vting system in place and the right f member plicyhlders r representatives t participate in general meetings varies. Issues Paper n Crprate Gvernance Page 19 f 64
Functins f the bard f directrs Intrductin 58. With the verall respnsibility fr the insurer, the bard is legally bligated t cnduct the insurer s affairs in the interests f the insurer as a whle. Increasingly, diffuse stck wnership and mre sphisticated cnglmerate and grup structures have heightened the imprtance f effective gvernance and f the rle f the bard therein. Surce f bard functins 59. Bard functins arise frm at least fur surces: in general cmpany law and insurance regulatin, the jurisdictin f incrpratin impses statutry r rule-based requirements (pssibly clarified by case law), including minimum requirements related t bard cmpsitin and functins in cmmn law jurisdictins, cmmn law, r case law, can create certain expected bard respnsibilities, which can evlve ver time (eg, in sme jurisdictins, the duty f care has resulted in the expectatin that a bard must implement frmal internal reprting structures) sharehlders (r, in the case f mutuals, member-plicyhlders) can impse additinal duties n the bard that are enacted thrugh by-laws, rganisatinal rules r ther insurer-specific dcuments market frces can lead t the adptin f evlving best practices, whether thrugh self-regulatin r n a vluntary basis. 60. In recent years, many jurisdictins have expanded specific bard requirements, such as mandating an independent audit cmmittee. The trend twards expanding requirements is related bth t experience with crprate failures but als t the grwing cmplexity and size f grup structures and the cnvergence f best practices. Higher expectatins can als arise when public mnies are at stake, such as in the case f gvernment supprt fr the financial and ther industries which further blsters the need fr effective versight and bard accuntability. Specific bard respnsibilities Crprate gvernance 61. A primary bard functin is t articulate and cmmit t specific crprate gvernance principles. These principles shape the gvernance structure and practices f insurers. In sme jurisdictins bards rely n these principles when deciding n fundamental gvernance issues such as n what type f checks-and-balances t have in place. The bard regularly versees internal reviews and authrises external reviews f crprate gvernance principles, prcesses and utcmes. As an insurer grws and its risks evlve, it may have t clarify r revise its principles and strengthen its crprate gvernance practices. Issues Paper n Crprate Gvernance Page 20 f 64
Cde f ethics and standards f business cnduct 62. A key bard functin is t establish strategies and plicies that define ethical individual and crprate behaviur and nging, effective prcesses that ensure adherence t these strategies and plicies. The mst effective, address a brad range f tpics, are cnnected t the insurer s values and culture, and are cmmunicated clearly by senir management thrughut the rganisatin. Tpics include: bligatin t cmply with law, regulatins and the insurer s strategies and plicies cnflicts f interest decisin making guidelines where it may be legally r ethically unclear what the right decisins shuld be channels fr encuraging and facilitating emplyees raising cncerns r reprting a pssible breach f law r regulatins, with apprpriate measures t prtect against retaliatin against reprting emplyees fair treatment f plicyhlders and emplyees infrmatin sharing with stakehlders, including investrs, plicyhlders, member-plicyhlders (fr mutuals r mutual-type assciatins), emplyees, supervisrs, and ther cnsumer r rating agencies 63. A well gverned insurer develps and nurtures a crprate culture that recgnises and rewards adherence t ethical standards. The apprpriate tne at the tp helps prevent crprate misbehaviur and prtects plicyhlder and investr interests. The survey results shw that supervisrs and insurers believe that ethical standards have an impact n the gvernance f insurers. Cnflicts f duty r interest 64. Respnsible bard members avid psitins where their interests and duties wuld cnflict with duties they we t the insurer. Bard members disclse t the bard in a timely manner any ptential cnflict f interest r apparent cnflict f interest. This duty is nrmally set ut in the insurer s by-laws r rganisatinal rules alng with a descriptin f the prcess by which the bard reslves ptential cnflicts. In sme jurisdictins, cnflicts f interest can als be cnnected with implicit fiduciary duties impsed by cmmn law. Ptential cnflicts include situatins where: a bard member cnsiders accepting a bard psitin in anther cmpany an insurer enters int a transactin r makes an investment in ther cmpanies in which a bard member r a relative may have financial r ther interests an insurer hires a relative r ther persn with whm the bard member has a clse cnnectin. 65. A further ptential cnflict fr stckhlder cmpanies, is the cmpeting interests f sharehlders, plicyhlders and management. T help address this sme jurisdictins impse a duty n the bard t cnsider r act in the interests f plicyhlders r prspective plicyhlders, r issue nn-binding guidance t this effect. In mutual (and t a certain extent in cperative) insurers, cnflict between plicyhlders and sharehlders is nt relevant as mutuals d nt have sharehlders and are wned/cntrlled by their plicyhlders. Issues Paper n Crprate Gvernance Page 21 f 64
