Public

Application Paper on
Proactive Supervision of Corporate
GovernanceFebruary 2019

PublicApplication Paper on Proactive Supervision of Corporate Governance
Adopted by the Executive Committee on 27 February 2019

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About the IAISThe International Association of Insurance Supervisors (IAIS) is a voluntary membershiporganisation of insurance supervisors and regulators from more than 200 jurisdictions. The
mission of the IAIS is to promote effective and globally consistent supervision of the insurance
industry in order to develop and maintain fair, safe and stable insurance markets for the benefit
and protection of policyholders and to contribute to global financial stability.
Established in 1994, the IAIS is the international standard setting body responsible fordeveloping principles, standards and other supporting material for the supervision of theinsurance sector and assisting in their implementation. The IAIS also provides a forum forMembers to share their experiences and understanding of insurance supervision andinsurance markets.
The IAIS coordinates its work with other international financial policymakers and associationsof supervisors or regulators, and assists in shaping financial systems globally. In particular,
the IAIS is a member of the Financial Stability Board (FSB), member of the Standards Advisory
Council of the International Accounting Standards Board (IASB), and partner in the Access to
Insurance Initiative (A2ii). In recognition of its collective expertise, the IAIS also is routinely
called upon by the G20 leaders and other international standard setting bodies for input on
insurance issues as well as on issues related to the regulation and supervision of the global
financial sector.
Application Papers provide additional material related to one or more ICPs, ComFrame or
G-SII policy measures, including actual examples or case studies that help practicalapplication of supervisory material. Application Papers could be provided in circumstanceswhere the practical application of principles and standards may vary or where theirinterpretation and implementation may pose challenges. Application Papers can provide
further advice, illustrations, recommendations or examples of good practice to supervisors on
how supervisory material may be implemented.
International Association of Insurance Supervisors c/o Bank for International Settlements
CH-4002 Basel
Switzerland
Tel: +41 61 280 8090
Fax: +41 61 280 9151
www.iaisweb.org
This document was prepared by Governance Working Group in consultation with IAIS
Members.
This document is available on the IAIS website (www.iaisweb.org).
© International Association of Insurance Supervisors (IAIS), 2019.
All rights reserved. Brief excerpts may be reproduced or translated provided the source isstated.

PublicApplication Paper on Proactive Supervision of Corporate Governance
Adopted by the Executive Committee on 27 February 2019

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Contents
Introduction ........................................................................................................................... 4
1

Supervisory organisation, culture and processes ........................................................... 6
1.1

Supervision of financially sound insurers ................................................................ 6

1.2

Supervisory expertise ............................................................................................. 7

1.3

Supervisory “blind spot” .......................................................................................... 7

1.4

Willingness to act .................................................................................................... 7

1.5

Organisational impediments.................................................................................... 8

2

Information ..................................................................................................................... 93

Yellow and red flags..................................................................................................... 10

4

Communication ............................................................................................................ 12

5Conclusions ................................................................................................................. 13

PublicApplication Paper on Proactive Supervision of Corporate Governance
Adopted by the Executive Committee on 27 February 2019

