Insurer Governance Principles Monitoring Commission

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1 Insurer Governance Principles Monitoring Commission Report Insurer Governance Principles December 2011

2 The original Dutch text will be binding and shall prevail in case of any variance between the Dutch text and the English translation. 1

3 Table of Contents Foreword Introduction Report structure The Insurer Governance Principles Self-regulation Development and legal basis The principles of the Code The scope of the Code Insurer Governance Principles Monitoring Commission General trends related to the themes in the Code Working method An outward orientation Focus of the 2011 review Questionnaire Interviews The Commission s findings Parts of the Code Specific themes General findings Look ahead to Annex 1: Insurer Governance Principles Annex 2: Decree Establishing the Insurer Governance Principles Monitoring Commission Annex 3: Commission members and an overview of other relevant positions held Annex 4: Insurers interviewed

4 Foreword This report is the first report published by the Insurer Governance Principles Monitoring Commission (hereinafter referred to as the Commission ). The Commission was established on 6 September 2011, with retroactive effect from 6 July 2011, by the Minister of Finance and the three insurer umbrella organisations: the Dutch Association of Insurers (Verbond van Verzekeraars), the Association of Dutch Health Insurers (Zorgverzekeraars Nederland) and the Federation of Mutual Insurers' (Federatie van Onderlinge Verzekeraars). In this report, the Commission has documented compliance with the Insurer Governance Principles (also referred to as the 'Code'), which the insurers agreed to implement. The Code is a form of self-regulation that has now been enshrined in law. Implementation of the Code is still a work in progress in many cases, as it was introduced only during the course of 2011 with retroactive effect from 1 January As such, the Commission s assessment of compliance is provisional. The provisional nature of this report is also reflected in the fact that the assessment this autumn is limited to member insurers of the 'Dutch Association of Insurers' and/or the 'Association of Dutch Health Insurers', as well as in the fact that the Commission - partly because it was only established at the end of the summer has focused mainly on three of the Code s topics: remuneration policy, product approval process (PAP) and placing the client s interests first. The Commission s first full report is scheduled for publication in late Insurers observed the public's dramatic loss of trust in the insurance sector especially because of the profiteering scandal and the 2008/2009 credit crisis and the Code was drawn up in response to the loss of trust. Among the various steps taken to improve public confidence, the Code plays a key role. The purpose of the Code is to promote responsible practices on the part of insurers as regards good governance, providing certainty, placing the client s interests first and the fulfilment of the insurers commitment to society. In addition to implementing the Code, insurers will be faced with several other new developments. For example, new legislation introduced at both the national and international levels will have to be implemented in the insurance sector in the coming months. However, because the Code involves binding self-regulation and is in fact owned by the sector, the Commission feels that the Code has a special status. To gain an understanding of the sector s compliance with the Code, Metis GRC was asked to conduct a review on the Commission s behalf using a self-assessment form which was sent to some 200 insurers. Additionally, 22 insurers were interviewed with each member of the Commission taking part in 2 interviews. The Commission concludes that the sector has begun implementing the Code: clear steps have been taken. While this is promising, however, it was also noticeable that several insurers seem to lack a sense of urgency, believing that the Code s main purpose is to rectify other insurers improper conduct. They underestimate what they themselves still have to do in order to achieve full compliance. Where measures have been implemented, they are mainly seen as an exercise in compliance. Although somewhat understandable, this approach is too limited; in the Commission s view, it is precisely the Code s self-regulating nature that is also intended to bring about a cultural 3

5 shift at the same time. In addition to the development programmes observed by the Commission at some larger insurers, and the more ad hoc projects at the smaller insurers, the Commission believes that further steps will still be required next year. In short: the sector must learn to own the Code more. If insurers continue to cling to the idea that the Code has been forced upon them by politicians and the general public, the Code will not make a full contribution to the goal of restoring the consumers' trust in insurers. In relation to Remuneration Policy, the Commission has seen many insurers make the necessary modifications, partly in response to the Restrained Remuneration Policy Regulations (Regeling beheerst beloningsbeleid). Variable remuneration has been lowered and linked to non-financial performance criteria. Due to time constraints, the review did not clearly reveal whether a remuneration policy has been put in place for commercial positions in particular to further the goal of putting the client's interests first and promote the necessary behavioural changes. This will be a key priority for The degree to which insurers have implemented the PAP varies. While there is a PAP in place at most insurers, the process has not yet been adequately integrated into the insurers' strategy and full involvement across all disciplines in the organisation is still lacking. Management boards have remained relatively uninvolved. As regards placing the client s interests first, the Commission has seen insurers undergo many positive developments, but it has also noticed that some insurers confuse placing the client s interests first with a customer-oriented approach. Placing the client s interests first means more than simply focussing on the client. The Commission believes it should be reflected in the minutest details of the insurer s strategy and policies. To date, this topic has not been adequately embedded in the organisation, including at the management level. Next year, insurers will have to focus more on the complex implementation of a PAP and a system to ensure that the client s interest come first. Insurers will be forced to do so because of legislation currently under development that targets the product development process at financial enterprises and how to safeguard the clients interests in that process. The Commission urges executive board members to explicitly commit themselves to integrating the themes of PAP and placing the client s interests first into their company strategy. It also recommends that executive board members use and involve their supervisory boards/other supervisory bodies in the implementation of the Governance Principles and the related cultural and behavioural matters. Sector codes of conduct such as the Insurer Governance Principles play an important part in behavioural and cultural change, compliance and transparency vis-à-vis stakeholders. A Code of this kind can have far-reaching effects and also create more momentum than government-imposed regulations, particularly because it is supported by the sector itself and because the establishment of the standards and the whole development process take place in interaction between the sector parties and the stakeholders. This is precisely why it is essential that the participants in the sector are aware of the Code's importance and usefulness and play their full part in its establishment and implementation. The Insurer Governance Principles Monitoring Commission aims to facilitate this process by reviewing progress. In that light, the willingness expressed by all three umbrella organisations to participate in the Commission's 2012 review is a positive development. Ferdinand Grapperhaus, Chair 4

