corporate governance & insurance

8/3/2019 Corporate Governance & Insurance

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Corporate Governance &

Insurance

SIBM Bangalore


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TheThe GlobalisationGlobalisation of Standardsof Standards

The rationale & the broad strategy

IMF,World Bank,OECD,Commonwealth,

BCBS,IAIS

The moves fro generic to specific the early

arguments of ACG

All assume market economy benefits andmostly the outsider model


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2005 YRK Reddy 3

A Good SituationA Good Situation

Research

Analysis/

Media/

Ratings/markets for

control

Activisim/

Transparency/

Accountability/equitable rights

Shareholder Meetings & Vote

Board, supervision, meetings & Vote

Management Reportings


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1Reputational agents referto private sectoragents, self-regulating bodies, the media, and civic society that reduce

information asymmetry, improve the monitoring offirms, and shed light on opportunistic behaviour

External

Private

Reputational agents1

yAccounts

yLawyers

yCredit Rating

yInvestment Bankers

yFinancial media

yInvestment advisors

yResearch

y

Corporate GovernanceAnalysis

Markets

yCompetitivefactorand

product marketsyForeign direct investment

yCorporatecontrol

Standards

(forexample, accounting and

auditing)

Laws and

regulations

Regulatory

FinancialSector

yDebt

yEquity

Shareholders

Board ofDirectors

Management

Corefunctions

Reports to

Appointsand

monitors

Operates

Internal

Stakeholders

Modern corporations are disciplined byModern corporations are disciplined by

internal and externalfactorsinternal and externalfactors(Sou

rce:Co

rpo

rate

Gover

nance

Fram

ewo

rk, Nad

ereh Cham

lou, Magdi Iskand

e, Wo

rld Bank)


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2005 YRK Reddy 5

The Irresistible Case for CGThe Irresistible Case for CG

Korea-US Research: 160% premuim

ABN/AMRO: Best CG Rated companies had P/E ratios 20%higher

Russian study: 70,000% increase in firm value of 21companies

Deutsche Bank: S&P 500: 19% out-performance.

Harvard / Wharton: abnormal returns of 8.5%

Cheaper debt: Romania`s BCR Operations too: better ROE; EVA


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The Country Analysis in ScorecardThe Country Analysis in Scorecard FourFour

Critical FactorsCritical Factors

Legal InfrastructureLegal Infrastructure

RegulationRegulation Information InfrastructureInformation Infrastructure

Market InfrastructureMarket Infrastructure


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The Special Case of Insurance Industry

Opacity of financial institutions due to nature of some

contracts; deferred exchange; swift changes in risk

profiles

Illiquidity & risk of Asset liability mismatch

Informational asymmetries between policy holders &

insurers

Complex structure of principle-agent issues and

coordination problems


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The need for strong regulation and active supervision.

( fixes the informational asymmetries, market failures,

systemic risks).

Supplemented by self-regulatory initiatives by Boardsand shareholders; market discipline, legal

infrastructure etc.

A complex construct of listing agreements; company

laws; insurance laws; regulatory norms; supervisoryexpectations the great need for alignment /

harmonisation.


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2005 YRK Reddy 10

The IAIS Guidance

ICP 9 is mainly the role, responsibility of Boards andsenior management.

Integrates with other Core Principles that relate to CG:

Suitability of Persons Changes in control & Portfolio Transfers.

Internal Controls

On-site inspections

Risk Assessment & Risk Management

Information, disclosure andTransparency towards t

he market


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2005 YRK Reddy 11

Insurance Core Principles on Corporate

GovernanceEssential criteria

A) The supervisory authority requires and verifies that the insurercomplies with applicable corporate governance principles

B) Board of Directors:

1. Sets out its responsibilities in accepting and committing to thespecific corporate governance principles for its undertaking.Regulations on corporate governance should be covered ingeneral company law and/or insurance law. These regulationsshould take account of the size, nature and complexity of theinsurer.


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2. Establishes policies and strategies, the means of attaining them,and procedures for monitoring and evaluating the progresstoward them. Adherence to the policies and strategies arereviewed regularly, and at least annually.

3. Satisfies itself that the insurer is organised in a way that promotesthe effective and prudent management of the institution and theboards oversight of that management. The board of directors hasin place and monitors independent risk management functionsthat monitor the risks related to the type of business undertaken.The board of directors establishes audit functions, actuarialfunctions, strong internal controls and applicable checks and

balances.


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4. Distinguishes between the responsibilities, decision-making,interaction and cooperation of the board of directors, chairman,chief executive and senior management. The board of directorsdelegates its responsibilities and establishes decision-makingprocesses. The insurer establishes a division of responsibilities thatwill ensure a balance of power and authority, so that no oneindividual has unfettered powers of decision.

