First Consulting & Administration, Inc. 1

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1 ARE YOU READY FOR THE NAIC CORPORATE GOVERNANCE MODELS? CAROL STERN, FLMI, AIRC, ACS SENIOR CONSULTANT FIRST CONSULTING & ADMINISTRATION, INC. CORPORATE GOVERNANCE MODELS STATUS IN THE STATE LEGISLATURES Two states have enacted the CGAD Models: Iowa New Chapter 521H ( 521H.1 to 521H.8) Vermont HB 73 - (VT. Stat. Ann. 8, 3316) Four states have proposed the CGAD Models: California - AB 553 (Section & Article 10.8) Louisiana HB 199 (Section 22:691.3 to ) Rhode Island SB 784 (Section to ) Indiana - HB 1341 (SECTION 18. IC ) CORPORATE GOVERNANCE-PART OF NAIC SOLVENCY MODERNIZATION INITIATIVE (SMI) The SMI focuses on key issues such as capital requirements, governance and risk management, group supervision, statutory accounting, financial reporting, and reinsurance. 1

2 CORPORATE GOVERNANCE-PART OF NAIC SOLVENCY MODERNIZATION INITIATIVE (SMI) New Models fit with other elements of SMI: 2014 Enhancements to Holding Company Models Form F (Enterprise Risk) Reports filed and reviewed 2015 Own Risk Solvency Assessment (ORSA) Model Act ORSA Summary Reports filed and reviewed 2016 Corporate Governance Models Annual corporate governance disclosures filed and reviewed CORPORATE GOVERNANCE DEFINED The Models do not define corporate governance, but here s our working definition: A framework of rules and practices by which a board of directors helps ensure accountability, fairness and transparency in an insurer s relationship with all its stakeholders. NAIC ADOPTS CORPORATE GOVERNANCE MODELS NOVEMBER, 2014 Corporate Governance Annual Disclosure (CGAD) Model Act Corporate Governance Filing Regulation Corporate Governance Annual Filing Guidance Manual free of charge on the NAIC website Approved by the NAIC November, 2014 and effective June 1, 2016 These models are part of the state accreditation requirements so all states are expected to adopt without variations. 2

3 SMALL COMPANIES ARE NOT EXEMPT The NAIC has made an affirmative decision not to exempt small companies from any corporate governance requirements. In fact, the NAIC Corporate Governance Working Group highlighted the need for small companies to focus on improving their corporate governance structure, strengthening their risk management governance, and ensuring that knowledgeable and qualified Board members make decisions that impact the company s risk and finances. SMALL COMPANIES ARE NOT EXEMPT Susan Donegan, Commissioner of the Vermont Department of Financial Regulation, and Chair of the NAIC Corporate Governance Working Group explained: Some trade associations asked us to exempt the small companies, but the Working Group said the small companies needed the oversight in these models because there are few checks and balances of small firms governance. It was the intent of the NAIC to have no exemptions to these models. CONFIDENTIALITY PROTECTION Same strong confidentiality language in CGAD as contained in other NAIC models, including the Insurance Holding Company Regulatory Act, the Risk-Based Capital Model Act and the Own Risk and Solvency Assessment. Documents are proprietary and contain trade secrets, are confidential by law and privileged and not subject to freedom of information laws. Documents are not subject to subpoena, discovery nor admissible in evidence in any private civil action. The Commissioner cannot make the documents, materials or other information public without the prior written consent of the insurer. 3

4 PURPOSE OF THESE NEW MODELS The NAIC adopted CGAD and the supporting Model Regulation to give insurance regulators a means to receive additional information on the corporate governance practices of U.S. insurers on an annual basis. IMPORTANCE OF CORPORATE GOVERNANCE Key elements of effective corporate governance at the Board level include the following: Clearly defined roles and responsibilities Independent and active board members Individuals who are suitable for their roles Directors who act in good faith, and exercise a duty of care, loyalty and candor Board that provides sufficient oversight for all significant company activities WHAT ARE REGULATORS SAYING ABOUT THESE MODELS? The Corporate Governance Annual Disclosure Model Act represents nearly five years of thoughtful discussion and work regarding regulatory guidance that details best practices for the corporate governance of insurers. Commissioner Donegan 4