6 1. Introduction In December 2010, the Insurer Governance Principles were adopted by the Dutch Association of Insurers (Verbond van Verzekeraars) to promote self-regulation. In April 2011, the Association of Dutch Health Insurers (ZN) and the Federation of Mutual Insurers (FOV) endorsed the Code. The content of the Insurer Governance Principles (hereinafter referred to as the Code ) is nearly identical to that of the Banking Code and consists of a number of principles in relation to governance, risk management, audits and remuneration policy. In order to monitor the Code s implementation, the Minister of Finance has established an Insurer Governance Principles Monitoring Commission, which reports its findings to the Minister and the three umbrella organisations on an annual basis. This report is the first report published by the Insurer Governance Principles Monitoring Commission (hereinafter referred to as the Commission ). In this report, the Commission discusses its initial findings in relation to compliance with the Insurer Governance Principles. Please note that the Commission only recently became operational (second half of 2011) and the Code was not on the radar of some insurers until some time had passed in 2011, all of which means that this initial report is somewhat limited in scope. The aim of this report is to gain a sense of whether insurers have implemented the necessary measures and are showing sufficient commitment to achieve full compliance with the Code. The Commission has also used this initial period to identify parts of the Code that will require more attention in the months ahead. The Commission is scheduled to publish its first full report in late Report structure First the Code itself, as well as the establishment and duties of the Commission are explained. This explanation is followed by a description of the approach taken by the Commission to gain an initial impression of the sector s compliance. Next, the Commission's findings are discussed for each theme in the Code. Finally, this report offers a look ahead to the Commission's 2012 activities. The Annexes consist of the Code, the Decree establishing the Commission, an overview of the members of the Commission and an overview of the insurers interviewed in The Insurer Governance Principles 3.1 Self-regulation Self-regulation has been the context in which insurers have established mutual agreements about how to interpret and handle sector-specific matters for many years. This self-regulation is binding and is in addition to legislation imposed by the government. It benefits consumers, insurers and the proper operation of the market. The insurers 1 also agreed to adopt the Insurer Governance Principles as a binding system of self-regulation aimed at restoring and increasing the public's trust in the insurance sector. 1 FOV will present a motion to this effect to the next General Members Meeting with a recommendation that the members adopt the motion. 5

7 The development of the Code was motivated by the waning trust in the insurance sector. After the debate about unit-linked insurance policies and then the credit crisis (in which the Dutch government had to bail out several large insurers and combined banking and insurance organisations), the public can no longer be counted on to automatically trust financial service providers. The Dutch Association of Insurers identified this trend in its regular consumer survey. The number of consumers with a positive opinion of insurers continued to decline over the course of 2009, only to stabilise in 2010, albeit at a low level. Insurers are not unique in this respect - many sectors are facing this same trend. However, the insurers decided to take action to reverse the trend because the insurance industry even more than anyone else needs the trust of the public to survive. When a consumer pays his premium, he expects the insurer to come to his aid in times of need. It was this development which motivated the 'Dutch Association of Insurers' to work on restoring the trust of the public and all other stakeholders. The agreements associated with the Insurer Governance Principles should be understood in this light. The Health Insurance Governance of ZN (2002), including requirements imposed on health insurers in relation to governance and supervision of the health insurer, and the Code of Conduct for Insurers of the Dutch Association of Insurers (2002), containing basic values and rules of conduct, are two examples of codes relevant to this Code that were agreed previously between insurers. 3.2 Development and legal basis Although the Governance Principles apply solely to insurers, the text itself was derived from the Banking Code, which was drawn up some time previously. Under the supervision of the Dutch Banking Association (Nederlandse Vereniging van Banken, (NVB)), the Banking Code was produced in 2009, building on the recommendations in the report Restoring trust (Naar herstel van vertrouwen) by the Advisory Committee on the Future of Banks (Adviescommissie Toekomst Banken). The Code was declared applicable with effect from Chaired by Jan de Wit, the 'Temporary (Parliamentary) Committee Investigating the Financial System (Tijdelijke (parlementaire) commissie onderzoek financieel stelsel) published its report Lost Credit (Verloren krediet) on 10 May 2010, which recommended that other types of financial institutions, including insurers, produce their own Code. The Dutch Association of Insurers then began preparing a code, culminating on 15 December 2010 in the adoption of the Insurer Governance Principles and the declaration that the principles would be applicable to the association s members with effect from 1 January Initially, during the Code s development, different drafts were prepared. Ultimately, however, it was decided that the Banking Code would be used in its entirety, by simply changing the word banks to insurers. As mentioned above, ZN and FOV also endorsed the Code in April By Order in Council dated 23 August 2011, the Code was designated a code of conduct within the meaning of Book 2, Section 391, paragraph 5 of the Dutch Civil Code with retroactive effect from 1 January The Decree of 23 August 2011 also contains more detailed regulations regarding the content of insurers annual reports and specifies that insurers must begin reporting on compliance with the Code in the 2011 annual report. 3.3 The principles of the Code The intention behind the Code is to promote responsible practices on the part of insurers as regards good governance, providing certainty, placing the client s interests first and the fulfilment of the insurers commitment to society. There must also be adequate in-house supervision of the 6

