Public

Application Paper on the Composition
and the Role of the Board

November 2018

PublicApplication Paper on the Composition and the Role of the Board
Adopted by the Executive Committee on 7 November 2018

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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 the 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), 2018.
All rights reserved. Brief excerpts may be reproduced or translated provided the source isstated.

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Contents
1

Introduction .................................................................................................................... 42

Competence of Board members .................................................................................... 6

3

Diversity of competencies of the Board .......................................................................... 84

Allocation of the roles and responsibilities ...................................................................... 95

Delegation of activities and tasks of the Board ............................................................. 11

6

Combining the roles of the Chair and CEO .................................................................. 12

7

Being a Board member of multiple entities within the same group ............................... 12

8

Access to information ................................................................................................... 13

9

Behavioural aspects of the Board’s functioning ............................................................ 15

Conclusion .......................................................................................................................... 20
Sample Board composition grid: What skills and attributes does your Board need?
21
The DNB template for a matrix to assess the collective competence of membersof the management body .................................................................................................... 22

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1

Introduction

1.
The outcome of the Self-Assessment and Peer Review (SAPR) conducted by the IAISin 2014 showed a need for more proactive supervision of corporate governance by the
insurance supervisors. The most common challenges to full observance of some of thestandards concerning supervision of the Board activities were the robustness and frequencyof the supervisor’s assessments of some aspects of the Board’s performance. Some of theissues identified in the SAPR were addressed by revision of ICP 7 (Corporate Governance),
finalised in November 2015. The IAIS also noted from the SAPR that some challenges related
to supervision of the Board’s composition and functioning should be addressed by providing
supervisors with good practices and tools.
2.
Considering particular challenges for achieving effectiveness in supervision of theBoard, this Application Paper aims to provide additional material to help with the practicalinterpretation and application of selected standards and guidance of ICP 5 (Suitability of
Persons) and ICP 7. This Application Paper is based on input from the members of theGovernance Working Group – in terms of challenges and possible solutions – andfeedback received from the broader IAIS membership and stakeholders.
3.
The IAIS recognises that Boards may be structured in various ways depending on,among other things, jurisdictional corporate law (such as one-tier or two-tier Boards). This
Application Paper applies to the Board as referred to in the context of the ICPs (inparticular ICP 7), which is a body of elected or appointed individuals ultimately
responsible for the governance and oversight of the insurer, regardless of the Board
structure. Another factor influencing the insurer’s governance is its corporate structure,such as stock companies, mutuals or co-operatives. This Application Paper refers toa specific organisational structure when some of the challenges or proposed supervisory
responses are more relevant for a particular structure. However, it is recognised thata particular issue and the most relevant supervisory response depend on a number offactors and specific characteristics of a particular case.
4.
The ICPs describe the proportionality principle by indicating that: “supervisory
measures should be appropriate to attain the supervisory objectives of a jurisdiction andshould not go beyond what is necessary to achieve those objectives.” 1 The terms “nature,scale and complexity” subsequently provide the perspectives for considering proportionality.
The proportionality principle in the ICPs gives room for tailored solutions to achieve the desired
outcome or objective of the relevant Principle Statement or Standard when carrying out
supervision of the Board’s functioning. However, it should be kept in mind that theconsiderations leading to a proportionate application of a Principle or Standard should givedue consideration to the desired outcome of that Principle or Standard.
5.
The Board is responsible for providing the overall strategy and direction for the
insurer and overseeing its proper overall management, while leaving the day-to-day
management of the insurer to Senior Management. 2 One of the roles of the Board is toprovide leadership, direction and oversight of the insurer’s business within an effective
system of risk management and internal controls and functions to address the key risks it
faces and for the key legal and regulatory obligations that apply to it. 3 The effectiveness1 Paragraph 8 of the Introduction to ICPs.
2 ICP 7.1.1.

