The implementation of new governance rules in the insurance sector: overview and outlook

At the same time, the European regulatory authorities published associated guidance and legislation that aimed to clarify supervisors’ expectations.

The purpose of this publication is thus to look back on these changes and to present the ACPR’s assessment of these developments five years after the new rules came into force.

The findings are based on an analysis of an extensive body of documentation collected from the supervised institutions concerned and on interviews held with their executives and control function heads and with members of their supervisory bodies (chair of the board of directors and/or president of the risk committee). The methodology applied is set out in the appendix to this publication.

The intention of this review is not to provide a comprehensive and detailed inventory of all regulatory provisions concerning the governance of insurance undertakings under European and French law. Its objective is rather to highlight where the new rules depart most significantly from previous provisions and to draw attention to insurance undertakings’ efforts to comply with them. It also serves – based on real cases dealt with by the ACPR – as a platform to recommend sound practices to help supervised entities improve their governance frameworks.

The key takeaways of this report are as follows.

• The new regulatory framework for governance is laid down in a directive that is binding on all European insurers irrespective of the legal and cultural environment in which they undertake their business activities. Nonetheless, in this respect, conditions differ greatly from one European Union (EU) Member State to another. Furthermore, the diversity that can be seen at the European level also exists within the French market. The profiles of the undertakings supervised by the ACPR thus differ greatly in terms of their size, activities and the legal texts that govern them (the French Insurance Code, Mutual Insurance Code or Social Security Code).

• The principle of proportionality is particularly relevant to issues of governance. While governance regulations and sound practices concern all institutions, they take on particular importance for large or complex groups. The ACPR therefore expects the largest groups, whether they are a publicly listed company or in the mutual insurance or provident institutions sectors, to follow the highest and most exacting market standards when choosing their governance system.

• The prudential regulations stress the supervisory body’s new risk management duties, which have been expanded and reinforced considerably. However, it is important to remember that these new responsibilities take nothing away from the essential role the boards of directors and supervisory boards must continue to play in setting a firm’s strategic orientations and taking the management decisions that fall within their remit (the scale of this role varies depending on the company’s form).

• The segregation of duties between the chair of the board of directors and a company’s managing director is sound governance practice and is becoming increasingly common in major firms. While this segregation is mandatory in the European banking sector, there are no formal regulations in the insurance sector that prohibit “dual hatting” (i.e. serving in more than one role) as managing director and chair of the supervisory body. Thus, even though the principle of segregation is laid down in international and European guidance, not all EU Member States, including France, have made it a regulatory requirement.

• In the absence of binding texts, the ACPR recommends segregation to all the undertakings under its supervision and expects it to be the norm in listed companies and large insurance groups. Segregation should therefore be implemented at head of group level and irrespective of legal form: société anonyme (SA, public limited company), société d’assurance mutuelle (SAM, mutual insurer), union mutualiste de groupe (UMG, mutual insurance union groups), société de groupe d’assurance de protection sociale (SGAPS, group social protection insurance companies) or société de groupe d’assurance mutuelle (SGAM, group mutual insurance companies).

• The regulatory provisions of the Code de la mutualité (the French Mutual Insurance Code) even make dual hatting unavoidable insofar as the chair of the board of directors is the effective manager by right. While the historical and cultural reasons behind this situation are understandable, it has to be acknowledged that it does not help prudential groups of entities subject to different codes to effectively and optimally organise their governance systems. The ACPR feels that on this point, the regulations need to be adjusted.

• The regulations stress the importance of criteria of experience and expertise in selecting directors and members of supervisory bodies as well as the people who effectively run the firm (“effective managers”) and key function holders. When the supervisor deems that the professional experience of a candidate for an executive position is insufficient or inappropriate, it opposes the appointment or makes it conditional on the candidate following a supplementary training programme. For members of the supervisory body, the criterion applied is that of collective expertise. The effectiveness of an insurance undertaking’s governance system largely depends on the manner in which the supervisory body plays its role. For example, it will be better prepared to take decisions that fall within its remit if its members have a sound understanding of the firm’s business lines and of the regulations. Equally, it will better perform its duties if the members have the legitimacy that a transparent selection process carried out in a general meeting to approve their appointment would confer upon them. In practice, however, there is no definition of an optimal level of collective expertise for the supervisory body, nor is there an objective way to assess the legitimacy of its members. Because these considerations depend on an undertaking’s corporate form, business activities and operating methods, the supervisor has not insisted on enforceable standards in this regard. However, it does expect supervised undertakings to establish their objectives and the means to achieve them and to decide how they intend to organise and formalise the process of selection, appointment and training of their directors.

• Compliance is required with the procedures stipulated in the regulations for governing bodies’ approval of written policies, risk appetite, the ORSA (Own Risk and Solvency Assessment) and reports by key function holders. However, this compliance must not be purely formal. Decisions taken on risk management are binding and consequently should be made by the board of directors or the supervisory board after a proper discussion and after hearing from the people who effectively run the firm. It is vital that the supervisory body forms its own opinion and weighs the real stakes for the firm of the orientations it adopts.

• Many undertakings (mutual insurers governed by the French Mutual Insurance Code, provident institutions or SAMs) have committed to processes of closer cooperation and mergers to cope with the burgeoning competition and to improve their competitiveness. They need to reach critical mass on their markets and to that end have built up prudential groups (UMGs, SGAMs and SGAPSs). While maintaining a certain degree of autonomy, the affiliated entities within these groups aim to gradually streamline and integrate their information and management systems as well as the human resources those systems depend on.

An effective and properly functioning governance system is a key factor in the success of these prudential groups. However, they face numerous challenges due to their often complex organisation. A balance has to be achieved between requirements that may appear contradictory. In order to carry out the restructuring required, the decision-making bodies of these new groups must have sufficient legitimacy and authority. However, the governance structures of all the entities within the group must also fully play their part and be involved in setting strategies, policies and objectives as they are bound by the orientations adopted by the group. They must adhere to them while (at the level of the entity under their management) continuing to carry out the duties that fall within their remit.

Consequently, the choice of governance system by these prudential groups is a major issue. It must comply with the requirements of the prudential regulatory framework while also helping to bind together the different components of the new group. This is why the measures to be adopted to comply with the regulations must be subject to a thorough analysis in close consultation with the ACPR.