8 application of these principles and transparent reporting to the outside world on all the issues involved. The Code s instructions can be divided into five categories: Part of the Code Supervisory board Executive board Risk management Audits Remuneration policy Sub-topics Composition of the supervisory board, the expertise of its members, implementing a lifelong learning programme, performance assessments of the supervisory board and its members and, finally, the supervisory board s risk management tasks. Composition of the executive board, the expertise of its members, implementing a lifelong learning programme, organising the insurer s risk management, balancing the interests of all of the insurer s stakeholders, focus on the client and the duty of care vis-à-vis the client, the moral and ethical conduct declaration and translating that declaration into principles for the other personnel. The organisation of the insurer's risk policy (including establishing the risk appetite) and setting up a Product Approval Process. The arrangement of the auditor s duties within the insurer s organisation and the exchange of information between the in-house auditor and the external auditor, the supervisory board and its relevant committees and the Dutch central bank (De Nederlandsche Bank). Drafting a meticulous, restrained, long-term remuneration policy, setting out the role of the supervisory board in that regard, establishing the level and composition of the executive board remuneration and the method of payment, establishing allocation criteria for variable remuneration and the supervisory board s powers to claw back variable remuneration under certain circumstances. The preamble to the Code states that the degree to which the Code is followed to the letter does not determine its effectiveness (this is not a box-ticking exercise ), but rather the way in which the Code s intentions are handled. In order for the Code to be effective, the basic ideas underlying the Code must be firmly embedded in the culture and business operations of the insurer. The Code operates on the principle of comply or explain. In principle, insurers must apply the Code. However, it will be difficult, if not impossible, for certain insurers to comply with some of the principles. For example, smaller insurers without an executive board and/or a supervisory board which delegate the duties typically assigned to an executive or supervisory board member differently will have difficulty in applying certain principles. The Code states that where indicated because of the situation, the principles of the Code can be applied in proportion to the individual circumstances of the insurer and that departures from the Code, if substantiated, can be justified. See Annex 1 for the full text of the Code. 7

9 3.4 The scope of the Code The Code specifies that all insurers with a permit under the Financial Supervision Act (Wet op het financieel toezicht, (Wft)) are subject to its principles. No distinction is made in this regard between activities performed in the Netherlands or in another EU Member State, and it is irrelevant whether or not the activities are carried out through a branch office. It is recommended that the Code be applied to activities and branch offices in non-member states of insurers that are subject to the Code, as well as to foreign subsidiaries of insurers that are subject to the Code. The same applies to activities and branch offices of insurers in the Netherlands with permits issued in other member states. It follows, then, that the following shall apply to foreign insurers operating in the Netherlands or Dutch insurers operating abroad: The Decree (Order in Council) of 23 August 2011 specified which insurers will have to report on their application of the Code starting with their 2011 annual report. The insurers in question are all insurers with a permit under the Financial Supervision Act, as well as all insurers in possession of a statement from the De Nederlandsche Bank (DNB) as referred to in Sections 3 or 4 of the Provisions on Scope (Financial Supervision Act) Decree (Besluit reikwijdtebepalingen Wft). The addition of the latter means that mutual insurance associations must also fulfil the obligation to report on implementation of the Code. This Decree also stipulates that the insurer s auditor must verify whether the insurer has included the relevant information in the annual report or in an appendix to the annual report. In 2012, the Commission will base its review on the entire spectrum of insurers subject to monitoring - thereby also including the small mutual insurance associations - because the Code s purpose is of course to help restore the consumer s trust in insurers, which can only be achieved if as many insurers as possible implement the Code. With the goal of equal treatment, the Commission will also monitor foreign insurers subject to the Code in

