CORPORATE GOVERNANCE, LEGAL
REQUIREMENTS AND THE POSTECON. CRISIS ENVIRONMENT
PRESENTATION TO INSURANCE REGULATORS & SUPERVISORS-E.A MEMBER STATES, MALAWI &
ZAMBIA
9TH MARCH,2011
COMMONWEALTH RESORT HOTEL, MUNYONYO,
RICHARD WEJULI WABWIRE
CORA CONSULT
1
 Rationale of Corporate Governance for Insurance Industry
◦ Definition of Corporate Governance
◦ Importance of Corp Governance, in general and for insurance industry
◦ What makes Corporate Governance imperative
 The Legal and Institutional framework for insurance regulation

Core governance principles in insurance Regulation

Post Global financial crisis environment- impact, learnings and trends
 Indicators of poor Corporate Governance
 Conclusion
2
2
“The system by which corporations are directed,
controlled and held to account “ -Institute of
Corporate Governance of Uganda
“The means by which members of the board and
senior management are held accountable and
responsible for their actions”
-International
Association of Insurance Supervisors
3
3
“… set of processes, customs, policies and systems by which
companies are directed, administered or controlled.” –Sir
Adrian Cadbury-Chairman-Cadbury Schweppes/ Cadbury
Committee
“......... a mechanism through which boards and directors are
able to direct, monitor and supervise the conduct and
operation of the corporation and its management in a
manner that ensures appropriate levels of authority,
accountability, stewardship, leadership, direction and
control”.-IFC
4
4

Direction

responsibility

Monitor

accountability
control
openness
authority
stewardship
supervision
integrity
transparency
leadership
5
5

Enhances efficiency, profitability and sustainability;

Increases shareholder value;

Encourages innovation and value addition;


Enhances confidence, loyalty, stakeholder support and
corporate profile;
Investors will pay a premium for well-governed companies;
6
6

Endemic corporate ethical scandals- fight against corruption,
bribery and abuse of corporate power;

Public perceptions of corporate greed and short termism;

The need to make corporations viable destinations for
investment in a competitive global market;

Institutional investor pressure;

The realisation that good corporate governance has “an
economic and political payoff”;

Risk management initiative by corporations.
7
7
Pressure on Directors

Their roles are increasingly becoming more complex, more
professional and more demanding.

Directors need to clearly understand their business, roles,
duties, responsibilities and liabilities

They need to keep up to date with global developments and
implications e.g. global economic crisis/environmental issues.

They need to have adequate knowledge of the business they
direct.
8
8

Risk of legal liabilities – must act lawfully and in good faith in
the exercise of their functions.

Donor/Development partner pressure;

Environmental concerns; (lessons from BP oil spillage)

Employee retention -employees are increasingly concerned
about the profile of their employers since it impacts on their
own profiles;
9
9

Increased stakeholder activism
◦ Is the business legitimate, accountable and sustainable
◦ Is there transparent corporate reporting;
◦ Are stakeholder rights recognised/respected
◦ fairness and equitable treatment of all stakeholders;
◦ ICT-internet and social networking media- amazing
velocity of information flow and gravitation of opinion and
following; (Tunisia, Egypt, Iran)
10
10
“In today's environment,
Corporate Governance is
not a luxury but a dire
necessity to locate and
weed out corporate crime”-
S.N Mchapatra & Sanjay Pandey :
Corporate Governance vs. Corporate
crime-ICAI, New Delhi .
11
11
◦ Corporate governance is in itself, a core principle of the
supervisory framework for the insurance industry.-IAIS
◦ It is a handmaid for effective oversight and regulation.
◦ It is therefore imperative for regulators and supervisors to
fully appreciate the fundamentals of corporate governance
i.e. put it in context, understand its principles, best
practices, risk management issues, board dynamics etc .
12
12
Across our jurisdictions, the Insurance laws require that
Insurers are bodies corporate (Insurance Act :s.4.
Uganda, s.22 Kenya and s24 Tanzania)
i.e. entities separate from the owners and capable of
contracting, suing and being sued etc
Consequently
insurers
requirements stipulated
are
subject
to
governance
by the provisions of the
Insurance Acts and the Company laws
13
13


The laws and corporate governance standards and practices are enforced
under an industry specific Regulatory framework;
The Insurance Acts of the respective jurisdictions- Tanzania, Uganda,
Kenya, Zambia & Rwanda
 Regulations/subsidiary legislation enacted under the Acts
 Company Laws

These laws set out the bedrock for corporate governance standards.

