The NAIC Corporate Governance Annual Disclosure Model Act
July 2017, NAIC State Legislative Brief
Circular 2017/2 Corporate Governance – Insurers
December 2016, FINMA
Last Updated 12/5/17
Issue: Corporate governance is the system of rules, practices and processes by which an insurance company governs itself. Corporate governance includes not only the obvious corporate structure (board of directors, senior management, business area functions, etc.), but also a company’s organizational culture (values, ethics, etc.) and strategies and controls as well as all the governing documents that capture the spirit and the letter of a company’s guiding principles and mandates.
Overview: Corporate governance defines all organizational roles, responsibilities and accountabilities at all levels. It describes and explains the management hierarchy, that is, the decision-making and accountability chain and ultimately who has the power to manage and legally represent the company in all settings. Corporate governance spells out requirements for documenting decisions and actions as well as the thinking behind them. It also provides for corrective action for non-compliance or weak oversight, controls and management.
Hence, corporate governance addresses the allocation and regulation of power and accountabilities within an insurer, and includes avoiding undue concentration of authority and power. Also, corporate governance has to be transparent and have appropriate systems, controls and limits to ensure the given authority and power is used protecting the interests of all of the insurance company’s stakeholders.
Status: In 2012, the National Association of Insurance Commissioners (NAIC) formed the Corporate Governance (E) Working Group to outline high–level corporate governance principles for use in U.S. insurance regulation and to develop regulatory guidance, including detailed best practices, for the corporate governance of insurers. The requirements for extensive disclosure of regulated insurance companies’ corporate governance practices that were developed were set in the Corporate Governance Models adopted by the Executive Committee and Plenary during the 2014 Fall National Meeting. Following that meeting the Corporate Governance (E) Working Group was disbanded.
Upon state adoption of the NAIC models and as early as June 1, 2016, each U.S. insurer or the insurance group in which the insurer is a member, must submit, a Corporate Governance Annual Disclosure (CGAD) to its lead state or domestic regulator on an annual basis.
In the CGAD, insurers must document highly confidential information about their corporate governance framework, including the structure and policies of their boards of directors and key committees, the frequency of their meetings, and procedure for the oversight of critical risk areas and appointment practices, among other things. Insurers must also disclose the policies and practices used by their board of directors for directing senior management on critical areas, including a description of codes of business conduct and ethics, and processes for performance evaluation, compensation practices, corrective action, succession planning and suitability standards. This information will be utilized by insurance regulators to understand, review and assess the corporate governance practices of insurers to promote effective oversight on an ongoing basis.