1. Corporate Governance and Principle-Based Reserves: Applying the Basics
American Council of Life Insurers – July 23, 2009
Christopher J. Ray Debevoise & Plimpton LLP1
1 Copyright Debevoise & Plimpton LLP The author is an associate of Debevoise & Plimpton LLP. The views expressed herein are those of the author and are not intended to express the views of Debevoise & Plimpton LLP.
The slides appearing in this presentation provide summary information only and are not intended as legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

2. Introduction
The National Association of Insurance Commissioners (NAIC) has initiated an effort to clarify how corporate governance standards will apply in the context Principle-Based Reserves (PBR).
Specific corporate governance guidelines under PBR are still in flux, as the NAIC revises draft language of the Governance section of the Valuation Manual (Section VM-G).
This presentation will attempt to place the current PBR corporate governance guidelines and discussion in the context of the broader duties of a board of directors.
The general duties and protections of directors remain the same under PBR.

3. Table of Contents General Duties of Directors
Key Practices of and Protections for Directors in Discharging their Duties
NAIC Guidance on the Application of Existing Duties in the Context of Principle-Based Reserves

4. A Director’s Basic Duties
Generally, a corporation’s board of directors is responsible for oversight of the corporation’s affairs and management.
A director’s basic duties are:
The Duty of Loyalty, and
The Duty of Care.
Duties of good faith and of oversight may be considered as derivative of or as separate from (though intertwined with) the duties of loyalty and of care.

5. The Duty of Loyalty The duty of loyalty includes:
An affirmative duty to protect the interests of the corporation, and
An obligation to refrain from conduct that would injure the corporation and its stockholders (or, in the case of a mutual insurer, the insurance company and its members) or deprive them of profit or advantage.
Under this duty, transactions in which one or more directors have a conflict of interest may be subject to an “entire fairness” analysis of their terms, including procedural fairness and substantive fairness.

6. The Duty of Care
In general, the duty of care requires directors to act using that degree of care that ordinarily prudent persons would use in similar circumstances, and consider all material information reasonably available in making business decisions.
In some jurisdictions (e.g., Delaware), the duty is a creature of case law.
In other jurisdictions (e.g., New York), it is codified in statutes ( “A director shall perform his duties as a director…with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances.” New York BCL § 717.).

7. Other Potential Duties of Directors
Developments of the past several years indicate an emerging duty of oversight, heightening the importance of having a sound process for informed, disinterested decision-making by directors.
Some courts (e.g., In re The Walt Disney Co., 906 A.2d 27 (Del. 2006)) have also discussed a duty of good faith as a duty that is separate from, though related to, the duty of loyalty.

8. Table of Contents General Duties of Directors
Key Practices of and Protections for Directors in Discharging their Duties
NAIC Guidance on the Application of Existing Duties in the Context of Principle-Based Reserves

9. Key Corporate Governance Practices
In general, in discharging their duties, directors should:
Focus on and decide on important matters,
Identify and minimize conflicts of interest,
Act with care and on an informed basis, and
Rely on experts when appropriate.

10. The Business Judgment Rule
The business judgment rule has been developed by courts to protect directors from judicial review of their decisions after the fact.
In general, the business judgment rule establishes a presumption that directors have acted in conformity with their fiduciary duties if they:
act in good faith,
without a personal interest in the matter before them that conflicts with the interests of the company, and
on a basis of being adequately informed, including consideration of information and advice from officers and professionals they consider worthy of reliance.

11. Reliance on Experts
Directors may, in general, rely on the advice and opinions of experts (e.g., board committees, senior management, accountants, lawyers, consultants) in discharging their duties.
In New York, for example, the BCL states that a director performing his or her duties “shall be entitled to rely on information, opinions, reports or statements…prepared or presented by…officers or employees…whom the director believes to be reliable and competent in the matters presented, …counsel, public accountants or other persons as to matters which the director believes to be within such person’s professional or expert competence, or…a committee of the board…as to matters within its designated authority, which committee the director believes to merit confidence, so long as in so relying he shall be acting in good faith and with such degree of care, but he shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause such reliance to be unwarranted.” New York BCL § 717(a).

12. Table of Contents General Duties of Directors
Key Practices of and Protections for Directors in Discharging their Duties
NAIC Guidance on the Application of Existing Duties in the Context of Principle-Based Reserves

13. Role of PBR Governance Guidance
The July 14 exposure draft of the governance section of the Valuation Manual (Section VM-G):
States that it does not “expand…the existing legal duties of a company’s board of directors, senior management and appointed actuary…or qualified actuaries,” but
Indicates that it is intended “to emphasize and clarify how their duties apply to the principle-based reserves actuarial valuation function of an insurance company or group of insurance companies.”

14. Section VM-G Guidance for Directors
Just as directors in general are responsible for overseeing a corporation’s affairs, the July 14 exposure draft of Section VM-G notes that directors are responsible for “general oversight” of the PBR actuarial function that is “[c]ommensurate with the materiality of principle-based reserves in relationship to the overall risks borne by the insurance company.” This includes overseeing:
The process taken by senior management to correct material weaknesses in internal controls,
That the infrastructure to implement and oversee PBR is in place, and
The documentation of “review and action undertaken by the board” relating to PBR in the minutes of the board’s meetings.

15. Ability for Directors to Rely on Experts
The July 14 exposure draft of Section VM-G implies that the board may rely on experts (e.g. senior management and the appointed actuary or qualified actuaries) in performing its duties. Specifically, the exposure draft notes that its guidance for a board of directors is “consistent with [the board’s] oversight role,” and that, under its guidance, the board:
“[R]eceives and reviews reports” and “interacts with senior management to resolve questions and collect additional information as needed,” and
“[D]etermines what additional steps or direction, if any, are necessary to rely on the principle-based reserving and the valuation function established by senior management.”

16. Section VM-G Guidance for Senior Management
The July 14 exposure draft of Section VM-G notes that senior management has the roles of:
Direct oversight of the actuarial function (including by ensuring that adequate infrastructure has been established, reviewing PBR elements and results, and addressing significant or unusual issues),
Adoption of internal controls,
Determining that resources are adequate,
Overseeing various processes and review procedures, and
Communicating on certain matters to the board.

17. Section VM-G Guidance for the Qualified Actuary or Actuaries
The July 14 exposure draft of Section VM-G notes that one or more qualified actuaries have the roles of:
Overseeing the PBR calculation,
Reviewing assumptions, methods and models,
Providing a summary report to senior management and the board and an opinion on the adequacy of company statutory reserves, and
Cooperating and working with internal and external auditors, regulators and senior management.

18. Conclusions
Under the July 14 exposure draft of Section VM-G, directors will have the same basic governance duties as they do today.
Directors must oversee senior management, which in turn must oversee the appointed actuary or other qualified actuaries.
Boards should establish procedures for explicit compliance with the guidance of Section VM-G, as evidence of effective oversight.
The directors can conduct themselves with protection of the business judgment rule.
Directors:
May continue to rely on experts as appropriate, consistent with the Section VM-G guidelines,
Need not themselves act as actuaries, and
Are not generally expected to step into senior management’s shoes.

19. Corporate Governance and Principle-Based Reserves: Applying the Basics
American Council of Life Insurers – July 23, 2009
Christopher J. Ray Debevoise & Plimpton LLP1
1 Copyright Debevoise & Plimpton LLP The author is an associate of Debevoise & Plimpton LLP. The views expressed herein are those of the author and are not intended to express the views of Debevoise & Plimpton LLP.
The slides appearing in this presentation provide summary information only and are not intended as legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.