The Ministries of Finance exercise political/policy oversight on the industry

In some of the jurisdictions, the Central Bank has direct supervision over
the insurance industry
14
14

The Insurance Acts establish;
 Kenya -Insurance Regulatory Authority
 Tanzania -Tanzania Insurance Regulatory Authority
 Uganda -Insurance Commission

In Uganda, the Act also envisages the formation of and requires
subscription to insurance industry professional Associations

In Tanzania, the Act provides for the services of an industry
Ombudsman
15
15
oInsurance
business
is
required
to
be
conducted
by
duly
incorporated corporate entities
oIn Kenya, Uganda and Tanzania, no person can be registered to
carry on insurer business unless that person is a body corporate
incorporated under the companies Act
oThere are additional requirements for a
minimum prescribed
portion of ownership to be held by citizens of some of the
jurisdictions.
s22KE,s4 UG & s16 Tz
16
16
 The Insurance Act, Cap 213, Laws of Uganda: “An Act to
amend and consolidate the law relating to insurance and to
regulate the business of insurance…”
 The Insurance Act, Cap 487, Laws of Kenya: “An Act of
Parliament to amend and consolidate the laws relating to
insurance and to regulate the business of insurance …”
 The Insurance Act, 2009, Laws of Tanzania:-An Act to
establish the Tanzania Insurance Regulatory Authority, to
provide for its functions in regulating and supervising
insurance business.
 The Insurance Act-Zambia: “An Act to make provision relating
to the carrying on of insurance business….”

17
17

Governance

Suitability of persons

Changes in control and portfolio transfers

Internal control

On-site inspection

Risk assessment and management

Information, disclosure and transparency.
18
18

CG framework recognizes and protects the rights of all
interested parties.

Consequently, the Regulator’s role is to require compliance
with all applicable corporate governance standards, principles
and practices by the insurer

The Insurance legislation from the different jurisdictions
broadly grants a wide ranging mandate of governance over the
insurance industry & policy holder protection.
19
19
 Insurance Act-Kenya: s 3A: “..to ensure the effective
administration, regulation and control of insurance, to
formulate and enforce standards…..license,….protect the
interests of insurance policy holders and beneficiaries….”
 Insurance Act-Tz: s 6:”…to promote and maintain an
efficient, fair, safe and stable insurance market….,to
regulate and coordinate activities…effect supervision and
monitor insurers….formulate standards in the conduct of
business…”
 Insurance
Act-Ug:
s
15:”…to
ensure
effective
administration, supervision, regulation and control of
business of insurance, …license…. provide a bureau to
which
complaints
may
be
made….ensure
strict
compliance with this Act and any other law relating to
insurance..”
20
20

The board (by whatever name called)is the focal point of the
corporate governance system.

The Board is therefore ultimately accountable and responsible
for the compliance, performance and conduct of the business

It is a legal imperative for insures to have Boards of directors
and to submit the particulars and any changes of directors to
the Regulator.
21
21

Regulators therefore need to have mechanisms in place by
which they can require and ascertain compliance, by the
Board, with the laws and with corporate governance
practices.

Regulators should ascertain and ensure that;
◦ Insurer Boards have in place mechanisms for, and that they
do independently monitor risk.
◦ the Insurer establishes standards of business and ethical
behavior conduct
for directors,
senior management and
others.
22
22
◦ The Insurer complies with all relevant laws, regulations
and established codes of conduct
◦ The insurer identifies officers with responsibility for
ensuring
compliance
with
legislation
and
corporate
governance standards
◦ The insurer board has knowledge, skills, experience and
commitment to oversee the insurer business effectively.
◦ The insurer Board communicates with the regulator as
required.
◦ The Board Sets out policies that address conflicts of
interest etc
23

Initial and on-going assessment of the suitability of insurers is a
critical aspect of supervision and regulation

