CORPORATE GOVERNANCE GUIDELINES FOR INSURANCE COMPANIES

Dr. Vrajlal K. Sapovadia Director National Insurance Academy Pune

General
y y y y y

Corporate Governance is a system of financial and other controls in a corporate entity Defines fiduciary relationship between the Board of Directors, senior management and shareholders More intensive governance structure needed for financial sector in economic development Regulatory responsibility to protect interests of policyholders in insurance sector Good governance practices for maintenance of solvency, sound long term investment policy & assumption of underwriting risks on prudential basis.

July 14, 2011

General
IRDA outlined governance responsibilities of the Board in management of insurance functions under various regulations y Comprehensive guidelines to be issued in addition to provisions of the Companies Act, 1956, Insurance Act, 1938, etc.
y

July 14, 2011

Objectives
To ensure that the structure, responsibilities and functions of Board of Directors and senior management of the company fully recognize the expectations of all stakeholders as well as of the regulator y The guidelines covering following major structure elements of Corporate Governance:
y
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Objectives
Governance structure Board of Directors Control functions Senior management
x CEO & other senior functionaries x Role of Appointed Actuaries x External audit Appointment of Statutory Auditors

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Objectives
Disclosures Outsourcing Relationship with stakeholders Interaction with the Supervisor Whistle blowing policy

these guidelines Board means Board of Directors & Senior Management refers to team of personnel with core management functions. yAppointed Actuary has a special executive and statutory role
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yIn

Significant Owners, Controlling Shareholders & Conflict of Interest Role of Board

The certificate of commencement of business of an insurer (R3) issued by IRDA prescribes minimum lock-in period of 5 tears Section 2 (7A) of Insurance Act, 1938 capped the ceiling of FDI in Indian Insurance Companies at 26% Computation of FDI detailed at Regulation 11 of the IRDA (Registration of Insurance Companies) Regulations, 2000

July 14, 2011

Significant Owners, Controlling Shareholders & Conflict of Interest Role of Board

Insurance Act stipulates prior approval of IRDA for registration / transfer of shares in compliance with provision of the Act & Circular No.022/IRDA/F&A/Aug-05 dt. 25.08.2005 on regulatory framework on (i) issue of shares & (ii) transfer of shares Conflicts of interest of significant owners as well as directors shall be disclosed to the Authority

July 14, 2011

Significant Owners, Controlling Shareholders & Conflict of Interest Role of Board

Auditors, Actuaries, Directors & Sr. managers shall not simultaneously hold two positions in the insurance Co. that can result in conflict of interest No arrangement involving payment of remuneration be entered into by the Co. with any promoter companies without prior explicit approval of IRDA The Board must ensure ongoing compliance with statutory requirements on capital structure
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Governance Structure
y

General
Private insurers yet to go public and get their shares listed in stock exchanges Corporate Governance requirements of companies listed in Stock Exchanges outlined in clause 49 of Listing Agreement of Stock Exchanges Authority advises all insurers to familiarize with Corporate Governance structures appropriate to listed entities

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Governance Structure
y

Varying structure of the Board:

Companies could have different structures with the Board of Directors headed by a full-time or part-time Chairman

Groups & Conglomerates:

Governance structure of insurer could be influenced by association with an insurance group or larger financial / non-financial conglomerates subject to regulatory requirements on governance policies & practices in order to reinforce controls across the group
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Board of Directors
y

Composition:
Insurance Act stipulates that the insurance companies in India would be public companies requiring a properly constituted Board Size of the Board should be compliant with legal requirements & consistent with scale, nature and complexity of business To ensure that the Board comprises of competent and qualified Directors in order to sustain growth and protect interests of stakeholders

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Board of Directors
Shareholders to elect / nominate Directors from various areas of financial / management expertise with qualifications and experience appropriate to the Co. Significant no. of Independent Directors In case of non-executive Chairman, 50% Independent Directors Other cases 1/3 Independent Directors especially under conglomerate structure

