FINANCIAL SERVICES
Non-executive directors
in the Insurance Industry
Steve Roder,
Partner In Charge, Financial Services
KPMG China and Hong Kong SAR
July 12 2005
ADVISORY
All governance is not alike
Banks play an important role in Germany.
The government is an important stakeholder in France.
Employees have an important role in the Netherlands and
Germany.
Shareholders have a key role in Australia, Canada, the United
Kingdom, and the United States.
Families have a central role in many Asian countries.
Economic and cultural differences have influenced governance.
Source: KPMG – A New Focus on Governance
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Directionally consistent – more governance
not less
International triggering events
UK Cadbury
Report
1993 - 2000
• Code of best
practices
• Disclosure in Annual
Reports
HK CG initiatives
Global
accounting
scandals
2001
• SCCLR CG
proposals
(phase 1)
2002
• HKEx
Consultation on
CG issues
• Guidelines on
INEDs
• Requirements on
directors
2003
• HKEx
Consultation
Conclusions on
CG issues
• FSTB
Corporate
Action Plan
2004
• Amendments to
Listing Rules
for CG issues
• Revised Code on
CG Practices
• Requirement of
CG Report
• SCCLR CG
proposals
(phase 2)
Source: Hong Kong Exchanges and Clearing
Governance in HK listed companies is an example.
2
D & O Liability premiums
US
$8 billion
Europe
$1 billion
Asia
$100 million
Source: Swiss Re, Asia Insurance Review February 2005
An indicator of the level of director discomfort?
3
Asia can expect some of the same
Asian companies listing in US or Europe
Sarbanes Oxley applies to foreign registrants
Opening up of government and family owned
companies
4
Accounting scandals have thrown a spotlight
on governance
“Audit committees are meeting 8-10 times a year instead of 4”
“The documentation and paperwork …. is off the charts”
“You don’t have the free lunch like you had …….”
Source: Business Week – The Boss on the sidelines – April 2005
NEDs are under increased pressure
5
Increasing governance requirements laid
down by regulators
Australia – APRA draft Prudential Standard
Hong Kong – Office of the Commissioner of Insurance
Guidance Note
Singapore – MAS Guidelines
All require NEDs ……. seeking to protect beneficiaries.
6
APRA leading the way in Insurance Reform
“ ….. duty as the prudential regulator …… to look after the interests of
beneficiaries …. and ensure their interests are not compromised ……. “
“…….. appreciably different from that of ASX which is responsible for
ensuring the operation of a transparent accessible and accountable market
……..”
“APRA needs to be confident that governance arrangements are robust.”
Source: Governance for APRA – regulated institutions, May 2005
Taking governance beyond the listed company benchmark.
7
APRA ….. Expecting great things
“The chairperson of the board should be an independent non-executive
director.”
“A majority of the Board Audit Committee must be independent nonexecutive directors.”
“The Board Risk Committee members should be non-executive
directors.”
“At least one independent non-executive director on the Board should
have financial expertise ……”
Source: Governance for APRA – regulated institutions, May 2005
NEDs will be very prominent in the governance of all insurers.
8
Insurance NEDs have it tough
• Business model
• Global structures
• Jargon
“It takes years to get up to speed ………” – Public Co NED, May 2005
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What makes it tough?
• Premium before claim
- insureds only find out later if key get value for money
• High technical content
- matched only by derivatives activity in the banking arena
• Long tail exposure – “the black box”
“Manufacturers just count the inventory and reconcile
the cash ……” – Public Co NED, May 2005
10
A plethora of audit committees?
Parent
Sub
Sub
Sub
Sub
Sub
Sub
Sub
Different committees with different requirements and knowledge
11
Is it that simple at subsidiary level?
Parent
Global Product
Global HR
Global IT
Sub
Sub
Sub
Legal structure ≠ Management structure?
12
A serious shortage of suitable talent …….
SITUATION VACANT
NED …….. Insurance Industry
… made worse through trepidation and the need to refresh the Board
13
Advice for NEDs
Line of sight transparency over drivers of value and
associated risks
14
Example of Audit Committee Input
Analysis of key assumptions underlying the financials and
whether they are appropriate
The assumption appears conservative considering both entity specific factors
and industry experience
The assumption appears realistic considering both entity specific factors and
industry experience
The assumption appears aggressive considering both entity specific factors
and industry experience
Helping NEDs understand the risks and judgements
15
Example of Audit Committee Input
Assumption and process overview
Litigation
In 2004, two bankruptcy cases were
brought against ABC Company for nonpayment of debts. These have been
over-turned by the courts. Subsequently,
the curator of the first case has sued for
payment of his costs. We understand
that his has also been over-turned. ABC
Company has provided in full for all
outstanding legal fees but not for the
curator fees.
Provision for unrealised loss on
structured notes - Taiwan
In the third quarter of 2004, due to
liquidity issues associated with the
structured notes market in Taiwan,
approximately 25% of the market value
of bond funds were withdrawn by
investors.
In Q4 2004, the Taiwan SFC amended
the regulations to prohibit the country’s
bond funds from acquiring structured
notes.
In Q4 2004, the Taiwan SFC stated that
it does not expect the investors to lose
out from the early redemption of
structured notes.
At 31 December 2004, ABC Company
held NT$ X billion of structured notes.
Analysis of experience versus
assumptions
Assumption
positioning
Conclusion
ABC management have stated that all
the cases against the company have
been found in their favor and therefore
no provision for damages has been
made.
We have written to the two legal
advisors to confirm their understanding.
One has replied confirming
management’s view. The second is
outstanding but is expected to confirm
management’s statement.
The accrual appears reasonable
On 31 December 2004, ABC Company
booked a realized loss of NTD Y million
in respect of the sale of NT$ Z billion of
structured notes.
A provision of NT$ S million has been
recognised in respect of a potential
future sale of NT$ T billion of structured
notes.
ABC company are currently reviewing
whether the current level of provision is
considered adequate.
We will review the ABC paper on the provision
for unrealised losses associated with the
structured notes when it is available in order to
assess the adequacy of the provision.
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Advice for NEDs
Line of sight transparency over drivers of value and associated risks
Understand the full range of reporting responsibilities – different
regulators, different forms of GAAP
Ensure access and dialogue with key personnel, regardless of group
structure
Clarify communications between audit committees in the same group
Access to independent advice
Arrangements for continuous briefing and learning
Plenty of D & O cover
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