Insurer Corporate Governance –

Group Issues
Scenario
You recently moved to the group-wide supervision department of the Gothampolis
Insurance Regulatory Agency (GIRA). Honest Insurance Group (HIG) is a large,
internationally active insurance group based in the United Kingdom with operations in 30
countries in Africa, Asia, Europe and Latin America. Recently, the GIRA approved the
licensing application by HIG to set up a life insurance subsidiary called Honest
Insurance Company (HIC) in Gothampolis.

As the supervisor of HIC, the GIRA has been invited to attend the supervisory college
meeting for HIG that will be chaired by HIG’s group-wide supervisor, the Prudential
Regulation Authority (PRA) in London. Your manager, Cat Frauen, who heads the
group-wide department of the GIRA, has asked you to prepare a background note for
the meeting.

You refer to the Insurance Core Principles (ICPs) and the Application Paper on the
Composition and the Role of the Board published by the International Association of
Insurance Supervisors (IAIS).

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Group Corporate Governance Approaches
In general, insurance groups can organise themselves in the following ways:

• centralised – characterised by the head of the group having more authority or

the decision-making powers residing with the board and senior management at
the group level
• decentralised – each legal entity within the group has greater autonomy and
authority rests with the board and senior management at the entity level

In practice, insurance groups are likely to adopt a hybrid approach, combining elements
of both approaches. The approach taken by an insurance group will determine the
appropriate corporate governance requirements that should apply to the group.

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HIG’s Group Corporate Governance Approach
In the case of HIG, its board has taken a centralised approach, dictating policies and
procedures that should be followed by HIG’s constituent entities. The PRA, as HIG’s
group-wide supervisor, has the best view of the group’s objectives and strategies and
communicates these closely to all involved supervisors, including the GIRA.

Insurance groups like HIG face two key challenges in setting group objectives and
strategies. Firstly, they need to balance the needs and interests of the group as a whole
with those of insurance legal entities within the group. Secondly, they need to ascertain
that entities within the group are able to comply with relevant jurisdictional requirements,
as well as the group’s internal policies.

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Group Structures
Review the agenda of the supervisory college meeting prepared by the PRA.

The activities listed in the agenda are some examples of good supervisory practices in
overseeing the corporate governance of insurance groups as described in the IAIS
Application Paper on Group Corporate Governance.

Insurtech
Insurtech is short for ‘insurance technologies’. It refers to the variety of emerging technologies and
innovative business models that have the potential to transform the insurance business.

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Role of Supervisors
From an involved supervisor’s perspective, you should review HIG’s group-wide
objectives and strategies to understand how these might impact HIC’s local operations.
Group-wide supervisors, like the PRA, should approve any material acquisitions or
disposals of insurance entities within the group. Collectively, the supervisory college
should consider any new risks arising from the group’s objectives and strategy and, in
this instance, risks from the artificial intelligence company that HIG is not familiar with.

Group-wide supervisors may not always have access to the policies of legal entities. It is
a good opportunity to obtain such information through supervisory colleges. Supervisors
should review both group and legal entity policies to ascertain consistency and identify
potential conflicts of interest between different legal entities. Reviewing the relevant
board minutes can reveal if board members provided adequate challenge and the extent
to which legal entities’ interests are considered when setting group policies.

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Board of Directors
You review HIG’s documented policy on the roles and responsibilities of its board
members, senior management and control functions. Such formal documentation is
useful to provide clear communication throughout the group and accountability within
insurance groups, especially between legal entities and the head of the group, such as
between HIC and HIG. The policy should also describe the role of HIG in the
appointment of senior management and control functions at HIC. Supervisors at both
group-wide and insurance legal entity level should pay attention to cross representation
in boards within the group and how conflicts of interest are addressed within a group’s
policies and processes.

The PRA’s Role

The PRA, as the group-wide supervisor of HIG, should understand the decision-making
process of the group, including where in the group decisions are made, who is involved
in making decisions and how decisions are communicated throughout the group.

Role of the HIG Board

The board of HIG should develop and document clear group-wide policies on key
activities, such as investments, asset-liability management, underwriting and risk
management. Such policies can minimise operational errors that could threaten the
solvency of the group and its legal entities.

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Question: Conflict of Interest
In your view, which of the following can give rise to potential conflict of interest
between HIG and HIC?