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Board of Directors
Knowledge of group structure, organisational structure, Operational structure, process & products of the Insurer & the Board, essential for the Directors Where the Chairman of the Board is nonexecutive, the CEO should be a whole time director of the Board Not more than one member of a family or close relative should be on the Board Procedures concerning re-election, removal & retirement of members of the Board should be set out and documented.
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The role & responsibility of the Board

y

y y y y

The Board would primarily concentrate on direction, control & governance of the insurer, articulate & commit to corporate philosophy & governance that will shape the level of risk adoption, standards of business conduct & ethical behaviour of the Co. at macro levels Set up clear and transparent policy framework Delegate authority to Board Committees Seek detailed/transparent information flow from sr. management through well documented agenda notes Devise systems to serve as effective monitoring arrangements

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The role & responsibility of the Board

To set up objectives to meet expectations of stakeholders, strategies for their fulfillment & monitoring the achievements y Key board function to establish strategies & policies and ensure adherence to them which include:
y

Overall direction including projections on capital requirements, revenue streams, expenses and profitability
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The role & responsibility of the Board

fully comply with Insurance Act and regulations framed thereunder & other statutory requirements Addressing conflicts of interest Ensuring fair treatment of policyholders & employees Ensuring information sharing with disclosures to stakeholders Establishing channels for encouraging and facilitating employees with appropriate measures to protect against retaliation against reporting employees Developing a corporate culture that recognizes and rewards adherence to ethical standards
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Fit and Proper Criteria

y y y

Integrity demonstrated in personal behaviour & business conduct Soundness of judgement & financial soundness The Insurance Act prohibits (i) a life insurance agent to be Director of life insurance co. (ii) the common directorship among life insurance companies A declaration to be sought from the proposed / existing Directors at the time of appointment / re-appointment
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Fit and Proper Criteria

The Board should constitute a Nomination Committee to scrutinize the declarations before appointment y Annual declaration to be obtained from the Directors stating if the declarations submitted have undergone any change or no change y Deed of Covenant to be entered into by the Directors
y
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Conduct of Meetings
Systems to be laid down by the Board that would make the Company Secretary responsible for proper conduct of Board meetings y The Minutes to be recorded and circulated y Well structured arrangements updating the Directors through programmes covering regulatory systems, market growth trends, future strategic plans / operations, etc.
y
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Control Functions
y

Owing to the risks an insurer takes and potential impact on its business, it is important that the Board has in place:
Robust and efficient mechanisms for identification, assessment, quantification, control, mitigation and monitoring of risks; processes for ensuring compliance with Board approved policy & applicable laws & regulations; Internal controls to ensure that the risk management and compliance policies are observed; An internal audit function capable of reviewing & assessing adequacy & effectiveness of & insurers adherence to its internal controls as well as reporting on its strategies, policies and procedures

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Control functions
Reponsibility of oversight of control functions should be entrusted to Directors possessing appropriate integrity, competence, experience & qualifications y Should meet the fit and proper criteria y It is essential to manage risks appropriately on a group-wide basis as well as at the level of insurer
y

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Delegation of Functions
y y

Setting up of various Committees of Directors, delegating overall monitoring responsibilities Following role and functions of the Committees:
Constitution Objectives Responsibilities Frequency of meeting / quorum requirements Appointment & removal of members Reporting to the Board
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Delegation of Functions
y

Committees:
Audit Committee Risk Management Committee Nominations Committee Remuneration Committee Investment Committee Asset-Liability Management Committee Policyholder Protection Committee

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Delegation of Functions
Role & responsibilities of committees: y Audit Committee (mandatory):
To oversee financial statement, reporting & disclosure processes The Chairman should be an independent Director of Board, ideally a CA To oversee efficient functioning of internal audit dept., review its reports, monitor progress in rectification of irregularities & changes in processes wherever deficiencies have come to notice

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Delegation of Functions
y

Audit Committee (mandatory):

Appointment, remuneration, performance & oversight of the work of auditors Procedures to attend to issues Re maintenance of books of account, administration procedures, transactions etc. Any work other than audit entrusted to the auditor to be specifically disclosed in the annual accounts

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Delegation of Functions
y

Investment Committee (mandatory):

Comprising at least 2 Non-Executive Directors, CEO, Chief of Finance, Chief of Investment Div. & Appointed Actuary, if employed Constitution of the committee, new appointment or removal of any member to be approved by the Board and communicated to the Authority within 30 days. Overall investment policy & operational framework to be laid down. Focus on prudential ALM supported by robust internal control systems
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Delegation of Functions
y

