Presentation on theme: "Corporate Governance in a Group Context"— Presentation transcript:
1 Corporate Governance in a Group Context Regional Seminar on Supervision of Insurance GroupsSantiago, Chile, November 2013Gunilla Löfvendahl Senior Financial Sector Specialist
2 ICP 7 Corporate Governance The supervisor requires insurers to establish and implement a corporate governance framework, which provides for sound and prudent management and oversight of the insurer’s business, and adequately recognises and protects the interests of the policyholders.
3 Why is it important? Exposure to risk Decreases the risk of unexpected lossesCreate efficiency and value on a micro and macro levelCompetitive marketsGoals and objectivesReputation – legal entity and groupInter-linkagesRisk of contagion and damage to others’ reputationCustomer claimsConfidence in the ability to meet future obligationsComplianceFacilitates compliance with detailed and complex requirementsSupervisory focus on management and governance aspects promote prevention and early detection of problems
4 Key notions and functions ResponsibilityAccountabilitySeparation of duties and checks and balancesCompliance with rules and corporate disciplineManagement of riskIndependenceKnowledgeTransparencyBoards of directorsSenior managementRisk management and CROInternal audit and controlCompliance and actuarial functions
5 Building-blocks of sound standards and practices Clear lines of responsibility and accountabilityStrategic objectives and corporate valuesQuality, awareness, knowledge and independence of board membersQuality and duties of senior managementTransparent and manageable structuresRisk management, internal audit andother internal control functionsProper compensation policyDisclosure of information and market discipline
6 Clear lines of responsibility and accountability Define authorities and key responsibilities for board of directors and senior management – create an accountability hierarchy for the staffUltimate responsibility stays with the boardDifferent responsibilities often requires different persons (conflicts of interest and accountability)Good practice to have a separation between the Chair of the Board and CEOHow does the accountability hierarchy work for insurers being part of a group?What about the responsibilities of the shareholders and the accountability towards them?
7 Available accountability models Several models of the accountability hierarchy are available but there are two main key functionsOverall strategy and oversightExecution and managementOne-tier system with board and senior managementTwo-tier system with Executive and Oversight Board, where the latter consists of independent members (not employees, owners or other stakeholders)Committees of the board with different responsibilities (audit, remuneration, compliance, investment, risk management, etc)Elaborate systems of control can make decision-making more complicated, time consuming and expensiveCould also provide a pseudo-comfort about risk – many risks are uncertain and do not fit easily into control frameworks
8 Strategic objectives and corporate values Well articulated corporate strategy that is implementedShould include risk strategy and appetite in line with the long term interests and viabilityCorporate climate that prevents corruption and fraud (start from the top)Interests of key stakeholders to be safeguardedSystem to avoid conflicts of interestControlled lending and other forms of self-dealing, including related parties and other favoured partiesWhat about lending and other financial support within the group?
9 Quality, awareness, independence and knowledge of board members Understand oversight role and duty of loyalty (fiduciary duty to policyholders)Provide objective advice and recommend sound practicesIndependent – what does that mean in reality?Adequate knowledge and experience relevant to (each of) the material financial activities – see also ICP 5 Suitability of PersonsPower and structure to question management (information and standing)Conflict between knowledge and independence?Independence of board members in a subsidiary and knowledge of those in the parent company?
10 Structure and governance of the board Appropriate number and mix of individuals to ensure an overall adequate level of knowledge and skills that is commensurate to nature scale and complexityAvoid conflicts of interest (sufficient number of non-executives)Power and structure to question management (information, size, frequency, standing, evaluation etc)Appropriate internal practices to support the work of the board to promote efficient and independent judgement and decision-makingAdequate powers and resources to discharge its dutiesRobust enough to deal with crisis situationsMeet regularly with senior management and internal auditAssess own performance and take corrective actions