• Capital distribution among group entities (Yes/No)

• Dividend demands by HIG (Yes/No)
• Common board members (Yes/No)

Correct/Incorrect. From a group perspective, it is in the HIG’s interest to minimise

capital allocation to its group entities and to repatriate as much in terms of dividends as
possible from those entities to maximise its return on capital. However, these actions will
weaken the solvency position of group entities like HIC. To manage such potential
conflicts of interest, HIG can, for example, establish board committees with
representatives from the different business units or entities. The involved supervisors
should review the effectiveness of such arrangement to minimise conflicts of interest
within the group and ascertain that the objectives of the group and legal entities are
aligned.

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Conflicts of Interest
Some groups may deliberately choose to have common board members to ensure the
group’s strategy is aligned with that of the legal entity. However, this can give rise to
potential conflicts of interest, as what’s good for the group may not necessarily benefit
the legal entity.

To minimise this risk, supervisors can:

• require a minimum number of independent board members at the group and legal
entity levels
• discuss with the chair on a regular basis how he/she can become satisfied with
the independence of board members especially those with multiple board
positions
• require insurers to obtain prior approval for such board appointments
• require insurers to establish clear policies to address potential conflicts of interest
• set a maximum number of board memberships allowed for individuals

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Group Control Functions
The PRA has circulated meeting documents ahead of the supervisory college meeting.

Report from the Group Chief Executive Officer

We recognise that it is important for control functions at our insurance legal entities and
at the group level to be independent with direct access to the local and group boards. As
requested ahead of the supervisory college meeting, please find attached HIG’s internal
policy on group-wide escalation procedures that the control functions can use to bring up
issues for the attention of the boards.

Each group control function is required to meet the equivalent entity level control
function at least once every quarter. The legal entity control function provides quarterly
reports to the group control function. Such close communication facilitates closer
alignment of strategic direction between the group and its subsidiaries.

Report from the Group Chief Compliance Officer

In line with industry good practice, HIG’s Group Chief Compliance Officer is also a
member of compliance oversight committees at HIG’s insurance subsidiaries, including
HIC. This ensures that local regulatory requirements that apply to each of HIG’s
subsidiaries are fully considered and controlled at the group level.

Report from Group Risk Management

Following concerns raised at the last supervisory college meeting that HIG’s risk
management and compliance functions are combined, HIG has put in place procedures
to protect the independence of the Group Risk Management and Compliance Officer,
which include a direct reporting line to the chairman of HIG’s board of directors.

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Outsourcing
In HIG’s outsourcing policy, you noticed that the group outsources its risk management
function to HIC, which hosts the group’s risk management centre of excellence. Such an
arrangement is called ‘insourcing’. Another arrangement involves its insurance
subsidiary in Sunland outsourcing its compliance function to HIG.

Regardless of the form of outsourcing arrangements, the board of HIG must retain
oversight of such outsourced activities that are considered material. It is ultimately
responsible for the smooth execution of those activities. For group control functions that
are outsourced, the group-wide supervisor, the PRA, should verify that the board at the
group level assesses the effectiveness of the outsourced functions.

From a supervisory perspective, the PRA and other involved supervisors should have
the ability to access the outsourced activities, including conducting on-site inspections.
The supervisors should also review the service level agreements, key risk indicators,
escalation procedures and service logs to assess the effectiveness of the outsourcing
arrangement.

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ComFrame
HIG has been expanding its business globally. It is considered an ‘internationally active
insurance group’ (IAIG) as it fulfils the following conditions:

• underwrites insurance business in three or more jurisdictions

• obtains at least 10% of gross written premium from outside the United Kingdom,
where the group is based
• has assets of more than USD 50 billion or gross written premiums of more than
USD 10 billion

As an IAIG, it will be subject to the Common Framework for the Supervision of

Internationally Active Insurance Groups (ComFrame). ComFrame requires group-wide
supervisors to impose additional requirements on IAIGs.

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Review Question
Classify the following statements as True or False.

• Involved supervisors should collectively approve any material acquisitions or

disposals of insurance groups. (True/False)

• Insurance supervisors should prohibit insurance groups from combining the roles
of group-wide risk management and compliance functions. (True/False)

• Insurance groups can outsource material activities, such as investment

management functions, provided the board retains oversight of such activities.
(True/False)

Correct/Incorrect. It is the group-wide supervisor and not all involved supervisors that
has the responsibility to approve any material acquisitions or disposals of insurance
groups.

Ideally, group-wide risk management and compliance functions are separated to avoid
potential conflicts of interest. Failure to do so will make it difficult to assess compliance
of the risk management function with the group’s risk management policies.
Nevertheless, supervisors may accept such an arrangement if the insurance group puts
in place the necessary measures to minimise the potential conflicts.

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