5.E

stablish

es standards of business conduct and eth

ical beh

aviour fordirectors, senior management and other personnel. These includepolicies on private transactions, self-dealing, preferential treatmentof favoured internal and external entities, covering trading lossesand other inordinate trade practices of a non-arms length nature.The insurer has an on-going, appropriate and effective process ofensuring adherence to those standards.


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6. Appoints and dismisses senior management. It establishes aremuneration policy that is reviewed periodically. This policy is

made available to th

e supervisory auth

ority.

7. Collectively ensures that the insurer complies with all relevant laws,regulations and any established codes of conduct (refer to EC f)

8. Has thorough knowledge, skills, experience and commitment tooversee the insurer effectively (refer to ICP 7).

9. Is not subject to undue influence from management or otherparties. The board of directors has access to information about theinsurer, and asks and receives additional information and analyses

that the board sees fit.


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10. Communicates with the supervisory authority as required andmeets with the supervisory authority when requested.

11. Sets out policies that address conflicts of interest, fair treatment ofcustomers and information sharing with stakeholders, and reviewsthese policies regularly (refer to ICP 25).

C) Senior Management is responsible for:

1. Overseeing the operations of the insurer and providing direction to iton a day-to-day basis, subject to the objectives and policies set outby the board of directors, as well as to legislation.

2. Providing the board of directors with recommendations, for itsreview and approval, on objectives, strategy, business plans andmajor policies that govern the operation of the insurer.


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3.Providing the board with comprehensive, relevant and timelyinformation that will enable it to review business objectives,

business strategy and policies, and to hold senior managementaccountable for its performance.

Advanced criteria

1. The board of directors may establish committees with specificresponsibilities like a compensation committee, audit committee orrisk management committee.

2. The remuneration policy for directors and senior management hasregard to the performance of the person as well as that of theinsurer. The remuneration policy should not include incentives thatwould encourage imprudent behaviour.


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3.Th

e board of directors identifies an officer or officers with

responsibility for ensuring compliance with relevant legislation and

required standards of business conduct and who reports to the

board of directors at regular intervals (refer to EC b).

4. When a responsible actuary is part of the supervisory process,the actuary has direct access to the board of directors or a

committee of the board. The actuary reports relevant matters to

the board of directors on a timely basis.


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OECD Guidelines for Insurers Governance

Recommendations for Insurance and Private

Pensions Committee, adopted by OECD Council on

April 2005.

Note the absence of corporate and the overall

emphasis on the stakeholder system.


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Regulation alone cannot achieve the good

practice necessary for integrity and

effectiveness. Companies themselves must

develop internal rules and systems in order to

reach these goals, but governments and

international bodies can provide guidance on

these rules and systems.


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Main Objectives

To provide complementary guidance that would help the sector toenhance the protection of policyholders and/or shareholdersbeyond the protection already by existing regulation andsupervision; and

To develop complementary guidance specifically directed to theinsurance sector that would supplement corporate governancerules generally applicable to corporations

Covers:

Governance structure,

Internal governance mechanisms and

Stakeholders protection


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Guidelines for Insurers Governance

1. Governance Structure:The governance

structure must establish an appropriate

division of administrative and oversigh

tresponsibilities, stipulate and delineate the

qualifications and duties of persons

bearing responsibilities, and protect the

right of policyholders and shareholders or

participating policyholders

Guidelines I. Identification of responsibilities

Guidelines II. Board's structure


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Guideline III. Functions andresponsibilities

Reviewing andguiding the strategy of the insurance entity,

including insurance strategies,; approving the pricing

strategy, setting performance objectives, overseeing

auditing andactuarial functions, andother oversight

structures andmonitoring the administration of theinsurance entity in order to ensure that the objectives set

out in the fundby-laws, statutes or contracts, or in

documents associatedwith any of these, are attained(e.g.

diversifiedasset allocation, cost effectiveness ofadministration et.);


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Guideline IV. Composition andsuitability

Guideline V. Accountability

Guideline VI.Actuary

Guidelines VII. External Auditors


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2. Internal Governance Mechanisms: Insurance entities should have

appropriate control, communication and incentive mechanisms thatencourage good decision making power and timely execution,transparency, disclosure and ensure regular review and assessment,having regard to the branches of business operated. Thesemechanisms should be tailored to the protection of policyholders,beneficiaries and shareholders (or participating policyholders).

Guideline VIII. Internal controls

Guideline IX. Reporting


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3. Stakeholders protection: The governance framework of insurance

entities should ensure an appropriate protection of the rights ofstakeholders through disclosure and redress mechanisms and thecompliance with the basic rights of shareholders or participatingpolicyholders in the case of mutual insurers.

Guideline X. Protection of participating policyholders in thecase of mutual insurers.

Guideline XI. Disclosure

Guideline XII. Redress

corporate governance & insurance

Documents