10 4. Insurer Governance Principles Monitoring Commission The preamble to the Code stipulates that an independent monitoring body shall monitor compliance with the Code on an annual basis. At the request of the Dutch Association of Insurers' and the Ministry of Finance, Stichting Toetsing Verzekeraars (Stv), the independent foundation for the promotion of consumer confidence in insurers, which has monitored compliance with the codes of the Dutch Association of Insurers 2 since 2009 and developed the quality mark for customeroriented insurance (Keurmerk Klantgericht Verzekeren), performed the preliminary work during the first six months of 2011 in relation to the working methods and support for the Insurer Governance Principles Monitoring Commission. In early September 2011, the Minister of Finance and the Dutch Association of Insurers', the 'Association of Dutch Health Insurers' and the 'Federation of Mutual Insurers' agreed to establish the Insurer Governance Principles Monitoring Commission. The Decree establishing the Commission and the decision appointing the members came into force with retroactive effect from 6 July It is the Commission s job to monitor compliance with the Code by various means, including: - surveying the application of the Code; - flagging up any gaps, ambiguities and imbalances in the Code; - making recommendations about possible adjustments to the Code. The Commission can enlist the advice of third parties in the course of performing its duties. At least once a year, the Commission reports its findings to the Minister and the three umbrella organisations. The Commission also believes that it should perform its monitoring tasks in such a way as to promote understanding in the sector regarding the added value of complying with the Code. The Chair of the Stv board is involved in the Commission as an advisory member. The Stv office facilitates and supports the work of the Commission s secretary. The Commission's activities are fully financed by the Ministry of Finance, the Association of Dutch Insurers' and the Association of Dutch Health Insurers. See Annex 2 for the text of the Decree establishing the Commission and Annex 3 for a list of the members of the Commission. 5. General trends related to the themes in the Code The Code's purpose is to use self-regulation to promote a change in behaviour. The Code is not alone in this regard: partly in response to the 2008/2009 financial crisis, domestic and foreign governments have launched all kinds of initiatives including legislation which relate to or partly overlap the themes in the Code. These initiatives are aimed at shoring up the weak points in the financial sector, in supervision and in the regulation of this sector. 2 The Dutch Association of Insurers has over 40 Codes which are used for self-regulation. The Codes can be found on the website of the 'Dutch Association of Insurers' in the 'Code manual' (Codewijzer). 9

11 Therefore, insurers are expected not just to implement the Code s principles, but are also and more explicitly faced with the requirement to implement legislation that is closely related to or interwoven with the principles. The following developments are definitely worth mentioning: - the 'Policy Regulations on Expertise (Beleidsregel Deskundigheid) by DNB and the AFM, which sets requirements in relation to the expertise of executive board members and supervisory board members of financial enterprises (with effect from 1 January 2011). - the Restrained Remuneration Policy for Financial Enterprises Regulations (Regeling beheerst beloningsbeleid ) published by De Nederlandsche Bank (DNB) (with effect from 1 January 2011). - the implementation of the Capital Requirements Directive III (CRD III), including more detailed requirements issued by the Committee of European Banking Supervisors (CEBS), now called the European Banking Authority. - the implementation of Solvency II, which reviews and tightens existing European Directives to improve insurer risk management. Solvency II sets out quantitative requirements relating to an insurer s solvency, as well as qualitative requirements regarding the establishment of a risk management framework and its supervision by insurers. Although Solvency II does not come into force until 1 January 2014, insurers are already in the midst of preparing for its implementation. - the legislative proposal to modify and demand the return of bonuses and profit-sharing awards from bank executives and insurance companies (debate pending in the Lower House of the Dutch Parliament), also referred to as a claw-back. - the legislative proposal to ban bonuses at state-funded financial enterprises (debate pending in the Lower House). - the development of a legislative proposal to ban commission for brokers and consultants for complex and high-impact financial products as of 1 January The Minister of Finance has also announced that he wants to grant the AFM the power to supervise the product development process at financial enterprises. Currently, the AFM is already actively promoting the so-called KNVB criteria (products must be cost-efficient, useful, safe and understandable) among insurers. Insurers have themselves also worked on improving their relations with clients and other stakeholders, one example being the initiation of the programme Insurers Innovate (VerzekeraarsVernieuwen) by the Dutch Association of Insurers'. This programme consists of various courses of action and is aimed at bringing about a cultural shift at insurers and demonstrating this to the outside world. One key initiative is the quality mark for customer-oriented insurance (Keurmerk Klantgericht Verzekeren) which was granted to thirty insurers by the independent foundation Stichting Toetsing Verzekeraars in Some eight insurers are expected to be added to that list in To earn the quality mark, insurers must meet strict requirements in terms of the quality of their services and customer focus. Insurers who already have the quality mark are subjected to reassessments at regular intervals. 10