3 See ICP 7.3.1 and ICP 8.0.1.

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of the Board, as the body ultimately responsible and accountable for the sound andprudent management of the insurer, is pivotal to an insurer’s long-term success andsustainability. 4 An effective Board develops and promotes its collective vision of theinsurer’s purpose, its culture, its values and the behaviours it wishes to promote in
conducting its business. The Board’s own culture has an impact on the whole organisation.
For this reason, the Board should consider from time to time whether or not its own dynamics
and culture pose any particular risks to the organisation.
6.
From a supervisory perspective, the desired outcome of an effective Board may besummarised as one that:•

Establishes a sustainable business model and a clear strategy;•

Articulates and oversees a clear and measurable statement of risk appetite against
which major business options are actively assessed; and•Meets its regulatory obligations, is open and proactively engages the supervisor andsets a culture that fosters prudent management. 5

7.
Given the key function that the insurance sector plays in absorbing risks from the real
economy, it is critical that the Board of an insurer and its supervisor make a long-term
commitment to build and sustain closer, trust-based relations founded on open
communication. This requires the use of formal and informal channels between supervisors,
the whole Board, the Chair, and the chairs of key Board committees. The interaction shouldbe two-way with supervisors contributing their views and suggestions on the range of key
issues they think Board members should consider.
8.

For a Board to be effective, two aspects may be deemed essential:•

Formal aspects, such as suitability 6, composition, allocation and delegation of
responsibilities;•

Behavioural aspects, such as dominance and too much influence, skills to challenge
and to cooperate, capacity for change and openness to diversity.

In the sections below, these two aspects will be further elaborated and good practices forsupervision will be suggested.
9.
Each section of the paper is structured, to the extent possible, in the following way:a description of problems or potential challenges for the supervisor followed by proposals forsupervisory tools and good practices to remedy the problem or challenge.

4 ‘A company’s board is its heart and as a heart it needs to be healthy, fit and carefully nurtured for the company

to run effectively’, J. Solomon and A. Solomon, Corporate Governance & Accountability, John Wiley & Sons 2004,
p. 65.
5 Prudential Regulation Authority, Corporate governance: Board responsibilities, March 2016, p. 5,
https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisorystatement/2016/ss516.pdf?la=en&hash=FAC29DDE01AD00BF8E45222374D55F64468D18AE
6 As regards suitability, this Application Paper focuses mainly on competence.
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2Competence of Board members

10.
According to ICP 7.3: “The supervisor requires the insurer’s Board to have, on an ongoing basis, an appropriate number and mix of individuals to ensure that there is an overall
adequate level of competence at the Board level commensurate with the governancestructure”. This requirement is reinforced by the Principle Statement of ICP 5: “The supervisor
requires the Board Members, Senior Management, Key Persons in Control Functions andSignificant Owners of an insurer to be and remain suitable to fulfil their respective roles”. ICP
5.2 further specifies that: “The supervisor requires that in order to be suitable to fulfil theirroles, Board Members (individually and collectively), Senior Management and Key Persons inControl Functions possess competence and integrity”.
11.
Assessing the overall level of competence of the Board is intrinsically linked to themembers’ individual and collective suitability as well as the appropriateness of their mix andcomposition to adequately assume their roles and responsibilities. Supervisors can be facedwith various challenging situations when trying to measure the capability of a Board to fulfil its
responsibilities.
12.
The supervisor may experience a number of challenges related to the competence ofBoard members, such as those described below.
2.1 The selection process for future members is informal or undocumented
13.
This situation may occur, for example, where the selection 7 process of the insurer islimited to identifying candidates from past work experiences of current members, networking
activities and/or the business community in their region. In these cases, the supervisor could
request the insurer to develop a formal Board-approved nomination policy and/or the creationof a Board nomination committee, which could be supported by the human resources
department or external consultants. This may assist the Board to make the link between the
Board’s composition and the insurer’s strategy, which encompasses succession planning toensure that the diverse ranges of needed skills are present.
14.
Furthermore, the supervisor could ask for biographical summaries of all newly selected
members and the documentation resulting from the Board’s review within a reasonable timeafter their appointment, as well as the succession plan and a draft of a profile of new
candidates. Together the documents may provide a useful basis for a discussion between the
supervisor and the insurer about concerns that the selection process is informal or
undocumented. Some supervisors consider it good practice to interview candidates or persons
nominated for the position of the Chair of the Board, in order to gather information for theassessment of fitness and propriety and to determine whether there are supervisory concerns.
2.2 The Board is not competent collectively
15.
If the Board is not competent collectively, the supervisor may suggest enhancing the
succession plan for the Board’s membership to include the identification, mentorship anddevelopment of future members and to help improve the Board’s collective competence. The
Board’s succession plan could be linked to a Board composition grid (see example in Annexes
1 and 2) and reviewed periodically so that any gaps in the collective or individual expertise of

