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………