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Introduction
1.
The outcome of the IAIS Self-Assessment and Peer Review (SAPR) conducted in 2014highlighted the most common challenges to observance of Insurance Core Principles (ICP)
7 Corporate Governance and 8 Risk Management and Internal Controls and underlined theneed for additional guidance on supervisory practices related to corporate governance thatare proactive and sufficiently robust. While some of the issues identified in the SAPR wereaddressed by revisions to ICP 7 1, the IAIS also noted that some challenges related to proactive
supervision of corporate governance should be addressed by providing supervisors with goodpractices and tools.
2.
Proactive supervision requires a supervisor to be forward-looking, to identify issues
early, and to act quickly and constructively to address circumstances that are not yet criticalbut could lead to corporate governance-related problems, adverse outcomes to policyholders
or to violations of local requirements or laws. Proactive supervision may be contrasted withreactive supervision, which responds after a problem has occurred, or supervisory
forbearance, in which a supervisor does not take – or is reluctant to take – early corrective
action.
3.
Proactiveness has been recognised as a key feature of successful supervision 2.
According to ICP 9.7.1, the supervisor should be proactive and forward-looking in conducting
effective off-site monitoring, and not rely only on historical data. The supervisor should
question an individual insurer’s or the entire sector’s directions or actions, in good as well as
bad times, and not act only after things have gone awry. While it is important for the supervisor
to be proactive in order to address governance issues, the insurer is ultimately responsible forhaving a sound corporate governance framework.
4.
This Application Paper supports the practical application of the corporate governancerelated ICPs, mainly ICP 7 and ICP 8. It is based on inputs from members of the GovernanceWorking Group and feedback received from the broader IAIS membership and stakeholders.
5.
This Application Paper sets out good practices related to the organisation andfunctioning of the supervisor, with the objective of promoting proactive supervision of corporate
governance. It aims to raise awareness of, and seeks to address, the organisational, cultural,and procedural challenges faced by supervisors in detecting problems in corporate
governance and taking appropriate steps at an early stage.
6.
This Application Paper recognises that there is no one-size-fits-all approach toproactive supervision as there is a variety of organisational and governance structures
amongst the insurers. There are different steps that supervisors may decide to take, bothorganisational and procedural, direct and indirect, separately or together, to foster
proactiveness. Whichever steps are taken, proactive supervision should be carried out
proportionately to the issues identified, using an approach customised to the circumstances,including relevant supervisory objectives, laws and regulations. Whether the supervisor has,or should have certain legal powers to foster proactive supervision is outside the scope of this

1 Finalised in November 2015.

2 See e.g. J. Viñals and J. Fiechter, et al., The Making of Good Supervision:

Learning to Say “No”, IMF Staff
Position Note, SPN/10/08, May 2010, p. 19. See also Basel Committee on Banking Supervision (BCBS),
Frameworks for early supervisory intervention, March 2018. https://www.bis.org/bcbs/publ/d439.pdf.

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Application Paper. Also external developments, which are outside the control and influence ofthe supervisor, fall outside the scope of this Application Paper.
7.

Throughout this Application Paper, the following terms are used:•”Supervisor” indicates the authority supervising insurers, while “themanagement team” refers to the management of the supervisor. The term
“staff” refers to the persons conducting the supervision of insurers for thesupervisor.

•“Supervisory steps” refers to a variety of internal activities taken within the
supervisor, such as: additional analysis or available information; internal
discussions e.g. with other relevant units; escalating discussion to the
management team etc. Supervisory steps are different from supervisory
measures, which are described in ICP 10 Preventive Measures, Corrective
Measures and Sanctions

8.
This Application Paper is organised into four sections that address key aspects offostering and supporting proactive supervision. Section 1 discusses how the supervisor's own
organisation, culture and process should support proactive supervision. This encompasses
the supervisor itself, as well as its management team and staff. Section 2 highlights that thesupervisor needs relevant and timely information in order to be proactive. Section 3 provides
a non-exhaustive list of early warning indicators – yellow and red flags – that may signal theneed for investigation and, potentially, further steps. Finally, Section 4 explains how effective
communication by the supervisor with both insurers and the wider public can promote
proactive supervision.

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1Supervisory organisation, culture and processes

9.
Supervisory forbearance, in which supervisors do not take – or are reluctant to take –early measures, has been identified as a significant obstacle to proactive supervision 3.
Regulatory capture, for example, may lead to supervisory forbearance 4. To counter
institutional tendencies towards forbearance, supervisors should have an appropriate
supervisory framework, supported by experienced staff, and adequate internal organisation,
culture, and processes.
10.
This section identifies some challenges to the supervisors’ organisation, culture andprocesses, including the ability and willingness of staff, in carrying out proactive supervisionof corporate governance, and proposes good practices to address those challenges.
11.
The good practices outlined below complement those in ICP 2, which describes how
the supervisor, in the exercise of its responsibilities and powers, is operationally independent,
accountable and transparent; and has adequate resources and internal governancearrangements.
1.1