7 In this Application Paper “selection” covers recruitment and election, depending on a legal form of an insurer.

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the Board are identified and taken into account when considering the selection of new
members.
16.
It may also be appropriate for the supervisor to challenge the adequacy of the size of
the Board, subject to jurisdictional legal requirements or corporate rules, regarding theminimum number or percentage 8 of members sitting on the Board. In certain cases, it could
be an opportunity for the supervisor to encourage the insurer to have Board members withnecessary skills, knowledge or expertise.
2.3 The relevant expertise of the financial sector and specifically the insurance industry (e.g.
actuarial, investment) is not collectively held by the Board
17.
This problem occurs in insurers where there are no criteria or indicators predeterminedand documented by the Board to judge the appropriate level of experience and professional
qualifications needed to hold a position on the Board of an insurer.
18.
A Board composition grid could align both members’ names with the desired/needed
skills, experience and attributes (mentioned above in Section 2.2). Any identified important
gap pertaining to competence or qualifications should be encouraged (or required) to be filled.
19.
The supervisor should assess whether the Board makes the proposed Board members
aware of expectations regarding the time to be allocated for the function, their commitment
and their contribution relating to their competence.
20.
as:

The supervisor assesses whether the Board reflects relevant key characteristics, such•

Members have industry and/or functional experience and expertise which can beapplied to the business and strategy of the insurer;•

Members bring diverse backgrounds and perspectives that enrich Board discussions,analysis, insights and problem solving.

2.4 The competence of the Board members does not evolve to keep up with the changes in
the insurer’s business or environment in which an insurer operates
21.
After changes in the risk profile of an insurer, Board members may find themselves nothaving the necessary skills to understand, monitor and control the new risks arising 9. Board
members may not be able to follow the pace of regulatory changes, which could lead toinadequate performance.
22.
To help deal with the pace of changes, the Board should offer proper training for its
members. Board members should have access to and participate in on-going training on
issues relating to matters of interest for the members, especially for those with more limited
skills or knowledge. The supervisor could assess whether appropriate funding and time isdevoted to such training.
23.
The supervisor should encourage the establishment of internal arrangements forperiodic, staged rotation of its members so as to invigorate its capabilities by introducing
members with new expertise and perspective while retaining valuable knowledge, skills and
8 In certain mutuals, a specific percentage of the mutual’s members must sit on the Board.

9 See W. McDonnell, Managing Risk: Practical lessons from recent “failures” of EU insurers, Occasional Paper

Series, FSA, December 2002, p. 15-16, http://www.fsa.gov.uk/pubs/occpapers/op20.pdf.
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experience and maintaining continuity. However, for certain positions within the Board (e.g.
Chair of the Audit Committee), requiring a specific skill-set or background, likeaccounting/audit, rotations may not be necessary.
24.
Furthermore, the supervisor may request and obtain the insurer’s talent management
and mentoring programmes for the Board members in order to assess how talent andleadership is managed.