12 6. Working method 6.1 An outward orientation This autumn, the Commission conducted preliminary discussions with the umbrella organisations of the insurance sector ( Dutch Association of Insurers, ZN and FOV) and took note of their thoughts on the trends in the industry. It also consulted with the supervisory authorities for the insurance industry (DNB, AFM and the Dutch Healthcare Authority (NZa)) to form an impression of the key developments and to explore the options for sharing knowledge and coordinating activities. Furthermore, the Commission spoke with the Banking Monitoring Commission about its experiences and the approach taken to monitoring the implementation of the Banking Code. The Commission will remain in contact with all of the above parties in Focus of the 2011 review Because the Commission did not become operational until the second half of 2011, it was decided to limit the review in the 2011 report to three of the Code's themes: - Placing the client s interests first - Remuneration policy - Product approval process The Commission selected these themes because they could be analysed properly in the short period available for the review and because they enable the insurers to demonstrate how the Code works. The theme placing the client s interests first refers to a focus on the client s interests by the entire organisation and involves a change in behaviour in all the layers of the organisation, not only in departments that deal directly with clients, for example. Insurers must demonstrate that they place the client s interests first by taking concrete actions to effect the required behavioural changes in the organisation, procedures and employees. The steps taken to ensure a smooth process of behavioural change are also critical. In other words, the insurer must set clear goals (e.g. clearly defined criteria regarding desirable and undesirable behaviour) and determine whether those goals are being achieved. Accordingly, the insurer must specify certain indicators that it can use to manage the process and change course where necessary in order to place the client s interests first. The remuneration policy theme relates to the remuneration of executive board members, employees, and, where applicable, the brokers. A key feature is that incentives must not be given for high-risk behaviour aimed at fulfilling short-term interests. It is also about how insurers place the client's interests first in dealing with remuneration (fixed and variable). Insurers that implement the principles relating to remuneration policy must demonstrate how the remuneration system has or will be changed. Insurers must also be able to show what role customer-oriented performance criteria play in those changes, as well as which indicators are used to determine any variable remuneration. The third theme is the 'Product Approval Procedure' (PAP). The Commission expects insurers to base their product approval procedure on the client s interests and will examine how insurers determine which products (whether new or modified) are suitable given the clients interests, as well as how this process is monitored. The Commission also expects insurers to subject their current product 11

13 portfolio to a product approval procedure to determine whether existing products are still in line with new requirements and new perceptions. In addition to the thematic frameworks for monitoring described above for 2011, the Commission s 2011 monitoring activities also targeted some but not all of the insurers to whom the Code had been declared applicable. In 2011, the Commission s monitoring efforts were limited to the members of the Dutch Association of Insurers and the Association of Dutch Health Insurers. Unless they were members of one of the other two umbrella organisations, the members of the FOV were not included. FOV members represent a relatively small portion of the total market (0.4% of the total gross premium volume in 2009). It was agreed with the Ministry of Finance and FOV that the smaller mutual insurers will be actively monitored in 2012 and the Commission reached agreements with FOV to the effect that the Commission would formulate a number of proportionality rules in consultation with FOV. Given the nature of FOV and the size of its members, these rules are necessary to ensure that the Code functions properly and that the business of the mutual insurers is not hampered in relation to the relevant areas of the Code. 6.3 Questionnaire It was not possible to include the insurers reporting in their annual reports in the 2011 review, because the Code did not enter into force until 2011 and insurers will only start reporting on the Code in their 2011 annual reports. The Commission therefore distributed a questionnaire in mid-august to all member insurers of the Dutch Association of Insurers and the Association of Dutch Health Insurers to gather information about the implementation of the Code. Respondents could fill in the questionnaire online, answering questions on the three different themes selected by the Commission (see 6.2), in addition to general questions about the status regarding the parts of the Code covering the supervisory board, the executive board, risk management, audits and remuneration policy. Finally, the insurers were asked whether they planned to deviate from the Code stating reasons for doing so ( comply or explain ). The Commission processed and drafted a report on the questionnaire results with the help of Metis GRC, a consultancy specialising in governance and risk management services in the financial sector. The insurers asked to participate had about 4 weeks to fill in the questionnaire. On request, a few insurers were given a little more time to complete the questionnaire. The Commission contacted 192 insurers (entities) who returned 77 completed questionnaires representing a total of 147 of the entities contacted, which is a response rate of over 75%. Thirty insurers indicated that, due to their specific circumstances, they would be unable to complete the questionnaire. That means that the Commission was in contact in one form or another - with 92% of the insurers who were asked to participate. A large number of the 30 entities referred to above and of the 15 insurers who did not respond at all were foreign insurers, in addition to several small (mutual) insurers. A small group of insurers could not fill in the questionnaire for practical reasons, such as merger negotiations or due to the phasing out of insurance portfolios. The Commission decided to release these insurers from further participation, due to the limited nature of the 2011 review. 12

