System of GovernanceArticles 41 to 49 of Directive 2009/138/EC

11th May 2010

Eamonn Henry

System of Governance – Directive Articles System of Governance – Directive Articles

• General governance requirements (Article 41)

• Fit and proper requirements (Article 42)

• Proof of good repute (Article 43)

• Risk management (Article 44)

• Own risk and solvency assessment (Article 45)

System of Governance – Directive ArticlesSystem of Governance – Directive Articles

• Internal control (Article 46)

• Internal audit (Article 47)

• Actuarial function (Article 48)

• Outsourcing (Article 49)

General governance requirements General governance requirements

• Adequate structure with clear allocation/segregation of duties

• Effective transmission of information

• Written policies with prior approval by Board and annual review:– risk management, internal control, internal audit,

outsourcing (where relevant)

Fit and proper requirementsFit and proper requirements

• Applies to Directors/managers/key functions

• Adequate qualifications, knowledge and experience

• Good repute/integrity

Proof of good reputeProof of good repute

• Evidence of good repute

• Evidence of no bankruptcy

• Mutual recognition between Member States

Risk management Risk management

• Risk management function to be established to implement risk management system

• Effective risk management system to identify, measure, monitor, manage and report all risks and interdependencies

• Integrated into organisational structure and decision making

Risk managementRisk management

• Cover risks included in the SCR calculation and any other risks

• Cover underwriting/reserving/ALM/investment, etc. and have written policies

• Cover approved partial or full internal models:– design & implementation, testing & validation, document &

make changes, analyse performance, report to Board & recommend improvements

Own risk and solvency assessment (ORSA)Own risk and solvency assessment (ORSA)

• Company’s own view of its risks and capital needs

• ORSA is part of the risk management system

• Overall solvency based on risk profile, risk tolerance and business strategies

• Continuous compliance with SCR/MCR/technical provisions

• Identification of significant deviations of the risk profile from the SCR assumptions

Own risk and solvency assessment (ORSA)Own risk and solvency assessment (ORSA)

• Integrated into business strategy and strategic decision making

• To be performed regularly and after change in risk profile

• Results to be provided to the supervisory authority

• ORSA is not a parallel method to calculate the SCR

Internal controlInternal control

• Effective internal control system

• Sound administrative and accountancy procedures, reporting arrangements

• Compliance function to be established

Internal auditInternal audit

• Internal audit function to be established

• Evaluate internal control and other aspects of governance

• Objective and independent from operational functions

• Recommendations reported to Board

Actuarial functionActuarial function

• Staffed by persons with knowledge of actuarial/financial mathematics

• Responsible for coordinating the calculation of the technical provisions

• Appropriate methodologies, assumptions, data sufficiency and quality

• Compare best estimate against experience

Actuarial functionActuarial function

• Advise Board on reliability/adequacy of the calculation of the technical provisions

• Provide an opinion on overall underwriting policy and on reinsurance arrangements

OutsourcingOutsourcing

• Responsibility for outsourced functions remain with insurance undertaking

• Governance should not be impaired and operational risk should not be unduly increased

• Supervisor’s ability to monitor compliance should not be impaired

• Supervisors to be notified in advance of any planned outsourcing

ProportionalityProportionality

• Principle included in the Directive

• Based on the nature, scale and complexity of operations

• CEIOPS guidance still being developed

• Same rules for all but different implementation

Lessons learntLessons learnt

• Governance is important – pay attention to it!

• Risk management is fundamental

• Start thinking in terms of the ORSA

• Start working on written policies!

Thank youThank you