The key functionaries i.e. significant owners, board members,
senior management, auditors and actuaries should be suitable/fit
and proper for their roles.
 Prior to licensing, the Regulators you should satisfy themselves
as to;
 competence
and
integrity
of
the
administration
and
management of the applicant
24
 The Financial Status and antecedents of the applicant and
 Adequacy
of
the
applicants
capital
structure,
earning
prospects, etc and
 Whether the public interest would be served by granting the
license.
25
 Insurers are required to furnish details of their directors (executive and
non-executive) and technical personnel to the regulator
 The following persons cannot be officials or directors of insurance
companies;
 Person who has been responsible for mismanagement of an
insurance company, financial institution, insurance or security
brokerage firm or any other investment concern
 Ex-convict of any offence involving fraud or dishonesty
 Adjudged bankrupt
26

Insurance Act of Kenya-s27/27A:
Qualification
of
Board members- “knowledge, experience in insurance,
actuarial studies, accounting, finance or banking”.

Insurance Act of Uganda-s30:
Factors to be considered
in an application for a grant of license -”the competence
and integrity of the proposed management and
administration, the financial status and antecedents
of the applicant..”
27
.

The jurisdictions set a minimum capital requirement
to
enable one to be licensed as an insurer.

Distinctions are drawn between requirements for local and
foreign companies.

The laws of Kenya also require that a certain percentage of
the paid-up capital must be held by a citizen of Kenya

Kenya Insurance Act requires that share capital must
consist of only ordinary shares of single face value
28

The Insurance Act of Kenya also requires that;
 1/3 of board are Kenyan citizens
 Board has at least 5 members
 All members of the board must write to the commissioner
accepting appointment
29

The onus to prove suitability of the key functionaries lies with the
insurer

Proof can be by submission of documentary attestation to virtue or
quality claimed or inquired into by the Regulator.

Auditors
and
Actuaries
should
be
checked
for
professional
qualifications and proficiency, practical experience and knowledge
update

For Auditors, actuaries etc you may refer to professional bodies
for verification of suitability
30

It is the role of the Regulator to ascertain that the key
functionaries
appropriate
(Board
and
integrity,
Management)
competency,
posses
experience
the
and
formal qualifications, no conflict of interests at all
times.

Regulators
should
continually
assess
fitness
and
propriety of the key functionaries on an on-going basis
and not as a one-off event.
31
31

The
Regulator/supervisory
discretion
to
disqualify
authorities
the
have
appointment
of
the
key
functionaries including auditors and actuaries who do
not meet proper requirements

Where necessary, Regulators should share information
with
other
entities
functionaries-
but
to
ascertain
caution-be
suitability
mindful
of
of
key
ethical,
confidentiality and legal compliance issues.
32
32

Whereas the companies laws allow for acquisition
and transfer of shareholding,- generally without
limitation.

The Insurance legislation puts some limitation to
shareholding and changes in shareholding which may
affect control of insurer companies
33
◦ Insurance Act of Kenya s23(4A): “…no person shall be beneficially
entitled, directly or indirectly, to more than25% of the listed
share capital or voting rights of an insurer…..or entitles to
appoint more than 25% of the Board of Directors….to receive
more than 25% of the aggregate dividends of an insurer in any
FY..”
◦ Insurance Act of Uganda s38 “..any insurance company….shall not
make any modification in its memorandum or articles of
association or other document under which the company was
established without approval of the commission”
34



These provisions of the law are a check on the unfettered
acquisition of significant ownership or other interest in an
insurer company that may result in one person or entity
having control over the company.
What should the Regulator do?
◦ Exercise prudent discretion to grant or deny desired changes.
◦ ensure that changes do not undermine policy holders’ benefit
expectations or policy value.
The Regulator must be satisfied that the changed status meets
the minimum criteria and standards applicable to the pre-change
circumstances (i.e. licensing, benefits, value etc)
◦
35


Insurers are required to have in place adequate
frameworks.
Purpose of internal control should be to ensure that;
control
◦ The insurers business is conducted in a prudent manner consistent with the
policies and company strategies
◦ Transactions are only entered into transparently and with appropriate authorities
◦ Assets are safeguarded
◦ All records (accounting etc) provide complete, accurate, verifiable and timely
information
◦ Management is able to identify, assess, manage and control business risks