14 These proportions produce the following overview: Questionnaire response rate 16% 8% 76% Completed and returned Not completed, explanation provided Not completed This autumn, reports were received that some of the foreign insurers were confused about how to apply the Code and these insurers therefore failed to complete the questionnaire. Together with the Ministry of Finance, the Commission decided that they would not actively be held accountable in 2011 for failing to fill in the questionnaire. However, they will still be expected to report on their application of the Code in their 2011 annual report and will still be monitored by the Commission in that regard in Interviews Between late September and early November, the Commission interviewed 22 insurers to gain a clearer idea of the Code s application in addition to the information provided by the questionnaire. The interviews were conducted at executive board level. The 22 insurers represented over 80 entities (subsidiaries, etc.), which are active in a variety of segments (health care, nonlife, life, funeral and legal expenses). Based on the gross premium volume, they represent over 75% of the Dutch insurance market. See Annex 4 for a list of the insurers interviewed. The interviews were conducted by Metis GRC. In 10 cases, a member of the Commission was part of the interview team. The interviews added to the information from the questionnaires by providing valuable further information about the application of the Code and the challenges facing insurers in that regard. 7. The Commission s findings This chapter presents the Commission s findings, starting with the various parts of the Code, followed by a section devoted specifically to the themes of placing the client's interests first and the product approval process, and concluding with a number of general findings. Sections 7.1 and 7.2 cover the responses to the questionnaire. Due to the nature of self-assessments, the Commission could not determine to what degree the responses were correct and complete, apart from asking more detailed questions in some of the interviews with respondents. Therefore, in the report below, the Commission decided to validate the questionnaire findings to a certain extent by checking them 13

15 against its own observations during the interviews. The Commission is aware that the Code did not come into force until 2011 and that its application is still a work in progress for many insurers. Because the review data were obtained from a significant portion of the insurance sector, the Commission believes that its report can be applied to the entire sector. 7.1 Parts of the Code Supervisory board Nearly half of the insurers who completed and returned the questionnaire said the positions, structure and role of the supervisory board are already completely in line with the Code's principles, while the rest said they were still dealing with these issues. Lifelong learning and assessment of the supervisory board s own performance are parts of the Code which insurers have either not yet tackled, or are still addressing. The interviews revealed that a significant number of the insurers are also working out the details on other fronts (including diversity in the supervisory board membership, provision of information to the supervisory board, the supervisory board agenda, the size of the supervisory board, and the involvement of the supervisory board). The Commission concluded that there are not many insurers where the supervisory board is involved or is being involved actively in the Code s implementation and the associated cultural and behavioural issues. The Commission considers it useful and advisable to involve the supervisory board (or other supervisory body) in the processes that are necessary to implement the Code and therefore calls on executive board members to fully use and deploy their supervisory board (or other supervisory body) based on the supervisory role, not only as a body allocated duties under the Code, but also as a sounding board for the management. There are still only limited activities aimed at professionalising and modernising in-house supervision (e.g. diversity and lifelong learning). The Commission advises supervisory boards to take a proactive approach in respect of these topics. Many insurers have yet to work out precisely how in practical terms the supervisory board will fulfil the specific role prescribed by the Code as regards risk management. Monitoring the risk appetite determined by the executive board is a key task in that regard, in addition to the quality of the risk management system as a whole. The larger insurers have made more progress in this area. The Commission noted that the supervisory board plays an active role as regards placing the client's interests first at several (but not all) of the larger insurers. Not all of the insurers had a transparent system of governance, nor did the system always include enough checks and balances. Striking examples include structures comprising a large number of legal entities, in-house supervisory board members who act as supervisors for a Dutch subsidiary, and a members council which is the body with the highest authority and is therefore charged with supervising the application of the Code, but which is not given more information than the key developments once a year. 14

16 Executive board Nearly half of the insurers who completed and returned the questionnaire say the role of the executive board is already fully compliant with the Code's principles. The parts of the Code that have not yet been addressed or fully implemented are once again the lifelong learning programme, as well as the signing and publication of the moral and ethical conduct declaration. The interviews revealed that several insurers who believed they were compliant with the Code's principles have not yet sufficiently addressed risk management, the implementation of the duty of care and translating the moral and ethical conduct declaration into conduct guidelines for the other employees. Many executive board members feel that the moral and ethical conduct declaration is formulated in very general terms and contains points that are fairly obvious. This is partly why they downplay its importance. Although the Commission concludes that certain organisations have relegated the declaration to a marginal role, some insurers add a paragraph to the declaration to make it more consistent with their company's core values. The Commission considers this is a positive step. Risk management Just under half of the insurers who completed and returned the questionnaire said that their implementation of risk management is in line with the Code's principles. The process is still ongoing at a majority of the insurers, often because the risk appetite and/or risk policy still has to be finalised or because a product approval process still has to be implemented. The interviews demonstrate that most insurers are actively working on risk management and most are aligning the implementation of the Code s principles in this area with the introduction of Solvency II. In the interviews, it appeared that most insurers take an active approach to assessing the risks, but are still developing a comprehensive process in which the identification of risks must be an automatic part of an integrated approach to risk management with strategy and risk appetite being determined in a cyclic model. Proper implementation of risk management, in accordance with the 'three lines of defence model (risk management at the department level, internal audits and external audits), is still a focus area for smaller insurers. They are also struggling with dual positions combining the duties of risk management, compliance and audits, often due to the small size of the organisation. We noted that the larger insurers have now forged a link between risk management and the supervisory board and have functional risk committees in place. Despite the fact that health insurers must take the implementation of risk management a step further, it appears that most have already started the process and that it is on the management agenda. Audits About two thirds of the insurers who completed and returned the questionnaire said that they were compliant with the Code s principles regarding audits, while a few smaller insurers and foreign insurers said that the duties of the internal auditor still had to be organised, or that the position was filled by someone outside the business unit. This was not one of the Commission s key focus areas in the interviews, but it does plan to revisit this topic in the report to be published in late

