Corporate governance standards are nearing final adoption–Now is the time for insurers to assess their governance structure

At the November 2014 National Association of Insurance Commissioners (NAIC) meeting, the Executive Committee is expected to formally adopt the Corporate Governance Annual Disclosure Model Act and the Corporate Governance Annual Disclosure Model Regulation (collectively “the Act”). The Act will require insurers of all sizes to make an annual filing with the lead state Insurance Commissioner which discloses the insurer’s corporate governance structure, policies, and practices.

This is the culmination of a more than three-year effort by the NAIC’s Corporate Governance Working Group and included significant industry input. The Working Group’s multi-year effort involved identifying existing US corporate governance requirements, comparing US corporate governance standards to international standards, identifying company best practices, and proposing new regulations.

Anticipated effective date

The Act is expected to be effective January 1, 2016, with the initial filings due by June 1, 2016. Many of the provisions of the Act will require board oversight and involvement and may require some companies to establish and document new policies, procedures, and practices. Therefore, we would encourage companies to begin now with their assessment of what steps may be needed in order to comply with the corporate governance requirements of the Act.

Key information to be included in the filing

The Act is not prescriptive and does not stipulate any specific corporate governance structure, policies, or practices; nor is any filing format stipulated. It does require a description of the structure, policies, and practices in place, and in some cases requires discussion of the rationale for certain practices. In general, the contents of the annual disclosure filing should include descriptions of the following key aspects of corporate governance:

  • Board size and structure, including its duties, committees, the roles of CEO and board chairman, the qualifications and experience of board members, how an appropriate level of independence is maintained, and how the board evaluates its own performance
  • Senior management policies and practices, including practices in place to determine the suitability of the background and experience of persons in key control positions, a code of conduct and ethics, and succession planning
  • Senior management compensation programs and performance evaluation, including how risk management is a factor in compensation and how the organization ensures that compensation programs do not encourage and/or reward excessive risk taking
  • Board oversight of critical risk areas, such as the risk management processes, actuarial function, investment decision-making processes, reinsurance decision-making processes, business strategy/finance decision-making processes, compliance function, financial reporting/internal auditing, and market conduct decision-making processes

The company has the option to provide the information based on the governance activities in place at the holding company level, insurance group level, or legal entity level. The Act encourages the insurer to make the corporate governance disclosures “…at the level at which the insurer’s or insurance group’s risk appetite is determined, or at which the earnings, capital, liquidity, operations, and reputation of the insurer are overseen…, or the level at which legal liability for failure of general corporate governance duties would be placed.”

Once adopted by the NAIC Executive Committee, the state jurisdictions will begin taking the steps of enacting the Act through the state legislative process. Uniform adoption of the Act across jurisdictions will enable the US to meet the international standards of corporate governance established by the International Association of Insurance Supervisors (IAIS) as well as meet the recommendations of the Financial Sector Assessment Program conducted by the International Monetary Fund in 2009, and similar recommendations made by the Federal Insurance Office in its 2013 report.

Guidance resources

For companies seeking additional guidance on establishing strong corporate governance practices refer to the Insurance Core Principles (ICP) issued by the IAIS in ICP 5 – Suitability of Individuals, ICP 7 – Corporate Governance and ICP 8 – Risk Management and Internal Controls. In addition, the NAIC’s Financial Analysis Handbook and Financial Condition Examiners Handbook provide guidance to regulators for use in reviewing and assessing the corporate governance practices of insurers. These are the standards by which regulators will measure the effectiveness of a company’s corporate governance structure.

Now is the time to review the Act, review related corporate governance guidance, and assess whether your company should enhance its corporate governance policies, procedures, and practices.

For more information on this topic, or to learn how Baker Tilly insurance specialists can help, contact our team.