3

Diversity of competencies of the Board

25.
The diversity of the Board in its broadest sense can be an essential driver of theBoard’s effectiveness, creating a breadth of perspectives among members and breaking down
a tendency towards “groupthink” 10. It may also help increase the quality of group performance,
creative thinking and may lead to better decision-making. Diversity can be considered in thecontext of various issues such as gender, race, and ethnicity, but also skills, backgrounds,
personalities, opinions, and experiences. 11 This Application Paper focuses only on diversityof competencies, such as knowledge and expertise.
26.
According to ICP 5.3.6: “When assessing the competence of the Board Members,
regard should be given to respective duties allocated to individual members to ensure
appropriate diversity of qualities and to the effective functioning of the Board as a whole.”
According to the last sentence of ICP 7.3.1: “While certain areas of expertise may lie in some,
but not all, members, the collective Board should have an adequate spread and level of
relevant competencies and understanding as appropriate to the insurer's business.”
27.
The supervisor may experience a number of challenges related to the composition of
the Board in terms of its diversity of competencies, such as those described below.
3.1 The Board as a whole might not possess the relevant competencies and understanding of
the insurer’s business because of an imbalance in diversity
28.
The Board should assess how members are selected in order to foster a diversity ofcompetencies and to facilitate understanding by the Board of specific characteristics of theinsurer’s business. In addition the Board should assess the need to replace members lacking
relevant knowledge, skills or experience with others who have an appropriate level ofcompetence in areas assessed to be critical for the insurer.
29.
Additionally, succession planning, described in more detail in Section 2, may help
facilitate diversity within the Board. The supervisor should assess whether the insurer’s Boardor a nominations committee considers the need for diversity as part of succession planning.
30.
The supervisor should review whether the Board has in place selfassessment/independent review processes not only on the performance of each Board
member, but also on the Board’s structure, composition and diversity.

10 Financial Reporting Council, Guidance on Board Effectiveness, March 2011, para. 1.3.

11 For example, Boards composed only of men, the coming in the workforce of the Millenniums or the necessity tounderstand Fintech or cybersecurity matters.

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31.
As suggested in Section 2.2, an insurer’s Board composition grid could be used by thesupervisor to assess the degree of diversity found amongst Board members. It could be also
used to identify potential gaps in the collective and individual skill-set of the Board.
3.2 Unconscious or unquestioned sharing of common assumptions may take place in a Board
that is not diverse enough32.
This situation may preclude the Board from taking into account different and new
perspectives on the risks, consequences and possible implications of Board decisions. A lackof diversity may also result in poor discussions or limited analysis, paving the way for possible
inadequate decisions.
33.
For the supervisor, the infrequency or lack of difficult questions raised by Board
members and pursued with Senior Management regarding plans or performance could be anindicator of an unconscious bias or not enough challenges of difficult issues.
34.
Independence from Senior Management and experience and stature of Board’s
members are other important factors the supervisor should take into account in assessing thecapacity of a Board to challenge Senior Management.
35.
The supervisor may encourage the insurer to implement a decision-making process toensure the Board takes into account different and new perspectives on risks when the Board
lacks diversity. Even though the responsibility remains within the Board, the expertise fromoutside the Board may be retained to help facilitate this process.
36.
Interviews with members of the Board could be conducted to the extent necessary to
identify and assess the “tone at the top” relative to diversity. Examination of minutes of theBoard and committee meetings could also be indicative of the openness to different views
when dealing with difficult decisions.

4

Allocation of the roles and responsibilities

37.

According to ICP 7.1: “The supervisor requires the insurer’s Board to:•ensure that the roles and responsibilities allocated to the Board, Senior Management
and Key Person in Control Functions are clearly defined so as to promote an
appropriate separation of the oversight function from the management responsibilities;
and•provide oversight of the Senior Management.”

38.
The allocation of the roles and responsibilities between the Board and Senior
Management is one of the critical governance decisions made by the Board.
39.
The respective roles of the Board and Senior Management and the resulting allocationof responsibilities are a fundamental aspect of corporate governance 12. If the balance is not

12 The Financial Stability Board (FSB) recognised the strengthening of individual responsibility and accountability

as one of the overarching issues in strengthening corporate governance aimed at mitigating misconduct risk. See
FSB, Strengthening Governance Frameworks to Mitigate Misconduct Risk: A Toolkit for Firms and Supervisors, 20
April 2018, http://www.fsb.org/wp-content/uploads/P200418.pdf, p. 22 and next.