Supervision of financially sound insurers

12.
Supervisors may be faced with a dilemma when conducting more intensive supervisionof corporate governance, especially in supervising financially sound insurers. The insurer may
highlight its financial achievements as evidence of the insurer’s sound operations. Hence, it
may be difficult to justify the allocation of resources to supervision of corporate governance ofsuch insurers, especially when taking a risk-based approach.
13.
An insurer’s financial condition may provide insights into its financial capability andstrength. A good financial condition, however is not a direct indication of sound corporate
governance, as weaknesses in an insurer’s corporate governance arrangements may only
come to light over the medium or long term. Therefore, regular review of corporate governancepractices should be conducted regardless of the financial condition of an insurer.
14.
To be proactive, supervisors should consider the following practices, among othermeasures:•

Introduce procedures to look more deeply into certain aspects of an insurer’s corporate
governance even when the insurer has a positive financial situation. For example, thesupervisor could use yellow and red flags or another internal scoring system to help
identify issues that may merit further attention, according to the scale or nature of therisk 5.

•

Trigger an additional review when there is a diversity of opinions within the supervisor.
Different perspectives and views on a potentially problematic situation may promote
prevention of risks building up and/or early supervisory steps. The management team
could also encourage the staff to present divergent views throughout the discussion ofsupervisory findings.

3 BCBS, Frameworks for early supervisory intervention, p. 21.

4 Regulatory capture is a tendency for supervisors to take the mind-set of an interest group (e.g., the regulatedindustry) either because of the interest group or political influence. See T. M. Vaughan, The Economic Crisis andLessons from (and for) U.S. Insurance Regulation, NAIC Journal of Insurance Regulation, 2009, p. 7,
https://www.naic.org/documents/cipr_jir_vaughan.pdf
5 See Section 3 “Yellow and red flags” for further details.

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1.2

Supervisory expertise

15.
Supervisors should have staff equipped with the analytical and technical skills needed
to analyse corporate governance information from insurers and draw appropriate conclusions.
This should also allow the staff to exercise professional scepticism and utilise critical thinking
in investigating issues and reviewing information provided by the insurer.
16.
Supervisors should offer comprehensive introductory training on corporate governancefor new staff, in addition to regular training for all staff. Such training may include not only the
corporate governance requirements applicable in their jurisdiction, but also the latest
developments and good practices from other jurisdictions, other sectors or academics.
17.
More experienced staff could train or coach those less experienced, so that all staff
have sufficient skills to carry out proactive supervision.
18.
Information and experiences on corporate governance should be exchanged regularly
between teams or units within the supervisor. For example, for larger insurers which haveassigned supervisory teams, senior staff and/or corporate governance subject matter experts
could schedule regular sessions with the supervisory teams to discuss corporate governanceissues. Senior staff or corporate governance subject matter experts should also review thesupervisory teams’ reports and specifically flag questions or share potential issues relating tocorporate governance.
1.3

Supervisory “blind spot”

19.
Supervisors – at both staff level and institutional level – may develop “blind spots” overtime from continuous supervision of the same insurer. Methods to remedy or minimise such“blind spots” include:

1.4•

Having multiple staff members review each insurer (the so-called “4-eye” or “6-eye”
principle) through supervisory partnerships (for example, placing two staff members incharge of the same insurer). Such partnerships may be particularly useful in thecontext of group supervision, where one staff member could be in charge of the group’s
supervision and the other in charge of supervising the insurance legal entity within thegroup;•

Rotating the insurer portfolio of staff on a periodic basis (for example, every three
years), both to prevent staff from becoming overly familiar with their assigned insurers,
and thus blind to issues which may arise, and also to broaden staff experience byregularly exposing them to other insurers;•

Having dedicated governance experts to identify, and help staff responsible for theirassigned insurers address, emerging corporate governance issues; and•Having feedback loops with other supervisory units (such as special investigation orintervention units) who may identify concerns with an insurer’s corporate governance.
Willingness to act