17 Remuneration policy About two thirds of the insurers who completed and returned the questionnaire said that they are compliant with the Code s principles relating to remuneration policy. The non-compliant insurers refer to their control structures, arguing that the Code's principles would not be appropriate for their type of organisation (e.g. a foreign parent company which sets the remuneration policy or an organisation without any shares and/or a non-profit organisation). The interviews revealed that most insurers have now begun addressing this topic, in part or in some cases mainly in response to the restrictions of the Restrained Remuneration Policy Regulations (Regeling beheerst beloningsbeleid). Variable remuneration was reduced to 20%-30% of fixed salary at many insurers, which is well below the maximum stipulated in the Code (100% for an executive board member). Many insurers have a system whereby the remuneration is linked to non-financial performance criteria (such as employee satisfaction, customer satisfaction, integrity, duty of care) and, in their own view, their remuneration policy has been brought into line with their strategy, risk appetite, objectives and core values. Insurers maintain that they are ensuring a balanced relationship between placing the client s interests first and rewarding employees in commercial positions by means of performance criteria and by capping variable remuneration. On the basis of the interviews, it was not yet clear whether a remuneration policy has already been developed, primarily for commercial positions, aimed at placing the client s interests first and effecting the necessary change in behaviour. 7.2 Specific themes Product approval process Three-quarters of the insurers that completed the questionnaire said they had a product approval process (PAP) in place. The insurers indicated that a broad range of the various disciplines in their organisation were involved in the product approval process and nearly all of them said that the product approval process is laid down formally in their policies. The product approval process includes a cost-benefit analysis, the risks of the product for the company, the duty of care vis-à-vis the client, whether the product is in line with company strategy and objectives and whether the product is financially sustainable. The AFM s 'KNVB criteria (cost-efficient, useful, safe and understandable) are also frequently mentioned and some of the insurers have already included these criteria in their product approval process. Many insurers have had a process in place for quite some time for the introduction of new products and the process includes certain elements of the product approval process. However, the results of the interviews were mixed as regards the implementation of a product approval process within the spirit of the Code. In many cases, while a process was in place, it was not adequately integrated into the company strategy and the multidisciplinary involvement within the organisation was limited. In the Commission's view, therefore, the product approval process is still in its infancy at many insurers. The management is relatively uninvolved in the product approval process and the interviews revealed that the supervisory board is generally not involved at all. Few insurers take a structured approach to modifying existing products or services on the basis of a product approval process. Insurers who do take a structured approach have made smaller modifications to existing products having subjected them to the product approval process. Occasionally, clients are involved in the 16

18 product approval process through client panels and members councils. The product approval processes of health insurers are the most advanced, which can be attributed to the fact that they previously implemented Health Insurance Governance including themes such as the product approval process and placing the client s interests first. The product approval processes of insurers with the 'quality mark for customer-oriented insurance' also seem to be more advanced. Placing the client s interests first Half of the insurers that completed and returned the questionnaire indicated that they have a detailed concept of how to place the client's interests first, but that integration in the organisation is not yet complete. One quarter of the respondents feel that no plan for change is required because they have always placed the client s interests first and already have a detailed approach in place. This argument is heard primarily from the health insurers and the mutual insurers. The remaining quarter gave other reasons for not focusing specifically on this theme, for instance because they are already doing enough, the insurer operates on the business market or the insurer is owned by a foreign company. Insurers gave themselves a remarkably high mark on average when asked how much consideration is given to placing the client s interests first in, for example, the weighing of interests, acting in accordance with objectives and choices, providing the flexibility to discuss decisions, exemplary behaviour, feasibility, transparency and enforcement. Furthermore, they referred to applying the standards of the 'quality mark for customer-oriented insurance' and the AFM regulations relating to placing the client s interests first. Delving deeper into the reasons for these marks in the interviews, the Commission has the impression that insurers often have a too optimistic view of the degree to which they place the client's interests first, particularly insurers who operate in the nonlife and/or life insurance segments. The Commission concluded that, on the basis of their corporate mission, health insurers have actually placed the client s interests first for quite some time already for historical reasons and because of duties imposed by law. The Commission feels that nonlife and life insurers do not make a clear enough distinction between a client focus and placing the client s interests first. Although the quality mark for customer-oriented insurance lays a good foundation for insurers to develop an organisation and products tailored to the client's needs, the Commission feels that more is required to actually place the client s interests first. The key is that the express consideration of the client s interests must be integrated into the organisation s strategy and policy and that the employees are aware that this is the case and act accordingly. The client s interests will then be considered in all relevant processes, including the formulation of the company's objectives, risk management, personnel policy, product development, etc. There will be effects for everyone involved - clients, personnel, shareholders, suppliers and brokers. In the Commission s view, this embedding into the organisation needs to go further, including in the management layers, in order to achieve compliance within the spirit of the Code. This also applies to mutual insurance associations. While they say that their structure ensures consideration of the client's interests, the Commission does not believe that that is automatically true, particularly with regard to topics that are difficult for members to assess, such as the long-term strategy. 17