Investment Committee (mandatory):

Compliance with prudential regulatory norms, protection of policyholders funds, periodic review of investment policy & evaluation of dynamic market condition Members to be fully conversant with responsibilities cast on them by IRDA (Investment) Regulations 2000 as amended from time to time & guidelines issued on the system of risk management All investments made to be approved by the Committee Members should not be influenced by credit rating agencies and independently evaluate their recommendations on investment decisions by due diligence process

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Delegation of Functions
y

Investment Committee (mandatory):

Effective reporting system to be put in place to ensure compliance with policy apart from Internal / concurrent Audit mechanisms for monitoring of investment operations
IC to meet at least once in a quarter for monitoring the investment operations Furnish a report to Board on performance of investments on quarterly basis Provide analysis of investment portfolio & future outlook to enable Board to look at possible policy changes & strategies

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Delegation of Functions
y

Risk Management Committee (mandatory):

To lay down companys Risk Management Strategy to be able to monitor all risks across various lines of business of the Co. operating head has direct access to the Board Overall guidance and supervision of Chief Risk Officer RMC to assist the Board by performing specialised analyses and quality reviews; Maintaining group-wide & aggregated view on risk profile of insurer in addition to individual one Report to the Board details on risk exposures & actions taken to manage them

Advise the Board on strategic & operational matters like corporate strategy, mergers & acquisitions, etc.
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Delegation of Functions
y

Asset Liability Management Committee (mandatory for life insurers):

ALM is an ongoing process for formulating, implementing, monitoring & revising strategies related to assets & liabilities to achieve an organizations financial objectives Responsibilities:
x Setting insurers risk/reward objectives & assess policyholder expectations x Quantifying level or risk exposure & assessing expected rewards & costs associated with it

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Delegation of Functions
x Formulating & implementing optimal ALM strategies & meeting risk/reward objectives x Laying down risk tolerance limits x Monitoring risk exposures at periodic intervals and revising ALM strategies where required x Placing the ALM information before the Board at periodic intervals
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Delegation of Functions
y

Policyholder Protection Committee (mandatory):

IRDA notified the (i) Protection of Policyholders Interests Regulations, 2002 & (ii) Insurance Advertisements & Disclosure Regulations, 2002. to address various compliance issues relating to protection of interests of policyholders & keeping them well informed of insurance products & complaint-handling procedures PPC directly reporting to the Board Access of policyholders to redressal mechanisms Creation of dedicated unit / procedures to deal with customer complaints & resolve disputes Ensure compliance with statutory requirements Review of mechanism at periodic intervals
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Delegation of Functions
Ensure adequacy of disclosure of Material information to policyholders which will comply with requirements laid down by Authority Review the status of complaints at periodic intervals Provide details of grievances at periodic intervals as prescribed by the Authority Provide details of insurance ombudsmen

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Other Committees
y

Remuneration Committee (not mandatory)

As per Section 34(A)(1) of the Insurance Act 1938, remuneration of CEOs/whole-time Directors of Indian Insurance Cos. is subject to statutory approval of IRDA To determine specific remuneration packages / any compensation payment to CEO & EDs of the Co. Closely connected with performance objectives for sr. management Comprising of at least 3 directors (non-executive), Chairman being independent director Chairman to be present at AGM
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Other Committees
y

Nomination Committee (not mandatory)

The Board to constitute a Nomination Committee to scrutinize the declarations by Directors before appointment NC could make independent / discreet references to verify accuracy of information furnished by Directors

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Other Committees
y

Ethics Committee (not mandatory)

Monitoring compliance function & insurers risk profile, code of ethics / conduct Receiving reports on proactive compliance activities Supervising & monitoring matters reported using whistle blowing or other confidential mechanisms Advising the Board set the correct tone at the top Approving compliance programmes, reviewing their effectiveness, signing off any material compliance issues

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Senior Management
y

CEO & Other Senior Functionaries:

Responsible for operations & day to day management with directions of the Board & Committees set up by the Board Section 34A Insurance Act 1938 requires prior approval of the Authority for appointment, reappointment or termination of CEO and Whole time Directors. In case CEO resigns, the Authority to be kept informed The Insurance Act prohibits CEO of life insurance Co. from being Director in any other insurance co./bank/ investment co.
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Senior Management
The Board to take proactive steps on continuance of CEO before expiry of his tenure y Proposal to be submitted to the Authority at least a month before completion of tenure of the incumbent y Succession planning for key senior functionaries
y

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Senior Management
y

Role of Appointed Actuaries:

IRDA (Appointed Actuary) Regulations 2000 procedure for appointment, qualifications, powers, duties & obligations Prior approval of the Authority required The Appointed Actuary to qualify & satisfy fit & proper criteria Actuarys responsibilities & advisory role vis--vis Board or management to be clearly set Any type of Non-compliance to be informed to the Board / External Auditors by the Actuary
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Senior Management
To provide professional advise or certification to the Board with regard to:
x Estimation of technical provisions in accordance with valuation framework x Identification & estimation of material risks and its management x Financial condition testing x Solvency margin requirements x Appropriateness of premiums (and surrender value) x Allocation of bonuses to with-profit insurance contracts x Management of participating funds x Product design, risk mitigation x He shall at all times be provided access to information as required in order to facilitate discharge his responsibilities
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Senior Management
y

External Audit Appointment of Statutory Auditors

IRDA (Preparation of Financial Statements & Auditors Report of Insurance Companies) Regulations, 2002 empower the Authority to issue directions on appointment, continuance or removal of auditors Appointment: The Statutory Auditors recommended by the Audit Committee to be appointed at general body meeting. The Board to ensure that statutory auditors are compliant with regulatory requirements & no conflicts of interests in appointment They should possess competence & integrity to alert appropriate authorities of an event seriously affecting financial position / material irregularities of the organization

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Senior Management
y

Guidelines on eligibility Conditions / Qualifications:

The Authority, vide Circular No.36/7/F&A/ EMPL/74/July/05 dt. 25.07.2005 laid down requirements to be complied with for a firm to be eligible as statutory auditor of an insurance company. Guidelines provide for joint audit of each insurance company by 2 statutory auditors Be in continuous practice for a period of 15 yrs. Min. no. of partners, their qualification & experience in audit firm as employee / partner
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Senior Management
At least 1 partner / employee should have CISA / ISA or equiv. qualification 1 of the joint auditors may have term of 5 yrs. and the other 4 yrs. Max. duration an auditor can be retained 5 yrs. Must ensure compliance with requirements on cooling off period of 2 years on completion of tenure of 4/5 yrs. No Audit Firm shall carry out more than 2 statutory audits of insurance companies
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Senior Management
y

Access to board & audit committee:

Audit Committee should have periodical discussions with statutory auditors about internal control systems, scope of audit, observations of auditors Review quarterly / half yearly & annual financial statements before submission to the Board Ensure compliance of internal control system Should have access to Board through Audit Committee

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Disclosure Requirements
y

y y

Prescriptions on financial disclosures in financial statements laid down in IRDA (Preparations of Financial Statements) Regulations 2002. Authority finalizing additional disclosures to be made to it and public after which compliance thereof required for insurers The Board should disclose in the annual accounts, information including the basis, methods & assumptions on which information is prepared Actual solvency margin details vis--vis required margin Life insurers shall disclose policy lapse ratio

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Disclosure Requirements
y y y y y y y

Financial performance growth rate & current financial position Description of the risk management architecture Details of number of claims intimated, disposed off & pending, its duration All pecuniary relationships or transactions of non-executive directors vis--vis insurer to be disclosed in Annual Report All elements of remuneration package of individual directors to be disclosed All related party transactions Any other matters, having material impact on insurers financial position
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Outsourcing
y

IRDA (Registration of Insurance Companies) Regulations, 2000 requires that insurer should be able to carry on all insurance business functions, management of investments within its own organisations No other substantive functions of company to be outsourced other than those explicitly permitted All outsourcing (OS) arrangements to be approved by the Board & reported to IRDA
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Outsourcing
Every OS contract confidentiality of data, outputs, continuing ownership of data with insurer & handing over data on termination y Duration 3 years y Board to monitor & review performance of OS agencies annually y Authority reserves right to access operations of OS entity
y
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Relationship with Stakeholders