5 WHAT ARE REGULATORS SAYING ABOUT THESE MODELS? This model act was developed to promote regulatory oversight as well as protect the confidentiality of the insurer. Annual and transparent disclosure of corporate governance practices of insurers will ensure that state regulators have a comprehensive understanding of the corporate governance structure, policies and practices utilized by the insurer. Joseph Torti, III, Rhode Island Deputy Director and Superintendent of Insurance and Banking. Chair of the NAIC Financial Condition Committee, which oversees the work of the NAIC Corporate Governance Working Group. STRONGER QUALIFICATION REQUIREMENTS FOR BOARD DIRECTORS Regulators will be reviewing the makeup of the Board for appropriate background, experience and integrity to fulfill their prospective roles. The Board as a whole should possess the core competencies needed to oversee the insurance company. Examples of core competencies: financial literacy, accounting; business judgment; industry knowledge; management; leadership; vision and strategy. WHAT WILL INSURERS NEED TO REPORT? U.S. insurers will be required to provide a detailed narrative describing governance practices to their domestic regulator by June 1st of each year. The strict confidentiality measures should encourage insurers to be open and transparent in describing their governance practices to regulators. Insurers will be allowed some discretion in determining the level within the organization at which to report their corporate governance practices, depending upon their structure and organization. 5

6 WHAT WILL INSURERS NEED TO REPORT? To eliminate some duplicative filings, CGAD gives the ability to reference information provided in other filings (e.g. SEC Proxy Statement, ORSA Summary Report, any other regulatory filing). WHAT WILL INSURERS NEED TO REPORT? Insurers are required to provide information in the following areas: Corporate Governance Framework & Structure Rationale for current Board size and structure and discussion of the roles of CEO and Chair Board of Director Policies & Practices Qualifications and experience of board members, as well as the processes for electing members of the board and evaluating the board s performance WHAT WILL INSURERS NEED TO REPORT? Insurers are required to provide information in the following areas (continued): Management Policies & Practices Utilization of suitability standards, code of business conduct and ethics, and the process for overseeing compensation and succession planning Oversight of Critical Risk Areas May include actuarial function, investment and reinsurance decisionmaking processes, market conduct and compliance, and risk management function oversight 6

7 WHAT WILL INSURERS NEED TO REPORT? Model regulation instructs insurers to update disclosures each year on changes to corporate governance practices, framework, committees, policies and procedures to show changes from the prior year. This update requires an attestation from the CEO or corporate secretary. 12 COMPONENTS OF EFFECTIVE CORPORATE GOVERNANCE PROGRAMS Twelve Components of effective corporate governance programs 1. Adequate competency (industry experience, knowledge, skills) of members of the board of directors; 2. Independent and adequate involvement of the board of directors; 3. Multiple informal channels of communication among board, management and internal and external auditors to create a culture of openness; 4. A code of conduct established in cooperation between the board and management, which is reviewed for compliance and is formally approved by senior management; 5. Identification and fulfillment of sound strategic and financial objectives, giving adequate attention to risks; 12 COMPONENTS OF EFFECTIVE CORPORATE GOVERNANCE PROGRAMS 6. Support by relevant business planning and proactive resource allocation; 7. Support by reliable risk management processes across business, operations and control functions; 8. Reinforcement of corporate adherence to sound principles of conduct and segregation of authorities; 9. Independence in assessment of programs and assurance as to their reliability; 10. Objective and independent reports of findings to the board or appropriate committees thereof; 11. Adoption of Sarbanes-Oxley provisions, whether or not mandated, including, but not limited to, auditor independence and whistle-blower provisions; and 12. Board oversight and approval of executive compensation and performance evaluations. 7

8 EXAMINATIONS OF CORPORATE GOVERNANCE Financial Examination: Exhibit M of Financial Condition Examiners Handbook Onsite review of corporate governance and risk management Interviews of Directors and Senior Management Review of Board minutes and activities Overall Corporate Governance (CG) Assessment Market Conduct exams: Possible review of CG Issues that might affect the market conduct of the company DOCUMENTING A CORPORATE GOVERNANCE FRAMEWORK Audit, Risk & Compliance Committee Charter (one, two or three committees) Corporate Governance Committee Charter (board level) Board of Directors Corporate Governance Guidelines DOCUMENTING A CORPORATE GOVERNANCE FRAMEWORK Suitability Criteria for Chief Executive Officers Suitability Criteria for Board of Director Candidates Enterprise Risk Governance Team Charter (Company level team) Corporate Risk Policy (part of Code of Conduct) 8

9 QUESTIONS EXAMINERS WILL ASK Board of Directors Member Independence: Does independence from management exist for Directors when difficult and probing questions are raised? Board committees: Do appropriate Board committees exist and are their responsibilities documented adequately in their charters? Director Responsibilities: Does the Company charter or other Board documents clearly articulate the responsibilities of the Directors? Director Responsibilities: Do the requirements include attendance at Board meetings and review of the meeting materials in advance, with the expectation that the members will ask questions and evaluate the issues knowledgeably? QUESTIONS EXAMINERS WILL ASK Director and Management Qualifications: Do the Directors have the appropriate background, experience and integrity to fulfill their prospective roles such as adequate knowledge, moral reliability and applicable industry experience to serve effectively? Do they make a commitment of time to the Board and committee activities? Core Competencies: Does the Board as a whole possess such core competencies as financial literacy, accounting or finance, business judgment, industry knowledge, management, leadership, vision and strategy? QUESTIONS EXAMINERS WILL ASK Board Leadership Including Tone at the Top: What is the Board's role in establishing the appropriate "tone at the top? What examples document that the Board and audit committee are sufficiently involved in evaluating the effectiveness of the "tone at the top? What steps does the Board take to ensure an appropriate tone? Board Access to Management, Auditors and Advisers: What is the frequency and timeliness with which meetings are held with chief financial and/or accounting officers, internal auditors and external auditors? Does the audit committee meet privately with the chief accounting officer and internal and external auditors to discuss the reasonableness of the financial reporting process, systems of internal control, significant comments and recommendations, and management performance? 9