20.
A supervisor may face challenges in ensuring its staff are willing to act when potential
problems begin to appear. To counteract this issue, the supervisor should express strong andfrequent support for taking early steps. Three scenarios, and possible solutions, are described
below.
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21.
Staff may be reluctant to act upon their findings or conclusions and escalate an issue,
because of fear that the insurer’s problems will be perceived as a result of their personal failure
to supervise the insurer adequately. One way supervisors could address this issue is to shareinternally on a regular basis the outcome of peer group exercises that allow staff to compare
and benchmark findings in similar cases. This should facilitate consistency across thesupervisor in terms of approaches and possible measures taken, whilst giving properconsideration to the circumstances of a particular case.
22.
Staff may be unwilling to act because they do not want to appear to be managing theinsurer. To address this concern, the supervisor’s management team could practice an “opendoor policy” and otherwise promote an open culture where staff are not afraid to discuss orescalate issues to the management team when in doubt about an insurer’s corporate
governance practices.
23.
Staff may fear repercussions if supervisory investigation does not result in additional
adverse findings. To counteract this fear, supervisors should, in addition to the ”open door
policy” mentioned above, promote a culture of tolerance for staff who raise potential issues,even when that issue may not materialise or rise to the level of a significant risk. Staff should
feel open to be seen as making mistakes and not incur repercussions to their career.
1.5

Organisational impediments

24.
A supervisor’s own organisation, culture and processes may impede proactive
supervision. For example, the supervisor may have information that would allow identificationof potential issues at an early stage, but that information may be held by a staff member orunit within the supervisor without the necessary authority.
25.
A supervisor should consider creating appropriate support structures to encourage
taking early supervisory steps. Such support structures could include:•

Dedicated staff;•

Special investigation or intervention units 6;•

A legal unit, which could provide advice and help to identify gaps in the existing legal
framework that may hinder taking early supervisory steps or restrict the capacity tointervene.

26.
A supervisor should consider instituting internal processes that promote taking earlysupervisory steps, such as:•

Clearly delegating responsibilities from the management team to staff;•

Routinely sharing information between staff and the management team, as well as
within a particular supervisory team and between different supervisory teams(supervising different insurers);

6 See paragraph 19.

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2•

Encouraging staff to raise concerns with the management team if their analysis
suggests a potential material adverse finding 7, or other threats to the insurer’s financial
soundness over the short or medium term;•

Instituting a process to transfer specific issues to a dedicated supervisory or
enforcement unit when an insurer is persistently not cooperating;•Classifying recommendations according to the importance and degree of urgency of
expected preventive and corrective measures based on a progressive scale ofrequirements (e.g. supervisory intervention ladder), established by the supervisor;•

Requesting internal audit or other forms of review of the escalation process within the
supervisor; and/or•

Conducting thematic reviews within the supervisor to analyse the extent to which
corporate governance is scrutinised.

Information

27.
The supervisor needs to have relevant and timely information to proactively identify
potential corporate governance-related issues and to carry out proactive supervision.
28.
Supervisors should be able and willing to gather both quantitative and qualitative
information from different sources on the corporate governance-related issues facing theinsurer and the insurer’s ability to address them.
29.
Supervisors should consider a range of approaches to gathering relevant informationin order to facilitate the early identification of corporate governance-related problems that
require proactive supervisory steps, such as the following:•

Information gathered from the insurer itself, including its reports and meetings;•

Thematic reviews and analysis. These may help identify potential outliers which, inturn, may require further investigation by the supervisor. They may also help in theidentification of emerging issues;•

Obtaining information from other supervisors (e.g. within supervisory colleges, during
bilateral meetings or through reports from on-site inspections);•

Market-wide reports such as analysis of the industry and by rating agencies as well asother market intelligence;•

Consumer complaints (either directly to the supervisor or to an ombudsman) or whistleblowing complaints. Specific complaints and/or trends may provide insights into
possible corporate governance issues in the insurer as well as possible misconduct;and•Meetings between the supervisors and external and internal auditors. These may
highlight the potential lapses in the insurer’s control environment and point toweaknesses in corporate governance.

