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Corporate governance post-Penrose
Michael Culligan
Presented at a seminar of the Society of Actuaries in Ireland“Life Assurance – A brave new world”
20 May 2004
Penrose Report
Penrose Report into Equitable Life Commissioned in August 2001 To investigate and report into Equitable Life and identify any
wider lessons for conduct/regulation of life assurance Report delivered in March 2004 Quite a wait…but well-received when eventually published Critical of
– management & directors– regulators– actuarial profession
800 pages long!
Corporate governance (1)
System by which companies are directed and controlled Boards of directors are responsible for the governance of their
companies. Shareholders’ role is to appoint the directors and the auditors
and to satisfy themselves that an appropriate governance structure is in place
Responsibilities of the Board include– setting the company’s strategic aims– providing the leadership to put them into effect– supervising the management of the business; and,– reporting to shareholders on their stewardship.
The Board’s actions are subject to laws, regulations and the shareholders in general meeting.
So, it’s about how corporations are governed– “Does exactly what it say on the tin”!
Clear that the Board is placed squarely at the centre of things This applies to all companies But, life assurance companies are “special”
– bring their own issues– can prove tricky to accommodate within generic framework
True of mutuals in particular– don’t intend to consider mutuals – Penrose absolutely scathing on their structures– UK Treasury has launched independent review
Will focus on shareholder-owned companies
Corporate governance (2)
Agenda
Current corporate governance structures
Issues raised by Penrose
Recent UK regulatory changes
Possible implications for the Irish regulatory regime
Conclusions
Irish corporate governance (1)
Every company has a Board of Directors– No rules re size (other than min. 2 people)– No rules re qualifications– No single statement of directors’ responsibilities
Normally, a mix of execs and non-execs– No distinction in law– No law governing the mix (but code for listed companies)
Clear rationale for appointing non-execs– Can make a valuable contribution to decision making process– Can help to formulate strategy– Most importantly, bring an element of independence and objectivity
For life offices, IFSRA have power of veto over Board appointments– Board nominations subject to IFSRA approval– “Fit and proper” test
For new companies, approval of initial Board is part of overall approval process– Subsequent nominations subject to approval as above
Allows IFSRA to influence:– make-up of Board– skills, knowledge and experience of Board as a whole– balance between execs and non-execs
Influence may be more theoretical than practical
Irish corporate governance (2)
Generally held that Board is responsible for all aspects of the company’s business
IAIS core principle on corporate governance:– “…the board is the focal point…”– ”…it is ultimately accountable and responsible…”
IFSRA also clear about role of the Board:– “…ultimate responsibility lies with the Board and senior
management”
Irish corporate governance (3)
Position complicated by the statutory Appointed Actuary role
Appointed Actuary has Board as his/her principal– but also has a duty to IFSRA and to policyholders
Appointed Actuary’s annual investigation not subject to Board sign-off
Also, not subject to audit
Means that almost all of the liabilities side of the balance sheet (in IFSRA Returns) is dictated by one individual
Irish corporate governance (4)
Agenda
Current corporate governance structures
Issues raised by Penrose
Recent UK regulatory changes
Possible implications for the Irish regulatory regime
Conclusions
Penrose – introduction
UK arrangements were broadly similar to those outlined for Ireland– formed backdrop to Penrose’s report
Will examine his conclusions in relation to corporate governance
His report dealt with one company, but many findings have more general application
Report covered a range of governance issues– role of directors– role of audit committee – role of actuaries etc
Will concentrate on role of directors
Penrose – on directors (1)
Composition of Equitable Board– gradual shift from non-execs to execs
Penrose clearly viewed strongnon-exec presence as desirable
Also clearly viewed Board’s as having ultimate responsibility for all matters
However, problems with this in practice– skills and experience of actuarial matters?– able to make independent judgements on actuarial issues?
Penrose – on directors (2)
Penrose saw four main problems: non-execs “ill-equipped to manage a life office by training or
expertise” directors “totally dependent on actuarial advice” directors unable to “assess the advice…and challenge the
actuaries” actuaries on the Board inhibited by professional guidance
Criticisms cover Board’s oversight of all actuarial work
Not everyone agreed with his conclusions– representations from some non-execs– felt that his criticisms set unrealistic standards for non-execs
But, Penrose did not accept this– difference between ability to do technical actuarial calculations and
ability to understand the results of actuarial work
Also, further representations from some non-execs – “absurd” to expect non-execs to challenge actuaries when auditors
and regulators had not Penrose’s response:
– to accept this line of argument would have profound significance for the governance of life offices
Penrose – on directors (3)
Summary of current position
In summary:
Regulators want to emphasise primacy of Board
But, practical problems with ability of Boards to oversee the actuarial function independently
And, non-executives may feel it unreasonablefor them to understand and take responsibilityfor actuarial matters
How do we square this circle?