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appropriate, the governance structure within the insurer may not operate correctly and maylead to poor governance outcomes and ultimately poor performance.
40.
The supervisor may encounter challenges in supervising the allocation of the roles andresponsibilities within the insurer, such as those described below.
4.1 Improper allocation of tasks
41.
An insurer’s Board and Senior Management may have no clear allocation of
responsibilities or an allocation of roles and responsibilities that does not allow for clear-cut
distinction between oversight and day-to-day management of the business 13. The Board may
spend too much time “managing” and insufficient time “directing”. This situation may result
from a lack of proper planning and discussion between the leadership of the Board and theleadership within Senior Management in respect of the allocation of the roles andresponsibilities – for example, adopting off-the-shelf role and responsibility guidelines with noregard to the insurer’s specific circumstances and unique governance structure. In othercases, the allocation of roles and responsibilities within the insurer is informal and not
sufficiently documented, such as in a Board approved roles and responsibilities framework or
matrix. Furthermore, in some cases the allocated roles and responsibilities do not seem to be
regularly assessed or reviewed by the Board to reflect the changes within the insurer.
42.
In respect of the above-mentioned pitfalls, a jurisdiction’s legislation may address theroles and responsibilities of the Board, Senior Management and Key Persons in Control
Functions. The supervisor should provide guidance on key roles and responsibilities of theBoard and Senior Management in an insurance context. The FSB suggests the developmentof a short description of the significant functions or a statement of the activities for which eachsenior manager is responsible, which could be used to devise a “responsibilities map” showing
how key responsibilities are allocated across the firm 14. The supervisor may request andobtain such a framework or matrix and validate this against, for example, the CEO key
performance contract, the Board’s evaluation assessment or the strategy. The supervisor canuse this responsibility map and performance assessments as an indicator of the overall
effectiveness of the Board members individually and collectively. When deemed necessary,
the supervisor can request the Board to perform a regular assessment of the effectiveness ofa proper allocation of tasks by comparing the new situation with the old situation.
43.
The supervisor may also conduct interviews with the Board to ascertain the processthat the insurer implemented to allocate roles and responsibilities within the insurer.
44.
In addition, the supervisor may request and obtain internal audit reports if an internal
audit review was conducted in respect of the roles and responsibilities of the Board and Senior
Management. If no such internal audit was conducted, the supervisor may consider directing
the insurer to conduct such an internal audit review.
45.
In some jurisdictions, the supervisor reviews the Board documentation to understandthe respective roles and responsibilities of the Board and Senior Management. Where there
is an overlap between the roles and responsibilities of the Board and Senior Management,

13 See ICP 7.1.4, which describes activities to be taken by the Board necessary to provide effective oversight of
the Senior Management.
14 FSB, Strengthening Governance Frameworks to Mitigate Misconduct Risk: A Toolkit for Firms and Supervisors,
20 April 2018, p. 26.

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resulting in governance concerns, the supervisor should require the insurer to address theseconcerns and to demonstrate how this overlap was addressed.
46.
Additionally, the supervisor may also obtain a copy of the Board’s work plan toascertain whether its roles and responsibilities framework or matrix is regularly assessed andreviewed by the Board.