7 A “material adverse finding” can be defined as a finding made by the supervisor with respect to an event, trend,transaction or series of transactions, fluctuation, agreement, arrangement, operating results or violation of law,which either has, or reasonably could have, a significant negative impact on an insurer’s financial position.

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30.
When gathering and assessing corporate governance-related issues, supervisors
should consider the following:•

How to evaluate the corporate culture within the insurer, not only at the Board andSenior Management levels, but also within the business lines;•

How to assess whether remuneration and other staff incentives align with the insurer’s
corporate governance values and with the insurer’s strategic priorities set by the Board
and Senior Management; and•How to assess whether the Board and Senior Management of the insurer exercise
adequate oversight of the insurer’s business practices including sales practices anddifferences in risks arising from various distribution methods and channels.

3

Yellow and red flags

31.
In order to be able to identify corporate governance-related problems at an early stage,
the supervisor should consider developing an early warning system of potential indicators.
This may assist the supervisor to identify significant changes, anomalies or trends in order to
respond in a timely manner. Those indicators could take the form of “yellow or red flags”.
32.
An early warning system should include recommendations on possible next steps after
yellow or red flags are identified. The supervisor’s response to a yellow or red flag should take
into account all available information and be determined on a case-by-case basis.
33.
Identification of a yellow or red flag may, or may not, indicate a broader corporate
governance-related issue; regardless the supervisor should endeavour to identify and assessthe underlying issue. The supervisor should take into account the nature of the yellow or red
flag identified; for some of them, a single occurrence may be a cause for concern itself
whereas for others, the supervisor may be looking for a recurring pattern.
34.
The following non-exhaustive list of examples of non-financial yellow and red flags may
indicate problems related to corporate governance:•

Policies and procedures:oInconsistencies and/or gaps in internal control policies, audits and reporting (i)within the insurance legal entity or (ii) between the group and insurance legal
entities;oFailure of the insurer to conduct business and fulfil obligations in accordancewith written procedures (e.g. compliance with by-laws, charters or internal
guidelines);oLack of a transparent mechanism to take disciplinary actions;oInadequate disciplinary response to infractions;oInadequate handling by the insurer of employee or customer complaints related
to corporate governance;oLack of a process or having an inadequate process to, identify, evaluate or
escalate risk or corporate governance issues;oLack of a whistle-blowing process or not having an effective whistle-blowing
process;

PublicApplication Paper on Proactive Supervision of Corporate Governance
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Page 10 of 13•oLack of sufficient information flow within the insurer; andoLack of staff training on topics such as internal control policies and procedures,compliance with laws and regulations, whistleblowing process, escalation ofrisks, non-compliance and misconduct issues.

Board, Senior Management and Key Persons in Control Functions:oThe insurer appoints or proposes to appoint members of the Board, Senior
Management or Key Persons in Control Functions who do not possess thenecessary suitability;oHigh or frequent turn-over of the members of the Board, Senior Management
or Key Persons in Control Functions;oSudden departures of the members of the Board, Senior Management or Key
Persons in Control Functions;o

The Board or Senior Management overriding or ignoring existing policies andprocedures (e.g. code of conduct, conflict of interest);o

The Board or Senior Management are unaware of, or unable to articulate theirown responsibilities or those of their committees;o

The Board or Senior Management ignore, or reject available information when
making decisions;oInability of the Board or Senior Management to clearly explain the strategy,risks and results to the supervisor;oLack of awareness by the Board or Senior Management of the culture within
the insurer;oInconsistency between the culture promoted by the Board and the culture within
the insurer;oLack of adequate responses from the Board and Senior Management todevelopments affecting the insurer;oFailure to escalate issues to the Senior Management and/or the Board; and

o

•

•

Remuneration of Senior Management, Key Persons in Control Functions or
major risk-taking staff is not commensurate with their key performanceindicators and not in line with the insurer’s business and risk strategies or longterm interest of the insurer.