66. Freign-wned insurers that are whlly r majrity wned can experience ptential cnflicts between the interests f the parent (and wider grup) and the lcal insurer. While cntrlling sharehlders can bring beneficial resurces and expertise, it is imprtant that such wnership structures d nt impede sund lcal crprate gvernance. Fr instance, the lcal bard may place t much reliance n the parent s risk management scrutiny, rather than exercising its wn scrutiny. Where matrix management is practised by the parent (and wider grup), it can prmte accuntability t the grup but may limit senir management accuntability t the lcal bard. 67. Intra-grup transactins and/r the existence f cntrlling sharehlders may present challenging ptential cnflicts f interests fr bards. The survey shwed that supervisrs cnsider these factrs t be imprtant in terms f their impact n the gvernance structure f insurers. 68. Pssible actins t address ptential cnflicts f interest include bard-level review f key transactins, public disclsure f cnflicts f interest, specific regulatry requirements (including supervisry review) t manage and cntrl these cnflicts and prper internal plicies and prcedures. The general assembly f sharehlders (r, in the case f mutuals, member-plicyhlders) might als have a rle in terms f apprvals r in terms f being infrmed. Strategies and plicies 69. Anther imprtant functin f the bard is t set and versee the implementatin f the insurer s strategies and plicies. The written strategies and plicies are subject t prir apprval by the bard. Thus the relevant strategies and plicies are ideally apprved befre an insurer intrduces new risks r prducts. They are reviewed at least annually and adapted in view f any significant change in the internal r external envirnment. 70. Key decisin areas t be cvered by strategies and plicies nrmally include: strategic directin and marketplace psitining risk appetite (eg, insurance, credit, market, and ther risks) and risk prfile chice f insurance lines and ther business activities and the intrductin f new prducts, alng with pssible repercussins f new business prpsitins pricing, underwriting, prvisining and reinsurance cver investments and asset-liability management mergers, acquisitins and strategic alliances chice f crprate structure (eg, benefits and risks assciated with demutualisatin, ging public r the creatin f a hlding cmpany) utsurcing funding and financing strategies annual budget verall gvernance strategies and plicies (including bard renewal, risk management, internal cntrls, audit, actuarial, cnflicts f interest and intragrup transactins and cmpliance) Issues Paper n Crprate Gvernance Page 22 f 64
remuneratin the assessment f verall slvency needs 71. Strategies and plicies decided upn by the bard may als address such areas as disclsures, utsurcing, business cntinuity planning, reputatinal risk, cmplaints and claims handling, and dividends and plicy bnuses. Bard cmmittees can als play a rle in mnitring and reviewing bard plicies, including their implementatin. 72. Senir management is respnsible fr implementing and mnitring bard strategies and plicies within the insurers peratins and planning, cnducting, and cntrlling the day-t-day activities f the insurer. Senir management has an imprtant rle t play in mapping the risks faced by the insurer and prperly managing these risks, and develping ethical behaviurs and prfessinal cnduct and leading by example. Senir management prmptly identifies issues and events and brings them t the attentin f the bard. In practice, senir management may als assist in the develpment f strategies and plicies fr review and apprval by the bard. 73. T evaluate and guide business strategy prperly, a bard establishes and mnitrs perfrmance bjectives fr the insurer and fr senir management. The bard als reviews these perfrmance bjectives, and any related remuneratin, t ensure that they are in line with the insurer s lng-term interests. 74. Staff members are trained in the strategies, plicies and prcedures relevant fr their areas f respnsibility and instructed t take them int accunt in their daily wrk. Internal reprting system 75. Effective bard decisin-making and mnitring f senir management depends upn the quality and timeliness f the infrmatin received by the bard and its cmmittees. The frmal prcess by which the bard receives regular infrmatin and analysis f the insurer and requests and receives additinal infrmatin when necessary is knwn as the internal reprting system. An infrmed bard will have a reliable and cmprehensive internal reprting system in place and makes effective use f it.. The bard regularly evaluates the system and makes crrectins as apprpriate. These crrectins are essential given that the bard, n matter hw independent, is in many ways dependent n the insurer s internal reprting system. It is the bard s duty t request any infrmatin nt prvided in the insurer s internal reprting which it deems necessary t carry ut its respnsibilities. Externally generated reprts, such as the reprt f the external auditr, prvides imprtant infrmatin fr the bard. The bard may seek independent external advice t enhance its decisin making and mnitring. 76. Well gverned insurers develp internal reprting systems that include infrmatin n all risks t which the insurer is expsed at all levels, in an apprpriate frmat. This may include such infrmatin at the grup and parent cmpany level and the level f ther perating cmpanies and subsidiaries. Internal reprting als includes reprting against strategies and plicies. The bard reviews this infrmatin n a regular basis. Senir management may attend meetings f the bard r f bard cmmittees in rder t prvide further reprting. In additin, bard members may seek direct access t management and staff. 77. The recent financial crisis has highlighted that the essential value f an internal reprting system depends nt nly n what is reprted but als n the extent the bard takes accunt f such infrmatin and understands it. It als depends, in large part, n the bard s independence and willingness t use and challenge such infrmatin t Issues Paper n Crprate Gvernance Page 23 f 64