5

Delegation of activities and tasks of the Board

47.
The Board may delegate some of the activities or tasks associated with its own roles
and responsibilities. Notwithstanding such delegations, the Board as a whole retains theultimate responsibility for the activities or tasks delegated. 15
48.
Whenever the Board delegates activities or tasks within the Board structure, it should
promote independent judgement within the Board. Such delegation should not have a negative
impact on the balance of power within the Board or on the effective discharge of the Board’s
duties.
49.
An insurer should have adequate internal control systems and reporting to assist its
Board, or its delegated activities and tasks, in the fulfilment of its responsibilities for oversightof the insurer’s risk management framework.
50.
Any delegation of activities or tasks should be clearly documented and specify, among
other things: the exact activity or task being delegated; the authority of recipients to further
delegate the activity or task; and the restrictions placed on the exercise of delegated activities
or tasks. The insurer should also have adequate monitoring systems to ensure that thedelegated activities are properly controlled.
51.
The supervisor may encounter challenges in terms of supervising delegation ofactivities and tasks by the Board, such as those described below.
5.1 The delegation is informal and not documented.
52.
In accordance with ICP 7.3.4, the Board should have appropriate practices andprocedures for its own internal governance, and ensure that these are followed andperiodically reviewed to assess their effectiveness and adequacy. Adequate documentation
should be part of these practices. Where the delegation process is informal and not
documented, the supervisor should direct the insurer to formalise it.
5.2 There is a Board approved delegation policy, but the policy is not monitored and reviewed
on a regular basis.
53.
The supervisor should obtain a copy of the delegation policy of the insurer and assess
whether the policy clearly articulates the delegations and accountability structures within theinsurer. Furthermore, the supervisor should have an understanding of how the delegation
policy interlinks with the overall governance framework of the insurer.
54.
The supervisor may review Board minutes to assess whether the delegation policy isregularly reviewed by the Board and amended to align to the changing internal and external
15 ICP 7.3.13.

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environment of the insurer. It may happen that the policy is not monitored, reviewed andamended on a regular basis, in times of crises or when changes occur in the Board and Senior
Management.
55.
In addition, the supervisor may review relevant internal audit reports that provide theBoard with assurance that the delegation framework set out in the delegation policy is being
followed or not.

6

Combining the roles of the Chair and CEO

56.
The supervisor may encounter various challenges when the roles of the Chair and
CEO are combined. In jurisdictions where the positions of the Chair and CEO may be
combined, the supervisor should request mitigation measures to ensure “a clear distinction
between accountability for oversight and management.” 16
57.
Mitigating measures should be oriented to enhance the checks and balances, to foster
objective decision-making and to avoid concentration of powers in the hands of one person.
For example, the supervisor may require the insurer to have a clear division of responsibilities
between the Chair and CEO, which should be in writing and agreed by the Board.
58.
Additionally, the Board may be required to include some, or even a majority, of
independent members in order to encourage challenge and facilitate an objective decisionmaking process. In some jurisdictions there is a requirement to appoint a “lead independent
director” 17. The role of a lead independent director is mainly to provide leadership toindependent directors, with the aim of ensuring a proper power balance and independence of
the Board.

7

Being a Board member of multiple entities within the same group59.
An individual can be a member of more than one Board within a group (for example a
Board member of the parent company also being on the Board of a subsidiary). Many
jurisdictions allow individuals to be members of two or more Boards within a group as it isrecognised that there are advantages from this. For example, it may help create a common
culture and consistent management across the group and may lead to long-term synergies instrategy setting and talent management.
60.
An individual being a member of more than one Board may give rise to potential
conflicts of interest between different parts of the group and to being overstretched if that
individual is unable to devote sufficient time to responsibilities within each entity.
61.
In order to address the above mentioned challenges, it is good practice to put in place
mitigants (either within general corporate governance requirements or within insurance
regulation) so that this does not give rise to conflicts of interest between different entities within
the group. The supervisor should consider how a Board of the head of the group ascertains
limits for itself, taking into account the nature, size, and complexity of the entities within the
16 ICP 7.1.1. See also OECD Guidelines on Insurer Governance, 2017 Edition.
17 “Independent Director” or “Senior Independent Director” are also used.