10 QUESTIONS EXAMINERS WILL ASK Timely Delivery of Information to the Board: How often does the Board meet and review company financials, objectives and terms of significant agreements? Is the information provided to the Board or its committee sufficient and timely enough to allow monitoring of management's objectives and strategies, the entity's financial position, market conduct and compliance reports, and operating results, and relationships with third parties? Management Succession: Does the Company have succession plans established to replace and retain key employees? QUESTIONS EXAMINERS WILL ASK Board and Management Performance Evaluation: Do key members of senior management appear to be suitable for their respective roles? Do they appear to possess the necessary competence, leadership and integrity for their positions? How long has key management been with the Company in their current positions, and what specific industry experience do they have? Director and Management Compensation: What is the general design philosophy of the company compensation and incentive program? Does the compensation committee or Board approve executive incentive compensation plans? What is the process by which changes in compensation programs are approved? QUESTIONS EXAMINERS WILL ASK Oversight of the Actuarial Function: Does Management provide effective oversight of the Company s actuarial function in evaluating and providing advice to the Company in respect to technical provisions, premium and pricing activities, and compliance with related statutory and regulatory requirements? Are individuals within the Company s actuarial function suitable for their respective roles? Oversight of the Compliance & Risk Management Function: How is a risk-management and culture of compliance demonstrated throughout the Company? Is there evidence of an ERM framework? How is the compliance/risk culture positioned within the company s departments to emphasize its importance and value? How are risk tolerances and "appetites" defined and communicated throughout the Company? 10

11 CGAD AND ORSA HAVE THE SAME GOVERNANCE REQUIREMENTS Effective Governance with structures, policies and processes through which an organization or entity is managed and controlled; A governance structure that clearly defines and articulates roles, responsibilities and accountabilities; Documentation in by-laws, charters, policies and procedures to assure that the Board of Directors and any Board committees have been assigned the responsibility for governing the insurer; and High level company personnel that help assure the Company has effective governance and ERM programs. CGAD AND ORSA HAVE THE SAME GOVERNANCE REQUIREMENTS Commissioner Donegan: The NAIC made a conscious decision to make the governance framework in ORSA and the CGAD exactly the same. Every member of the Board should be able to explain the Company s risk appetite, risk profile and how risk management fits into the overall corporate governance framework. ROLES AND RESPONSIBILITIES OF THE ERM GOVERNANCE TEAM Adopt a. formal risk appetite statement for the Company, b. key risk indicators, c. a risk reporting format, d. an incident reporting process, e. frequency of risk governance team meetings. Complete a. risk assessment at least annually to b. gather the risks for the Company, c. prioritize them, d. develop action plans to help e. reduce the risks to acceptable levels. Evaluate a. reports from the ERM Program Director, b. incidents from Company management, and c. recommendations for changes as appropriate. 11

12 ROLES AND RESPONSIBILITIES OF THE ERM GOVERNANCE TEAM Establish Define Assume Accept a. policies and procedures. b. governance of Company's ERM function that is c. consistent with Company s Risk Management Manuals a. roles and responsibilities b. for the risk governance team c. including designation of a Chief Risk Officer and d. an ERM Program Director. responsibility for a. implementation and b. ongoing management of the ERM program. responsibility for a. maintenance b. monitoring and c. annual regulatory reporting, and d. ongoing compliance with ORSA law. CORPORATE GOVERNANCE KIT Head start on Corporate Governance (CG) documentation with CG Tool Kit Helps compliance readiness with new CG laws Any line of business, CG Tool Kit delivers templates and tools to assist CORPORATE GOVERNANCE KIT The Corporate Governance Tool Kit contains the following templates or tools to assist companies in documenting any new and updated governance structures and procedures: Audit, Risk & Compliance Committee Charter Corporate Governance Committee Charter Board of Directors Corporate Governance Guidelines Suitability Criteria for Chief Executive Officers Criteria for Board of Director Candidates Corporate Governance Compliance Readiness Checklist Enterprise Risk Governance Team Charter Enterprise Risk Management Corporate Policy Enterprise Risk Management Quarterly Board of Directors Report Template 12

13 QUESTIONS??? Contact Carol Stern at or with any additional questions or if you would like more information about the Corporate Governance Kit.. 13