ARE YOU READY FOR THE NAIC
CORPORATE GOVERNANCE
MODELS?
CAROL STERN, FLMI, AIRC, ACS
S E N I O R C O N S U LTA N T
F I R S T C O N S U LT I N G & A D M I N I S T R AT I O N , I N C .
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CORPORATE GOVERNANCE MODELS
STATUS IN THE STATE LEGISLATURES
One state has already enacted the CGAD Models:
 Iowa – New Chapter 521H (§§ 521H.1 to 521H.8)
Five states have proposed the CGAD Models:
 California - AB 553 (Section 1215.75 & Article 10.8)
 Louisiana – HB 199 (Section §§ 22:691.3 to 691.38)
 Rhode Island – SB 784 (Section §§ 27-1.2-1 to 27-1.2-10)
 Indiana - HB 1341 (SECTION 18. IC 27-1-4.1)
 Vermont HB 73 - (VT. Stat. Ann. 8, § 3316)
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CORPORATE GOVERNANCE-PART OF NAIC
SOLVENCY MODERNIZATION INITIATIVE (SMI)
The SMI focuses on key issues such as
capital requirements, governance and risk
management, group supervision, statutory
accounting, financial reporting, and
reinsurance.
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CORPORATE GOVERNANCE-PART OF NAIC
SOLVENCY MODERNIZATION INITIATIVE (SMI)
New Models fit with other elements of SMI:
2014 – Enhancements to Holding Company Models
• Form F (Enterprise Risk) Reports filed and reviewed
2015 – Own Risk Solvency Assessment (ORSA) Model
Act
• ORSA Summary Reports filed and reviewed
2016 – Corporate Governance Models
• Annual corporate governance disclosures filed and
reviewed
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CORPORATE GOVERNANCE DEFINED
The Models do not define corporate
governance, but here’s our working
definition:
A framework of rules and practices by which a
board of directors helps ensure accountability,
fairness and transparency in an insurer’s
relationship with all its stakeholders.
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NAIC ADOPTS CORPORATE
GOVERNANCE MODELS NOVEMBER, 2014
• Corporate Governance Annual Disclosure (CGAD)
Model Act
• Corporate Governance Filing Regulation
• Corporate Governance Annual Filing Guidance
Manual – free of charge on the NAIC website
• Approved by the NAIC November, 2014 and effective
June 1, 2016
• These models are part of the state accreditation
requirements so all states are expected to adopt
without variations.
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SMALL COMPANIES ARE NOT EXEMPT
The NAIC has made an affirmative decision not
to exempt small companies from any corporate
governance requirements. In fact, the NAIC
Corporate Governance Working Group
highlighted the need for small companies to
focus on improving their corporate governance
structure, strengthening their risk management
governance, and ensuring that knowledgeable
and qualified Board members make decisions
that impact the company’s risk and finances.
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SMALL COMPANIES ARE NOT EXEMPT
Susan Donegan, Commissioner of the Vermont
Department of Financial Regulation, and Chair of
the NAIC Corporate Governance Working Group
explained:
”Some trade associations asked us to exempt
the small companies, but the Working Group
said the small companies needed the oversight
in these models because there are few checks
and balances of small firms’ governance. It was
the intent of the NAIC to have no exemptions to
these models.”
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CONFIDENTIALITY PROTECTION
• Same strong confidentiality language in CGAD as
contained in other NAIC models, including the
Insurance Holding Company Regulatory Act, the
Risk-Based Capital Model Act and the Own Risk
and Solvency Assessment.
• Documents are proprietary and contain trade
secrets, are confidential by law and privileged and
not subject to freedom of information laws.
Documents are not subject to subpoena, discovery
nor admissible in evidence in any private civil action.
The Commissioner cannot make the documents,
materials or other information public without the
prior written consent of the insurer.
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PURPOSE OF THESE NEW MODELS
The NAIC adopted CGAD and the supporting Model
Regulation to give insurance regulators a means to
receive additional information on the corporate
governance practices of U.S. insurers on an annual
basis.
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IMPORTANCE OF CORPORATE
GOVERNANCE
Key elements of effective corporate
governance at the Board level include the
following:
• Clearly defined roles and responsibilities
• Independent and active board members
• Individuals who are suitable for their roles
• Directors who act in good faith, and exercise a duty
of care, loyalty and candor
• Board that provides sufficient oversight for all
significant company activities
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WHAT ARE REGULATORS SAYING ABOUT
THESE MODELS?
“This model act was developed to promote
regulatory oversight as well as protect the
confidentiality of the insurer.” “Annual and
transparent disclosure of corporate governance
practices of insurers will ensure that state
regulators have a comprehensive understanding of
the corporate governance structure, policies and
practices utilized by the insurer.”
Joseph Torti, III, Rhode Island Deputy Director and
Superintendent of Insurance and Banking. Chair of the NAIC
Financial Condition Committee, which oversees the work of
the NAIC Corporate Governance Working Group.
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STRONGER QUALIFICATION
REQUIREMENTS FOR BOARD DIRECTORS
Regulators will be reviewing the makeup of the
Board for appropriate background, experience and
integrity to fulfill their prospective roles. The
Board as a whole should possess the core
competencies needed to oversee the insurance
company.