Stakeholder is person / group / organisation having direct / indirect stake in insurer who can be affect or be affected by insurers actions, objectives & policies y Key stakeholders shareholders, employees, policyholders & supervisors y Others creditors, service providers, unions, rating agencies, equity analysts & community at large
y
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Relationship with Stakeholders

y

They are interested in its operations in terms of - profitability, its capacity to provide return on capital, hire employees, expand operations, etc., To ensure transparency in operations for protecting interests of stakeholders & make periodic disclosures ensuring that:
financial statements accurately & fairly represent financial condition

Insurer is running business soundly & viable over long run

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Relationship with Stakeholders

In case of conflict of interests, Board plays imp role and balances & resolves conflicting objectives y Board must be guided by clear principles y It must ensure protection of interests of current & prospective policyholders
y

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Interaction with the Supervisor

Effective corporate governance practices of insurer enables IRDA to have great confidence in the work and judgement of insurers board, sr. mgmt. & control functions y In assessing these in place, IRDA would:
y

Seek confirmation that the insurer has adopted & effectively implemented sound CG policies & practices Assess the fitness and propriety of board members Monitor the performance of boards Assess quality of insurers internal reporting, risk mgmt audit & control functions Evaluate the effects of insurers group structure on governance strategies Assess adequacy of governance processes in crisis mgmt & business continuity

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Interaction with the Supervisor

y

The problems detected through supervisory activities would be brought to the notice of Board & sr. mgmt at periodic intervals by IRDA Reporting to IRDA:
Insurers to examine extent of compliance with these guidelines & initiate action to achieve compliance within 6 months. If such compliance not possible, to be informed to IRDA for further guidance Compliance Officer to be designated to monitor continuing compliance with these guidelines

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Whistle Blowing Policy

Whereby mechanisms exist for employees to raise concerns about possible irregularities, governance weaknesses, financial reporting issues, etc. y Employee reporting in confidence directly to Chairman of board or of committee or to external auditor y Following aspects covered by the policy:
y

Awareness of employees about availability of such channels, how to use them & how their report will be handled

Handling of report confidentially for independent assessment, investigation & appropriate follow-up actions, where necessary

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Whistle Blowing Policy

A robust anti-retaliation policy to protect employees making reports in good faith Briefing of the board of directors The appointed actuary and the statutory / internal auditors have the duty to whistle blow i.e. to report in timely manner to IRDA about failure of insurer to rectify matter which has affected its financial condition

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Responsibilities of the Board of Directors

To ensure that Governance principles set comply with relevant laws, regulations & applicable code of conduct y To formulate following policies: Define & periodically review corporate business policy Define underwriting policy Determine retention & reinsurance policy Define policy of insurer in investment of its assets with ALM structure Define insurers policy on appointments & qualification requirements for staff, fixing their remuneration & benefits
y
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Responsibilities of the Board of Directors

y y y y y

To define and set standards of business conduct & ethical behaviour for directors & senior management To define standards to be maintained in policyholder servicing & redressal of grievances To provide strategic guidance for implementation of business policy Structure management information system Establish systems to regulate risk appetite and risk profile of Co. & develop an effective risk management system Ensure that all supervisory / regulatory directions are submitted to Board and utilized in implementation of Board philosophy
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Responsibilities of the Board of Directors

y y y y y y

Define role of appointed actuary Ensure that he has direct access to Board & reports on imp matters to Board in timely manner Ensure that IT systems are appropriate & have built-in checks to produce data with integrity Ensure that Co. has in place robust compliance system for applicable laws and regulations Prescribe forms & frequency of reporting to Board To delegate responsibilities to mandated Empowered Committees of Directors

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Responsibilities of the Board of Directors

y

Ensure that insurer is compliant with its directions & statutory provisions & regulations framed thereunder through:
Sound system of internal controls & audit annually reviewed by Board Internal audit function in objective, independent & risk oriented manner with timely feedback to the Board Prescribing & reviewing delegations of authority to various levels of management Ensure that critical decisions are taken under four eye principle
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THANK YOU

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