A system of internal controls provides a systematic and disciplined
approach to business execution and enhances regulatory
compliance.
36

Internal controls should address accounting procedures and management
information

That the insurer should have an in-house /internal audit function which
ensures compliance and review of policies and procedures and constantly
reviews robustness of controls, policies etc

The audit function should have reporting lines to insurers’ board,
unfettered access to insurer business and be sufficiently resourced

Evidence of proper records keeping and management

Insurer Board and management oversight over conduct of market
activities

There should be oversight and reporting systems that allow the Board and
management to effectively monitor and where appropriate, control
operations.
37

The Insurance Act of Kenya s56 - The accounts of every insurer shall be
audited annually by an auditor”

The Insurance Act of Kenya S9 - limitations on insurer lending to or
investing in related company

The Insurance Act of UgandaS43 - loans to associate companies
prohibited

The Insurance Act of Uganda S42- loans to own officers or directors by
insurer restricted.

The Insurance Act of Kenya S71- limitation on management expenses

The Insurance Act of Kenya S69 restrictions on form of directors and
managers remuneration
38


The objective of on-site inspection should be to examine
and ascertain compliance, by the insurer, with legislative
and supervisory requirements.
The Regulators are widely mandated to conduct inspections
to examine the business of insurers
for regulatory
compliance and to gather industry information.
 Insurance Act of Tanzania s142: “the commissioner may
for the purpose of ensuring compliance …..conduct on
site inspection of any person registered under this Act”
 Insurance Act of Kenya s67 and Insurance Act of Uganda s56
likewise provide for inspection by the Supervisor or a duly
authorized person
39

Evaluation of management and internal control system

Evaluation of technical conduct of insurers business

Evaluation of compliance with corporate governance standards

Check
sufficiency
and
adequacy
of
information
given
to
consumers

Assess regulatory compliance

The Supervisor/Regulator should share their findings with the
Insurer and also follow up to ensure implementation of the
recommendations
40

Reliable verification of data

Effective assessment of insurer’s management competence

Effective assessment of impact of specific aspects of regulation

Good for collecting benchmarking data

The Cost of on-site inspection should be borne by
supervising Authority
41
A firefighter at work: IRA should institute riskbased and on and off-site supervision to tackle
the perennial collapse of insurers.

Insurers are expected to identify, understand and manage risks
that face them

Look out for industry specific and generic risks e.g. underwriting
risks , interest rates, operational, legal, organizational risks

Insurers must have effective and prudent risk management
systems in place – DRP, Business continuity plans.

Regulators must ensure appropriate Regulations are in place to
contain risk. Eg prohibitions of loans to affiliates, directors etc
◦ Insurance Act of Uganda s98, Insurance Act of Kenya s1A and Insurance Act of
Tanzania s11 mandate the supervisors to make regulations in consultation with
the minister or to so advise the minister
43

Regulators also play a critical role in risk management by
reviewing and monitoring controls exercised by the insurer

Ensure that insurers have in place;
◦ Risk management policies
◦ Risk control systems
◦ Conduct regular review of market environment

It is good corporate governance practice to have a fully
fledged risk management function and to allot specific
Board attention to risk management and control
44

Company and insurance legislation across the jurisdictions
is very elaborate and explicit on the requirement for
disclosure of information - financial and non-financial

Insurers are required to periodically and on demand disclose
relevant information.

Insurers are required to produce annual audited financial
statements and avail them to stakeholders.

It is the role of the Regulator to monitor the
information disclosed and take necessary measures
to ensure compliance with disclosure requirements.
◦
45

Information disclosed should be;
◦ Accurate, complete, comprehensive, consistent and correct to
facilitate market decisions
◦ Timely and up to date
◦ Accessible without undue access or delay

The laws mandate the Regulators to take action, including
prosecution, penalties etc to ensure effective and relevant
disclosure Part VI Insurance Act Kenya, Part IV Insurance Act
Uganda , Part III Insurance Act Tanzania

Regular
and
proper
disclosure
facilitates
market
efficiency,
fairness and stability
46

