 Finance & Investment Conference June 2003 The Caledonian Hilton Hotel, Edinburgh Challenges to Best Practice in Corporate Governance in Life Offices Graham Cottingham, Brian Morrissey

Agenda n Introduction n Emerging themes n Life office challenges n Value? n Discussion

Introduction n High profile failures n Emotional response - legislation… … but failures arose through illegal acts n What about corporate culture and trust? n Separation of ownership and control n Actuaries responsible for both n Wider opportunities to apply actuarial skills for the improvement of corporate governance

Emerging Themes n Regulatory focus on management and internal control: n senior management “a regulatory regime built on senior management responsibilities is absolutely essential…expect the CEO to ensure that there is a risk management structure and a control framework throughout the business which ought to identify aberrant behaviour, or at least prevent it going on unchecked for any length of time” (Howard Davies) n managers more generally requirement for supervisors to have direct access to the Board, and “that they present to the Board their own unvarnished views of the risks the firm is running, and of how good the control systems are by comparison with the best of breed in their sector” (Howard Davies)

Emerging Themes n Regulatory focus on management and internal control n Executive reward “overreaching [into shareholders pockets] has become common but few hands have been slapped … when the compensation committee reports on a mega-grant of options to the CEO, it would be like belching at the dinner table for a director to suggest that the committee reconsider.” (Warren Buffet)

Emerging Themes n Regulatory focus on management and internal control n Executive reward n Shareholder activism n Quality of (independent) directors

Life office challenges n With profits nTransparency and disclosure n Current and anticipated returns and bonus levels n Disclosure of Asset Share Values n Relative positions of surrender values, ASVs and maturity values n Mis-selling n Shortfalls n Equitable Life n Defined benefit pension scheme shortfalls n International inconsistencies in governance standards

Life office challenges n CP 167 “this package of measures will shine a searchlight into life insurers' boardrooms… show how discretion is exercised in with-profits funds and ensure that boards and senior management are accountable not only for the decisions they take but also for ensuring that they obtain actuarial advice where appropriate… demonstrate that they have given proper attention to policyholders' interests.” (John Tiner)

Life office challenges n CP 167 n Appointed actuary - RIP, long live the “actuarial function”! n Board responsibility for statutory figures n With profits committee n Principles and Practices of Financial Management (PPFM) n Extended scope of regulatory returns audit expected n Obscurity of insurance accounting n Absorbing and responding to legion of reports, codes, regulations, laws, accounting standards…UK, EU...

Life office challenges n Ownership and control n Policyholders n Shareholders n Other stakeholders n Management n Inadequate ability for policyholders to use “voice” rather than “exit”

The Value of Good Corporate Governance n Reputation n Capital Markets exposure n Empirical research into the value of best practice n11-16% outperformance in UK and US companies nClear evidence of long term reward strategies adding value n Data sources nDJSI nFTSE4Good nHCI n Reservations nImpact of market falls? nGreater integration of different governance measures

The Role of the Actuarial Profession n Influence n Responsibility n Qualifications and experience n Are YOU up to the challenge?

Discussion n Should the provision of greater voice be provided to policyholders? If so, how? n What are the barriers to transparency and disclosure? n Who should be driving change? n What are your main corporate governance concerns?

Corporate Governance Working Party n There are many ways in which the Actuarial profession can make a positive contribution to improving Corporate Governance. n The Corporate Governance Working Party was established last year to encourage research and discussion. n New members are welcome - there is no shortage of subject matter!