Governance
Governance
Lapses
Embarrass
Insurers
The governance policies of insurance
companies rarely draw public scrutiny. The past
year has seen some noticeable exceptions on both
sides of the Atlantic.
In June, the Supervisory Board of ERGO
Versicherungsgruppe AG, a Munich Re subsidiary,
announced changes to its governance structure
following a well-publicized scandal ensnaring some
of its top salespeople, who were feted at a party
that featured prostitutes and was held at a
Budapest spa in 2007.
Torsten Oletzky, Chairman of the ERGO Board of
Management, said after an internal audit the company
would enact measures intended to supplement the
company’s existing Corporate Governance rules and
regulations. “What happened in Budapest in 2007 is
completely unacceptable,” Oletzky said in a statement
revealing the audit’s findings. “The measures adopted
today supplement the rules already introduced in the
last few years. They should ensure that nothing like it
ever happens again.”
In April, Cesare Geronzi, chairman of Assicura-
zioni Generali SpA, resigned after a dispute with the
company’s board regarding risk appetite. In its Jun
23rd edition, The Economist deemed Geronzi’s
ouster a victory for good governance. “As chairman
of Generali he quickly announced a new strategy for
the firm to expand in Latin America, which its chief
executive and board had not even discussed. The
insurer, he argued, could invest in a controversial
project to build a bridge to Sicily, which some people
think might indirectly enrich the mafia. So when
directors revolted and Mr Geronzi unexpectedly
resigned in April, many investors saw it as a good
day for European corporate governance.”
Such contretemps have not been limited to Europe.
This spring, the governance practices of Berkshire
Hathaway Inc., parent of GEICO and General Re, came
under scrutiny following the resignation of executive
David Sokol, who had purchased nearly 100,000
shares of industrial lubricant maker Lubrizol prior to its
acquisition by Berkshire in March. In April, the Audit
Committee of Berkshire Hathaway Inc. released a
report faulting the “misleadingly incomplete”
disclosures made by Sokol but acknowledged that it
was working with “company management and legal
counsel to identify and implement lessons learned
from these events, including possible enhancements
to its procedures.”
may well bristle at the prospect of having to satiate Brussels as part of a global shift toward regulatory modernization and harmonization.
GOVERN THYSELF
Yet, regulatory concerns are far from the reasons insurers are reassessing their governance and risk management structures. Speaking during a session at the
Insurance Accounting Systems Association’s Educational Conference and Business Show in June, Scott
McEntee, controller at Farmers Mutual Hail Insurance
Co., said the impetus for the enterprise risk management initiative he led at the firm was purely internal.
“We are a mutual company so we don’t have to worry
about SOX, the SEC or, hopefully, the model audit rule,
so we are doing it for the right reasons,” McEntee said.
“Management has talked about an ERM program for the
past few years and it finally came about two years ago.”
McEntee said marshalling the wherewithal to get the
program off the ground was challenging as the com-
pany had many other strategic initiatives under way at
the same time. “We knew that we wouldn’t have the re-
sources to carry the ERM initiative through from a proj-
ect management standpoint and we also knew that since
it was such a new thing we didn’t have the knowledge
base we needed,” he said. “So we went and got an out-
side vendor to help us out.”
Once the consultant and proper software were in
place, McEntee said a primary undertaking was con-
structing a risk matrix where risks are identified and
ranked. Though he says ERM is largely a qualitative as-
sessment of risk, some quantitative measures around
risk appetite are essential. “Until you can quantify your
risk appetite and develop the consequences you are
willing to accept and what level you are willing to accept
them at, it makes no sense to identify and rank individual
risks,” he said.
With the ERM regime now operational, McEntee says
its bottom-up approach converges well with the top-down nature of the company’s strategic planning. In this
light, a well defined, effective internal control structure
seems more a purposeful, value-added business initiative than a reaction to a burdensome regulation.
Many insurers are not waiting for a push from regulators to becoming more explicit about their governance practices. This entails publicly demonstrating
the strength of and management’s commitment to their
governance processes by clearly defining responsibilities
and appropriate reporting lines, and documenting governance policies and procedures. American International
Group and Allstate, for example, publish extensive information regarding corporate governance structures on
their respective Web sites. No doubt, a properly run governance regime can furnish its own rewards and bring
tangible business benefits, such as positively impacting
credit ratings and investor sentiment.
Despite the regulatory emphasis on governance, it
is still worthwhile to note that governance is not syn-
onymous with compliance. While compliance is done
solely to appease regulators, governance exists to
protect its owners’ interests. Indeed, some argue the
“checklist” mentality that defined some compliance
efforts in the wake of the Sarbanes-Oxley Act is espe-
cially dangerous in the face of Solvency II, which codi-
fies the use of analytics models in risk management.
“The increased use of complex actuarial models will
also require insurers to establish robust model gover-
nance procedures to support the integrity of actuarial
projections,” PWC notes.
HELP FROM ABROAD
So, where can insurers turn to in order to benchmark
their current governance efforts against what may
soon be expected from them? In May 2011, the Organization for Economic Co-operation and Development
Council (OECD) working with the IAIS, released the revised OECD Guidelines on Insurer Governance.
The revisions were based on a comprehensive review and seek to present the “evolving national and
international principles and good practices” regarding insurer governance. OECD says the new guidelines
seek to reflect lessons learned from the financial crisis
and are organized around four main sections: governance structure, internal governance mechanisms,
groups and conglomerates, and stakeholder protection.
Among the recommendations: the need for a board
with necessary leadership, expertise, and independent
decision-making, effective risk management and internal
control systems and integrated enterprise-wide reporting
within an insurer, sound compensation arrangements,
and well understood group structures.