Board committees:oLack of effective delegation from the Board to Board committees;oInappropriate composition of Board committees (for example, members without
adequate expertise or sufficient independence); andoLack of effective lines of reporting to and from Board committees.

Control functions:oControl functions are not adequately resourced (e.g. too few people comparedto the size of the company and volume of operations);

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oLack of independence of control functions, in particular a lack of separationfrom business functions;oLack of effective reporting lines from the control functions to the Board or its
committees;oThe head of a control function does not have access to the Board;oThe head of the control function’s records are non-existent or of poor quality;oInternal audit recommendations do not align with the internal audit findings.

o•The scope and frequency of internal audits are inadequate; andOther indicators:oNon-compliance with regulatory requirements;oRecurring findings observed by internal or external auditors or supervisors (i.e.
repeated failure to resolve observed issues);oFindings and ongoing investigations of other supervisors and/or jurisdictions;oLack of cooperation of the insurer with the supervisor;oUndue interference of an owner or another person in the insurer’s operations(for example, undue influence of reinsurers over the claims decisions of
insurers);oComplaints received are above the norm for similar insurers; andoWhistle-blowing cases are above the norm for similar insurers8.

35.
In addition, there can be financial indicators of governance-related problems, such asa significant financial loss, or adverse change to an insurer’s balance sheet or level of capital
cover, that:4•

Is out of line with the experience of the insurer’s peers;•

Was not anticipated or planned for by the insurer’s Board and Senior Management; or•Attracts significant adverse market comment or reaction (e.g. in the insurer’s shareprice).

Communication

36.
Effective communication with insurers and the wider public is one of the elements
supporting proactive supervision of corporate governance 9. Supervisors should share theobjectives and strategy of supervision and principles which guide their supervisory approachwith insurers and the wider public in order to increase their awareness and understanding.
A better understanding of the supervisory objectives may facilitate the furnishing of relevant
information to the supervisor. In addition, it may promote more open and transparent dialogue
between the supervisor and the insurer.

8 However, it is important to note that this disparity does not necessarily reflect poor corporate governance, but
may be an indication of insurers having appropriate internal procedures that assist the staff with concerns to blow
the whistle.
9 See draft revised ICP 2.9, available here.

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37.
Communication by supervisors may encourage the industry to take actions orimplement practices aimed at improving corporate governance, or prevent behaviour which
may lead to improper corporate governance-related practices. For example, communicationof the outcomes from a thematic review could help drive changes in behaviour that improve
corporate governance.
38.
Communication by supervisors may be verbal (e.g. physical meetings, public
speeches) or written (e.g. publicly available reports, guidelines, policy statements). Suchcommunication can be directed to the entire industry or selected insurers facing the same
issues.

5

Conclusions

39.
This Application Paper has been developed to provide good practices related toorganisation and functioning of the supervisor, aimed at facilitating proactive supervision of
corporate governance-related issues.
40.
As indicated in this Application Paper, proactive supervision requires a supervisor to
be forward-looking, to identify issues early, and act quickly and constructively to address
circumstances that are not yet critical but could lead to corporate governance-related
problems, adverse outcomes to policyholders or to violations of local requirements or laws. It
seeks to address the challenges faced by supervisors in detecting problems in corporate
governance and taking appropriate steps at an early stage.
41.
To help provide a better understanding of proactive supervision of corporate
governance-related issues, this Application Paper highlighted the following:•

Proactive supervision of corporate governance should be carried out proportionately
to the issues identified and using an approach customised to the circumstances;•

There are different approaches to foster proactiveness of supervision of corporate
governance;•

The supervisor should consider possible ways to improve the supervisory organisation,
culture and processes, such as the expertise of the staff and their willingness to act
upon relevant findings;•

The supervisor needs to have relevant information to be able to carry out proactive
supervision and may consider a range of approaches to gathering such information;•

The supervisor should consider developing an early warning system of potential
corporate governance-related indicators, such as the use of yellow and red flags; and•Effective communication with insurers and the wider public supports proactive
supervision of corporate governance.

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