Examples of core competencies: financial literacy,
accounting; business judgment; industry knowledge;
management; leadership; vision and strategy.
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WHAT WILL INSURERS NEED TO
REPORT?
U.S. insurers will be required to provide a detailed
narrative describing governance practices to their
domestic regulator by June 1st of each year.
The strict confidentiality measures should encourage
insurers to be open and transparent in describing their
governance practices to regulators.
Insurers will be allowed some discretion in determining
the level within the organization at which to report their
corporate governance practices, depending upon their
structure and organization.
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WHAT WILL INSURERS NEED TO
REPORT?
To eliminate some duplicative filings, CGAD gives
the ability to reference information provided in
other filings (e.g. SEC Proxy Statement, ORSA
Summary Report, any other regulatory filing).
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WHAT WILL INSURERS NEED TO
REPORT?
Insurers are required to provide information in the
following areas:
Corporate Governance Framework & Structure
• Rationale for current Board size and structure and discussion of the roles
of CEO and Chair
Board of Director Policies & Practices
• Qualifications and experience of board members, as well as the
processes for electing members of the board and evaluating the board’s
performance
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WHAT WILL INSURERS NEED TO
REPORT?
Insurers are required to provide information in the
following areas (continued):
Management Policies & Practices
• Utilization of suitability standards, code of business conduct and ethics,
and the process for overseeing compensation and succession planning
Oversight of Critical Risk Areas
• May include actuarial function, investment and reinsurance decisionmaking processes, market conduct and compliance, and risk
management function oversight
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WHAT WILL INSURERS NEED TO
REPORT?
• Model regulation instructs insurers to update
disclosures each year on changes to corporate
governance practices, framework, committees,
policies and procedures to show changes from the
prior year.
• This update requires an attestation from the CEO or
corporate secretary.
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12 COMPONENTS OF EFFECTIVE
CORPORATE GOVERNANCE PROGRAMS
Twelve Components of effective corporate
governance programs
1. Adequate competency (industry experience, knowledge,
skills) of members of the board of directors;
2. Independent and adequate involvement of the board of
directors;
3. Multiple informal channels of communication among board,
management and internal and external auditors to create a
culture of openness;
4. A code of conduct established in cooperation between the
board and management, which is reviewed for compliance and
is formally approved by senior management;
5. Identification and fulfillment of sound strategic and financial
objectives, giving adequate attention to risks;
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12 COMPONENTS OF EFFECTIVE
CORPORATE GOVERNANCE PROGRAMS
6. Support by relevant business planning and proactive
resource allocation;
7. Support by reliable risk management processes across
business, operations and control functions;
8. Reinforcement of corporate adherence to sound principles of
conduct and segregation of authorities;
9. Independence in assessment of programs and assurance as
to their reliability;
10. Objective and independent reports of findings to the board
or appropriate committees thereof;
11. Adoption of Sarbanes-Oxley provisions, whether or not
mandated, including, but not limited to, auditor
independence and whistle-blower provisions; and
12. Board oversight and approval of executive compensation
and performance evaluations.
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EXAMINATIONS OF CORPORATE
GOVERNANCE
Financial Examination: Exhibit M of Financial
Condition Examiners Handbook
• Onsite review of corporate governance and risk
management
• Interviews of Directors and Senior Management
• Review of Board minutes and activities
• Overall Corporate Governance (CG) Assessment
• Market Conduct exams: Possible review of CG Issues
that might affect the market conduct of the company
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DOCUMENTING A CORPORATE GOVERNANCE
FRAMEWORK
• Audit, Risk & Compliance Committee Charter (one,
two or three committees)
• Corporate Governance Committee Charter (board
level)
• Board of Directors Corporate Governance
Guidelines
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DOCUMENTING A CORPORATE GOVERNANCE
FRAMEWORK
• Suitability Criteria for Chief Executive Officers
• Suitability Criteria for Board of Director Candidates
• Enterprise Risk Governance Team Charter
(Company level team)
•
Corporate Risk Policy (part of Code of Conduct)
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CGAD AND ORSA HAVE THE SAME
GOVERNANCE REQUIREMENTS
• Effective Governance with structures, policies and
processes through which an organization or entity is
managed and controlled;
• A governance structure that clearly defines and
articulates roles, responsibilities and accountabilities;
• Documentation in by-laws, charters, policies and
procedures to assure that the Board of Directors and
any Board committees have been assigned the
responsibility for governing the insurer; and
• High level company personnel that help assure the
Company has effective governance and ERM
programs.
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CGAD AND ORSA HAVE THE SAME
GOVERNANCE REQUIREMENTS
Commissioner Donegan of Vermont: “The NAIC made a
conscious decision to make the governance framework in
ORSA and the CGAD exactly the same. Every member of
the Board should be able to explain the Company’s risk
appetite, risk profile and how risk management fits into the
overall corporate governance framework.”
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QUESTIONS???
Contact Carol Stern at carol.stern@firstconsulting.com or
816-391-2746 with any additional questions or if you would like
more information about the Corporate Governance Kit.
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