11 How to further improve board practices? Any ideas?
12 Quality and duties of senior management Carry out day-to-day operations in line with strategies, policies and procedures - necessary knowledge and experienceOversight duties consistent with board policy - exercise control over key employeesInvolved in key decisions (should be made by more than one person)Not too involved in business-line decisions -policy defining the limits and responsibilitiesPromote culture of sound risk management, compliance and fair treatment of customersProvide timely and relevant informationBoardSupervisorRelevant stakeholders
13 Transparent and manageable structures Board and senior management should know and understand the operational structure of the company/group, including SPVs and other special arrangementsAlso when operating in other jurisdictions - ensure that risks are assessed and managed appropriately and that local rules are followedToo big to fail? To big to manage?Supervisory tools: impose better structures or add requirements (capital add-ons, living wills/resolution)
14 Proper compensation policy A system of incentives that rewards excessive risk taking is like paying smart people to do stupid thingsActive board involvement in the design and operation of the compensation system – arm’s-length negotiations and decisionsCreate the right incentives and being consistent withEthical valuesLong-term objectives and strategy of the company (two-sided and only once the performance has been realised)Prudent risk-takingAppropriate mix of fixed and variable components, also based on non-financial criteria as appropriateEstablished through an explicit governance process with roles and responsibilities clearly definedSubject to shareholders approval at the annual meetingAlso supervisory process?
15 ICP 8 Risk Management and Internal Control The supervisor requires an insurer to have as part of its overall corporate governance framework, effective systems of risk management and internal controls, including effective functions for risk management, compliance, actuarial matters and internal audit
16 Risk managementEffective risk management is to ensure that risks are understood, managed and communicatedRisk should be linked to strategy - board has an oversight roleRisk managers should be an essential part in the implementation of the strategy (risk tolerance, appetite etc)Independent risk management function, including CRO or equivalent, with sufficient authority, stature and resources – ideally reporting directly to boardImplications for companies belonging to a group?Centralised and decentralised structures – outsourcing and cost-sharingConsistent or individual risk modelling – large exposuresInternal reinsurance and other risk transfers
17 Internal audit and other internal control systems Assist the board and senior management in the fulfilment of their respective responsibilities - consistent with strategy and risk appetiteAt a minimum provide assurance overKey business and ITFinancial polices and procedures (accounting, financial reporting)Risk management and compliance measures in placeProvide expertise, leadership, objectivity and independence (avoid conflicts of interest)Communicate on own initiative with any employee, and have unrestricted access to senior management as well as business and support areasRemuneration: Head of internal audit set by the boardDisciplining and dismissal: Head of a control function approved by the boardPerformance of the control functions assessed by the boardExternal audit to verify internal controls - board to oversee the process for hiring, removing and assessing their performanceUse findings timely and effectively and correct problems identified by internal/external auditorsUse auditors as independent check of information from management – meet with Chair of Board and Audit Committee without management presentRegular meetings between board and external auditorsDirect reporting to the board or Audit Committee
18 Compliance functionAssist the insurer in meeting its legal and regulatory obligations and promote and sustain an ethical corporate culture of compliance and integrityWell positioned, resourced and authorised function – led by Chief Compliance Officer or similarIdentify and address key legal and regulatory obligationsKeep senior management informed on developmentsEducate staff on compliance issuesPro-active identification of compliance risk (new business etc)Report to the board on performance against compliance standards and goalsEnsure that adequate disciplinary actions are taken and relevant authorities are informed
19 Actuarial functionEvaluate and provide advice to the insurer regarding technical provisions, premium and pricing activities, and compliance with related statutory and regulatory requirementsReport to the board on circumstances that may have a material effect from an actuarial perspective (adequacy of technical provisions, prospective solvency position etc)Evaluate and provide advice on the distribution of policy dividends or other benefits, underwriting policies, reinsurance arrangements, sufficiency and quality of data, and risk modelling in ORSA/use of internal modellingAppointed actuary providing certified actuarial opinions could be requiredShould not hold positions within or outside that may create conflicts of interestResignation or replacement should be notified to the supervisor
20 Supervisory tools and market discipline Risk- and principles-based supervisory methodology – why?Supervisory assessment of if effective and implemented – company needs to demonstrate the adequacy and effectiveness – what are the supervisory challenges?Initial and on-going assessment of suitability (licensing, reporting and on-site)On-going assessment of boardroom performance:Minutes of board: Information provided and discussedMinutes of board committees, where relevantQuality of audit and control functions – appropriate supervisory skills and resources, including in risk management and actuarial mattersReports of internal auditors to be discussed with audit staff and staff in affected areasReports of external auditorsInformation from external auditors to supervisors without prior consent of insurers – possibility to require further auditors or replacement of one chosen by an insurerFollow-up on important changes in companies (eg the CRO is leaving)Effects of group structures and how they are being managed and controlled (management structure could differ from legal entity structure)Where material deficiencies have been found - require effective and timely remedial action by the boardExamples of more informal tools that could be useful?Disclosure and market disciplineMaterial risksGovernance, including remunerationRisk management and internal control