Possible options
Two possible options: regulator ensures that Boards have requisite actuarial skills regulator makes clear to Boards that they are ultimately
responsible and should take necessary actuarial advice
Potentially a third option– regulator bypasses the Board and takes direct responsibility for
overseeing actuarial function– not realistic
Regulator unlikely to go for first option Second option provides potential way forward
Agenda
Current corporate governance structures
Issues raised by Penrose
Recent UK regulatory changes
Possible implications for the Irish regulatory regime
Conclusions
Developments in the UK (1)
Fundamental overhaul of regulation by FSA CP167 on governance issues
– final proposals published in June 2003 (after consultation) Driven/influenced by with-profits issues
– not going to focus on with-profits issues– focus on issues affecting all insurers
First main change is the removal of the Appointed Actuary role New role – “Actuarial Function Holder” (AFH) – created instead
– AFH’s role is to advise directors on actuarial issues– can be either employee or external consultant– may a director, but not be CEO or Chairman
Directors are responsible for the methods and assumptions– AFH’s role is an advisory one
Returns to FSA will include a cert. from the Board re value of long-term liabilities
Other major change is extension of audit– long-term liabilities now to be subject to review by actuary advising
the auditors (“Reviewing Actuary”) Peer review of AFH?
In summary, new regime brings fundamental change– Appointed Actuary’s sole responsibility removed
Developments in the UK (2)
UK developments vs. Penrose
How well do these measures address Penrose’s criticisms?
Penrose less concerned with detail of new proposals than with overall result
Key question for him was how to ensure “independent and effective actuarial audit”
New UK system achieves this (through auditors’ Reviewing Actuary)
But, is change from AA to AFH really necessary?
Would peer review of the AFH really addmuch value?
Agenda
Current corporate governance structures
Issues raised by Penrose
Recent UK regulatory changes
Possible implications for the Irish regulatory regime
Conclusions
Implications for Ireland?
Historically close ties with UK– industry– actuarial profession
Given scale and high-profile nature of UK changes, likely to put it on the agenda in Ireland
Society of Actuaries in Ireland (SAI) conscious of this
Society has developed a set of proposals for discussion with IFSRA
Proposals intended to address criticisms of existing regime
Echo broad thrust of UK changes, but differ in certain key respects
SAI’s proposals (1)
1. Position of Appointed Actuary to be retained AA to retain responsibility for deciding on methodology and
assumptions AA to continue to sign off as at present
2. Scope of directors’ certificate to IFSRA to be extended to include certifying the value of long-term liabilities
3. Wording of auditors’ certificate to IFSRA to be changed remove reliance on AA’s certificate matter for auditors to decide amount and source of actuarial
advice they need
Proposals have much to recommend them Clearly extend responsibility for signing off on long-term
liabilities to Board and to auditors But, are not unnecessarily prescriptive about nature or amount
of actuarial advice each should take– Directors free to engage independent actuarial advice if desired– Auditors would almost certainly take some advice, but this is left to
them to decide Less prescription is important practical point
– UK approach would bring significant extra cost for little extra benefit?
– Take example of purely unit-linked office Proposals form solid base for dialogue with
IFSRA
SAI’s proposals (2)
Agenda
Current corporate governance structures
Issues raised by Penrose
Recent UK regulatory changes
Possible implications for the Irish regulatory regime
Conclusions
Summary and conclusions
Current corporate governance structures increasingly seen as problematic
But, considerable practical difficulties with reconciling primacy of Board with actuarial expertise of directors
Question is how to square this circle
Conclusion is that Boards must be expected to take advice on actuarial matters (whether internally or externally)
UK proposals address this issue
SAI’s proposals also address this issue, but in a slightly different (and less prescriptive) way
Current regime seems destined to change – let’s see what happens!
Corporate governance post-Penrose
Michael Culligan
Presented at a seminar of the Society of Actuaries in Ireland“Life Assurance – A brave new world”
20 May 2004