19 The Commission has seen several good examples of insurers which, from the top down, have awoken a new trend in the organisation, thus breathing new life into their company. It is abundantly clear that the management must play a key role in integrating the placing of the client's interests first into the entire organisation, which will result in a significant cultural shift for some personnel. Incentives offered by the supervisory board (or supervisory body) may be essential in this process. Specific attention should be paid to the role of brokers as regards the theme of placing the client s interests first. The Commission holds the view that insurers that work with brokers should go to great lengths to ensure that the broker also places the client s interests first. Insurers therefore reach better agreements in partnership agreements and monitor broker performance. Several insurers provide training to brokers to improve the quality of their services. There is also a tendency, in part due to quality criteria, for insurers to gradually reduce the number of brokers they work with. By contrast, there are also insurers that only verify whether a broker has an AFM licence and/or expect brokers to fulfil the duty of care on their own initiative. In such cases, the Commission wonders whether insurers are doing enough to play their part in the responsibility of the supply chain as a whole to comply with the duty of care. As for the remuneration of the brokers, it appears that the sector is trying to strike a new balance. The new legislation announced by the Minister of Finance in relation to broker remuneration is expected to have a major impact on the sector over the coming years. The leading insurers have integrated broker remuneration into the product approval process, the intention being that remuneration should also be critically assessed. 7.3 General findings The Commission wishes to emphasise that this is the first report on a Code since it came into force for some insurers on 1 January 2011 and for others only during the course of The Commission therefore does not expect all insurers to comply with all parts of the Code yet. However, it does expect insurers to demonstrate that their approach to implementing the Code is proactive enough. The Commission also feels obliged at this stage to point out weak spots in implementation that need more attention in the coming period. The Commission has observed that the Code acts as a catalyst and has already resulted in organisational improvements being set in motion at a lot of insurers. At the same time, a large number of insurers seem to lack the sense of urgency that improvements are important. Some insurers remarked that the Code s main purpose is to crack down on the incorrect behaviour of other insurers, seemingly without really acknowledging that the entire sector is struggling with a lack of trust and a poor image. Many insurers do not believe the Code will have much impact (compared to other regulations that force insurers to change their processes) and they doubt the added value of this system of binding self-regulation. The implementation of the Code is mainly tackled as an exercise in compliance. While the Commission does have some understanding for this approach, it urges organisations to also use the Code to bring about a cultural shift. To date, few insurers have used the Code to refocus strategy and there is not enough of a management-driven, comprehensive approach to the implementation of the Code aimed at internalising its underlying values. 18

20 Despite only expending a minimum of effort, some insurers think that they already comply sufficiently with the Code. Others are implementing the Code s principles in some parts of their strategy and operations, but only incidentally. In addition, such activities are not always initiated in response to the Code. The formal structure of the larger insurers organisations has been adapted to the Code s principles and several larger insurers have also set up in-house development programmes to promote behavioural changes in their personnel. Naturally, undergoing such processes is a challenge. Not all larger insurers have implemented these types of programmes. Meanwhile, some smaller insurers are actively implementing the Code s principles and have a clear vision in doing so, while others are incorporating their implementation of the Code into ad hoc projects. The Commission believes that such an approach will possibly have the desired effect in insurers of this size. Implementing the new legislation (particularly the Restrained Remuneration Policy Regulations ) and the Code's principles concurrently is difficult for insurers (except for the really large companies). Quite frequently, the powers that be are also criticised for forcing through regulations without any prior agreement. The Commission feels that insurers do not yet fully understand that the Code is about self-regulation, i.e. rules which the organisation itself wishes to observe. They will need to adopt a more positive attitude in order to fulfil the Code s purpose and restore the public s trust. In short, the sector must learn to own the Code more. The Commission believes that the umbrella organisations can play a role in this regard as well. The Commission s impression was that the interviews gave a lot of insurers a better understanding of the Code s purpose and how it might be implemented, which was clearly needed, especially in the case of the smaller companies. Generally speaking, the Commission s activities, i.e. the questionnaire and the interviews, seem to have served as an additional impetus for insurers to consider their application of the Code. In the interviews, the Commission learned that the insurers think that Code is general and not aimed specifically at their sector. The Code does not make any distinction between the various insurance segments such as health care, life/nonlife, mutual insurance associations or family businesses either. Of the insurers who completed the questionnaire, nearly one-third said they were fully compliant with all parts of the Code and would not be taking the option of explaining a deviation from any of the Code s principles. The rest either said they would be explaining one or more deviations, or they were not yet sure. Some insurers were a bit overconfident when asked in the interviews what still had to be done to achieve compliance. In the Commission s view, the sector still has additional steps to take before the sector as a whole can be deemed fully compliant. That said, the sector has clearly already taken certain measures and the Commission feels that the initial results are promising. 19

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