Corporate Governance, Internal Control and Compliance

Download this Presentation


Presentation Transcript

  • 1.Exercise: Assessing the governance of an insurer and its insurance group – solutions for discussion Regional Seminar on Reinsurance and Other Forms of Risk Transfer Bogotá, Colombia, 26-28 May 2015 Gunilla Löfvendahl Senior Financial Sector Specialist
  • 2.2 The leadership root cause Human factor: aspirations and pride (ego-centric), and pressures impact on rational thinking inappropriate practices problems
  • 3.3 Reasons for failures and some views from insurers that were in trouble Understanding the business - failure to manage beyond numbers: “We felt we could get better returns by changing asset classes. While we were aware of mismatching, we under-estimated the risks.” Hubris: “We were determined to be number one” Myopia: “The whole market had become irrational. We went along with it rather than losing market share and going out of business.” Lack of courage/power: “The pressure and the incentives from the global head office were tremendous. New business targets were extremely aspirational and we chased any business we could get.”
  • 4.4 Areas to focus on Governance issues Regulatory framework and supervisory measures Incentives and improvements
  • 5.5 Governance and internal control issues Sufficient number of non-executives to avoid conflicts of interest CEO should ideally not be the Chair of the board Lack of independence of the board and inability to provide objective advice – lack of power to question management and parent company, blindly following their advice The board members from the parent company may be independent from the legal entity’s (Providence’s) perspective but what about their knowledge of the subsidiary? A retired CEO from the insurance industry is knowledgeable but is he independent? (knowledge vs independence) How long should board member mandates be? The board should be involved in choosing the head of internal audit Resignation or replacement of an appointed actuary should be notified to the supervisor Intra-group loans should only be granted on market terms, which should reflect the credit worthiness of the borrower (conflict of interest) What is the CRO doing? Should be independent and have sufficient authority, stature and resources – ideally reporting directly to board
  • 6.6 Risk management issues Centralisation vs decentralisation: Strategy set by the parent company and (unsound) competition within the group? Strategy should in any case not be decided by a CEO but the board Attentive to potential needs to modify risk management systems in light of new internal or external circumstances (if too risky – change) Material changes should be documented and available to internal/external audit and the supervisor Appointed Actuaries and Investment Committees have important control and risk management functions and should be listened to – have convincing arguments to go against their recommendations Although the company started innovating and moving into new business, most of the staff were the same as before, which would indicate that they lacked knowledge and experience of the new products Significant new activities and products should be subject to risk review and be approved by senior management and the board
  • 7.7 Regulatory framework and supervisory measures Framework with room for supervisory guidance on sound corporate governance, risk management and internal controls Supervisory assessment of if implemented and effective – company needs to demonstrate the adequacy and effectiveness Initial and on-going assessment of suitability (licensing , acquisition and changes in key staff) - reporting and on-site Expansion with preapproval – provide business plan with projected figures etc Assessment of strategy – changes to be communicated to the supervisor Follow-up on other important changes such as key staff leaving Assess boardroom performance: minutes of board and board committees – what has been discussed and how active have the members been? Quality of risk management and audit and control functions, including actuarial matters Reports of internal auditors to be discussed with audit staff and staff in affected areas Reports of external auditors Effects of group structures and how they are being managed and controlled : does the management structure differ from legal entity structure, are risk management practices coordinated, what reporting lines are there, etc?
  • 8.8 Regulatory framework and supervisory measures (continued) Investment and diversification rules, risk-weighing of assets, asset liability management, etc Supervisory tools to detect problems early: early warning indicators (eg, rapid growth and declining profitability) Proactive and reactive supervisory tools that are timely (pre-approvals, independent actuarial opinion, increased reporting, correction of errors etc) Supervisors should require effective and timely remedial action when problems have been detected– by the board if material deficiencies Preferential liens or policyholder protection schemes to protect the policyholders in case of insufficient capital to pay claims and other credits
  • 9.9 Incentives Use the human factor to create appropriate practices (competition to be the best) Map practices (eg survey) of the insurance industry and compare to those who had the best results as well as to global best practice Follow up regularly with new surveys and analysis of changed practices Disclosure and market discipline serve as incentives to implement good practices Also make results of surveys official, however keeping the names confidential to encourage participation
  • 10.10 Improvements Better board room compositions and practices Have a defined process and criteria for selecting the members Better mix and representation of individuals Defined mandate periods and age limits Regular evaluations of effectiveness and quality of the board as a whole Continuous training of the members Better functioning of internal controls Quality reflected in remuneration More face-to-face meetings with the board, not just reporting And more………