“In the wake of the financial crisis, many financial
corporations suddenly seemed to be built like a park
of cards and not grand castles. Eyes turned naturally
to the firm’s architects,- the corporate Boards and
directors and their role in contributing to the rapid
losses”
John Wilcox, Sodali 2009
47

Corporate governance lapses contributed significantly to the
collapse of banks and financial institutions
◦ Director incompetence
 Directors did not understand the businesses they directed
 Failed to adequately identify, monitor and control risk
 Authorized difficult to understand high-risk transactions
 Failed to exercise independence of judgment in oversight
◦ Manipulative accounting policies thrived
◦ Disregard or lack of minority shareholder rights
48

The general consensus is that the insurance sector was not
the source of financial instability*.

Only insurers who were a part of financial conglomerates
e.g. AIG and Fortis were directly impacted, none the less;
◦ Asset melt down
◦ Economic contraction leading to dampening of demand for cover, both
corporate and household
◦ Claims settlements under Directors & Officers (D&)) as well as Errors &
Omissions(E&O) policies
◦ Unrealized investment losses
◦ General economic slow down 2009- 2010, impacted the industry.
Patrick Liedtke, 2010
49

The Financial crisis did not question the basic business model of
the insurance industry i.e. insurance risk underwriting- there was
no shortage of cover or failure to meet policy obligations.

None the less, the crisis has been a re-awakening call and a
lesson on the importance of corporate governance and regulatory
compliance

There is a move to ensure that regulation is adequate and
effective, Streamlining of supervisory activities across the
financial sector
51

The financial and insurance sectors are interdependent,
insurance needs a strong, effective and efficient financial
system to thrive.

so reforms in the finance sector framework inevitably affect
insurance.
52

Regulatory convergence
◦ Industry is moving away from domestically focused
regulation and supervision to face the reality of crossborder insurance operations.
◦ Solvency II Reforms ; international benchmark and
reference model for insurance regulation.
◦ There is intent to close existing regional and international
regulatory gaps and disparities.., EAC + others
Commonwealth workshop good start!.
53

The Insurance industry is keen to establish clarity of
distinction between mainstream financial sector activities
and insurance to mitigate effects of inaccurate assumption
that banks and insurers offer similar services and therefore
also pose same risks to financial stability
◦ e.g. what would be the impact on the cost of insurance of introducing
overly prudent capital requirements on insurers


Uganda has currently tabled The Insurance (Amendment)
Bill, 2010 to delink The Insurance Commission from
supervision of the Central bank, enhance corporate
governance etc
The financial crisis has reinforced the importance of strong
independent risk management initiatives across finance and
insurance sectors
54

Directors must now accept primary responsibility
for
corporate governance and performance

Corporate
governance
is
increasingly
recognized
and
accepted as of key strategic and economic benefit to
companies

Debate for and against high-profile super star CEOs and
managers OR responsible leadership is raging(NSSF, UWA
,NFA, MUK, MUBS, Banks etc)
55
THE governor of the Bank of England has warned of another banking crisis
unless important reforms take place in the financial sector.
In an interview with British newspaper "The Daily Telegraph", Mervyn King said that
the problem of banks being "too big to fail" had "not been solved" and that
imbalances in the banks "are beginning to grow again." March 05, 2011 11:44PM
 Provide guidance to Insurers on sound & proactive corporate
governance practices
 Consider corporate governance as one element of policy holder
protection
 Determine
whether
Insurers
have
adopted
&
effectively
implement sound corporate governance policies & practices
 Assess the quality of Insurers’ audit and control functions
 Bring to the board of directors’ and management’s attention
problems that you detect through your supervisory efforts
 Use your position to help avert another financial crisis- in your
local jurisdiction, region or globally!
57 of 26
57

No distinction between ownership and management, especially in large
companies.

No distinction between Board and shareholders in large companies.

Fused Chairman and Chief Executive.

Domineering Chairman and CEO

Poor human resource management.

No
clear
understanding
of
the
different
roles
of
the
Board
and
Management (Policy vs. Operations).

Poor accounting/auditing practices

Complex businesses

Complex ownership structure

Poor corporate communication policies (internal and external)
58
58
“Good governance entails a combination
of statutory compliance and compliance
with corporate governance principles and
practices”.
59
59
60
60