Corporate Governance Yoshi Kawai Secretary General, IAIS IAIS-ASSAL Regional Seminar Buenos Aires,...

Corporate Governance

Yoshi KawaiSecretary General, IAIS

IAIS-ASSAL Regional SeminarBuenos Aires, Argentina, 22-24 November 2011

PUBLIC

IAIS-ASSAL Regional Seminar22-24 NovemberBuenos Aires

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Corporate Governance

Why is Corporate Governance important?Lessons learned from the Financial Crisis:

• People matter more than structures• Focus on adverse incentives• Importance of independent control functions

• Relevant Insurance Core Principles: ICP 5 Suitability of Persons ICP 7 Corporate Governance ICP 8 Risk Management and Internal Controls


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ICP 5 Suitability of Persons

“The supervisor requires Board Members, Senior Management, Key Persons in Control Functions and Significant Owners of an insurer to be and remain suitable to fulfil their respective roles”.

Fit and Proper criteriaKnowledge/experience (proper understanding of the

business)Senior Management attitude and behaviourFinancial soundness of significant owners

Suitable background, education and professional expertise/ understand and respect the law / ethical behaviour / avoid conflicts of interest etc.


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ICP 5 Suitability of Persons (2)

– Board Members, Senior Management and Key Persons in Control Functions must possess competence and integrity to fulfil their roles (Standard 5.2)

– The insurer must demonstrate the suitability of Board Members, Senior Management, Key Persons in Control Functions and Significant Owners (Standard 5.3)

– The supervisor should take appropriate action to rectify the situation with regard to the lack of suitability of Board and Senior Management and Key Persons in Control Functions (Standard 5.5)


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ICP 7 Corporate Governance

“The supervisor requires insurers to establish and implement a corporate governance framework which provides for sound and prudent management and oversight of the insurer’s business and adequately recognises and protects the interests of policyholders.”

The Supervisor must have the power to require the insurer to demonstrate the adequacy and effectiveness of its corporate governance framework (Standard 7.10) and the power to impose measures.


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ICP 7 Corporate Governance

Requirements to the Board as to:– Setting objectives and strategies of the insurer

(Standard 7.1)– Structure and governance of the Board – board

committees (Standard 7.3)– Duties of individual Board members (Standard 7.4) – Structure, role and responsibilities of the Senior

Management– Board responsibility for design and implementation of

sound risk management and internal control systems– Reliable transparent financial reporting (Standard 7.7)


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Board is responsible for reliable and transparent financial reporting and communication

Role of the Board of Directors


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The Board

The Board shall ensure that Senior Management:– carries out the day-to-day operations effectively

and in accordance with the insurer’s strategies, policies and procedures

– promotes a culture of sound risk management, compliance and fair treatment of customers

– provides the Board adequate and timely information

– provides to the relevant stakeholders and the supervisor the information required


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Remuneration

The Board shall have oversight of remuneration policies and practices (incentives for compensation

and risk taking)


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ICP 8 Risk Management and Internal Controls

“The supervisor requires an insurer to have, as part of its overall corporate governance framework, effective systems of risk management and internal controls, including effective functions for risk management, compliance, actuarial matters and internal audit.”


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Independent control functions

Control functions include:• Risk Management• Compliance• Actuarial• Internal Audit• Oversight of outsourced functions

In order to function properly, the control functions need:

• Authority• Independence• Resources


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Role of the Supervisor

Prerequisite:

ICP 1 Objectives, Powers and Responsibilities of the Supervisor Primary legislation clearly defines the objectives of insurance supervision and

the mandate and responsibilities of the supervisor and gives the supervisor adequate powers to conduct insurance supervision, including powers to issue and enforce rules by administrative means and take immediate action (Standard 1.2)

ICP 4 Licensing (Standard 4.3)

Licensing requirements and procedures are clear, objective and public, and are consistently applied, requiring:

• the applicant’s Board Members, Senior Management, both individually and collectively, Significant Owners and Key Persons in Control Functions to be suitable;

• the applicant to satisfy capital requirements;

• the applicant to have a sound corporate or group structure and governance framework that does not hinder effective supervision; and

• the applicant to have sound business and financial plans.


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Role of the Supervisor

First of all, the Supervisor must have the power to require the insurer to demonstrate the adequacy and effectiveness of its corporate governance framework (Standard 7.10) and the power to impose measures.

The supervisor should require that Board Members, Senior Management and Key Persons in Control Functions possess competence and integrity to fulfil their roles (Standard 5.2)

The supervisor should require the insurer to demonstrate the suitability of Board Members, Senior Management, Key Persons in Control Functions and Significant Owners (Standard 5.3)

The supervisor should take appropriate action to rectify the situation with regard to the lack of suitability of Board and Senior Management and Key Persons in Control Functions (Standard 5.5), e.g. suspend or revoke Board members, Senior Management or Key Persons in Control Functions

The Supervisor should use its powers to issue and enforce rules by administrative means and take immediate action.

Ultimately (threaten to) revoke the license (ref ICP 4 Licensing)


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Supervisory Review / Preventive MeasuresICP 9:

The supervisor has an integrated, risk-based system of supervision that uses both off-site monitoring and on-site inspections to examine the business of each insurer, evaluate its condition, the quality and effectiveness of its Board and Senior Management and compliance with legislation and supervisory requirements. The supervisor obtains the necessary information to conduct effective supervision of insurers and evaluate the insurance market.

ICP 10:

The supervisor takes preventive and corrective measures that are timely, suitable and necessary to achieve the objectives of insurance supervision.

Role of the Supervisor - oversight


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ICP 11:

The supervisor enforces corrective action and, where needed, imposes sanctions based on clear and objective criteria that are publicly disclosed.

The supervisor should use its power to enforce corrective action in a timely manner (Standard 11.1)

The supervisor should use its means to address management and governance problems, including the power to require the insurer to replace or restrict the power of Board Members, Senior Management, Key Persons in Control Functions, significant owners and external auditors (Standard 11.4)

Role of the Supervisor - enforcement


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Conclusion

• Good governance structures and processes are the foundation for all business activity and supervisors need to address issues of governance and internal controls at an early stage (in the licensing process) and on a continuous basis.


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Thank you very much!

Any questions?

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Corporate Governance Yoshi Kawai Secretary General, IAIS IAIS-ASSAL Regional Seminar Buenos Aires,...

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