NAIC Working Group Starts Development On Corporate Governance Model Laws

At last week’s National Association of Insurance Commissioners (“NAIC”) 2013 Spring National Meeting, the NAIC’s Financial Condition Committee approved two model law development requests submitted by its Corporate Governance Working Group (“Working Group”).  One calls for the development of a new model law on annual reporting of corporate governance practices of insurers.  The other would amend the Annual Financial Reporting Model Regulation (#205) to require large insurers exceeding $500 million in annual premiums to maintain an effective internal audit function capable of providing independent assurance of an insurer’s governance, risk management and internal controls.

The proposed corporate governance model law would be limited in scope to authorizing the collection of confidential information in the corporate governance of domestic insurers on an annual basis.  It would provide the strongest possible confidentiality protection for information received under its provisions, including protection from subpoena and open records laws.  In addition, it would address questions related to the level at which information on corporate governance may be provided (group versus legal entity), the filing due date and a commissioner’s authority to grant waivers.

If approved by the NAIC’s Executive Committee, the Working Group would begin development of this model law by identifying overlapping or redundant requests for corporate governance information that could be removed from other areas of the regulatory process.  These items would then be replaced by a reference to the information collected under such potentially redundant information such as several general interrogatories in the NAIC’s Annual Statement Blanks and numerous items in the Exam Planning Questionnaire of the NAIC’s Financial Condition Examiners Handbook.

Another topic discussed by the Working Group during its April 7 meeting was the amount of information reported to regulators about an insurer’s remuneration practices.  The existing Supplemental Compensation Exhibit requires certain compensation information to be reported to regulators on an annual basis, including salary and bonus information for the top ten highest compensated individuals associated with each insurance entity.  However, this information is not currently provided on an aggregate (company) level and does not describe or address an entity’s compensation practices and policies.

Among other actions, the Working Group agreed to:

• Send a referral to the Financial Analysis Handbook Working Group asking it to clarify the existing procedures in place to review the suitability of officers and directors of insurers on a regular basis; update procedures relating to the review and follow-up on corporate governance issues; and consider adding procedures in these areas for holding company analysis at the group level.
• Send a separate referral to the Financial Analysis Handbook Working Group and the Financial Examiners Handbook Technical Group about a long-term project to develop a common methodology for reviewing and assessing corporate governance practices of insurers.
• Send a referral to the Financial Examiners Handbook Technical Group requesting the addition of any necessary procedures and guidance to incorporate elements of the following International Association of Insurance Supervisors’ Insurance Core Principles (“ICP”) into the examination process:
  • ICP 5: Suitability of Persons
  • ICP 7: Corporate Governance
  • ICP 8: Risk Management and Internal Controls.
• Send a referral to the Life Actuarial Task Force recommending that the appointed actuary be required to present the full life actuarial report to the board of directors on an annual basis.
• Send a referral to the Casualty Actuarial and Statistical Task Force recommending that changes to the property/casualty actuarial process be considered to allow the commissioner a similar level of authority to deem an appointed actuary unsuitable as provided under the Actuarial Opinion and Memorandum Regulation (#822).
• Send a referral to the Reinsurance Task Force inquiring of the domestic supervisor regarding the reinsurer’s corporate governance practices during a review of collateral reduction applications.
• Send a referral to the Financial Regulation Standards and Accreditation (F) Committee requesting that Section 4B(10) of the Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to Be in Hazardous Financial Condition (#385) be considered a critical element for accreditation purposes.

To view the entire “Proposed Responses to a Comparative Analysis of  Existing U.S. Corporate Governance Requirements” that was approved at the April 7 Working Group meeting, click here.

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