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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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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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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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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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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
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