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group and of the roles undertaken by Board members who may have multiple Board positions.
The supervisor should discuss with the Chair on a regular basis how the Chair has obtained
comfort on the independence of Board members with multiple Board positions within the group(on their initial appointment and on an ongoing basis). The supervisor should also consider
taking measures that could include:

8•

Requiring or recommending some, or even a majority, of Board members to be nonexecutive;•

Requiring specific permission from the supervisor for multiple Board positions to beheld within the same group;•

Requiring insurers to have clearly set out policies for dealing with conflicts of interest
including provision for potential conflicts to be declared; or•Determining a maximum number of mandates to be held by persons who alreadyperform a similar role in other entities within the same group.

Access to information

62.
Board members may be unable to effectively execute their roles and responsibilities
because they do not receive all necessary information or take part in all relevant discussions.
Conversely, Board members may receive an excessive amount of information that makes it
difficult to review and analyse. Missing information or context may be caused by ineffective
management information systems and Board reporting tools in addition to a lack of information
sharing across Board committees.
63.
It may happen that the Board members do not receive all pieces of backgroundinformation necessary to make a well-informed and prudent decision when they receive
a proposal or recommendation from the Senior Management or a committee.
64.
A similar situation may arise when the Chair and the CEO have separate discussions
and exchange of information with selected Board members on important matters, such as
strategic planning or changes in the organisational structure. Other Board members may not
be aware of those issues or do not have the knowledge necessary to execute effectively theiroversight role and responsibilities. This scenario is contrary to good governance as no single
Board member or a selective group of Board members should have unfettered powers ofdecision and control where the Board acts collectively. Furthermore this type of behaviour may
sow division among Board members who should normally act as a leadership team.
65.
The above-mentioned scenarios may be extremely difficult for the supervisors to notice
unless one of the Board members alerts the supervisor. Where the supervisor is of the opinion
that the Board members do not receive comprehensive, risk focused and relevant information,
the supervisor may take measures, such as:•

conduct interviews with all Board members individually to ascertain the Board decisionmaking process and the quality of information that is provided to the Board members
in considering and making decisions, and to assess their level of understanding as tohow key metrics presented to the Board are constructed;

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•

instruct the insurer’s internal audit function or a suitable external party to conduct
a review and assessment on the Board’s decision-making processes, in terms ofaccess to relevant information; or•obtain copies of Board evaluations (self-assessments or external assessments) or
member peer assessments/reviews to assess whether the unfettered power resides
with an individual or group of members, or request a Board evaluation to be conducted(in case there is none).

66.
In order to facilitate involvement of all members of the Board in the decision-making
process, it is a good practice for the supervisor to require the Board to develop and havedocumentation (such as Board charters, mandates or terms of reference) that details theBoard’s functions and responsibilities to ensure that the members have free discussions andimpartial judgment in the Board and committee meetings. Such documentation should
highlight, for example, the division or balance of responsibilities between the Chair of theBoard, the lead/senior non-executive director, if any, and the CEO. In some jurisdictions theseparation of the roles and responsibilities of the CEO and the Chair is documented undershareholder resolutions.
67.
The supervisor should review whether Board documentation includes all relevant
information and is available for decision-making and whether discussions on matters ofimportance to the Board are held in order to enable them to play an active role in the decisions
that are made.
68.
The supervisor should also encourage the Board to assess the process of preparing
information for the Board, including who is involved in this process and who decides which
information is or is not presented to the Board, what checks and balances are used to avoid
the withholding of information or the delivery of partial or delayed information. In order to makesure that the Board receives all relevant information necessary to make well-informed
decisions, the supervisor should encourage the Board to make sure that the internal
governance below the Board level (at the management level) is organised in a proper way, so
the decisions made below the Board are made in an informed and objective way, andinformation provided to the Board is objective, balanced, relevant and timely. 18
69.
Reviewing minutes of Board meetings may help the supervisor to assess and verify
that the Board makes decisions within the confines and boundaries of the governanceprescripts as contemplated in terms of Board documentation. In this respect, minutes of theBoard meetings may enable the supervisor to assess whether deliberations and decisionmaking of the Board are within their scope. In addition, the supervisor may conduct interviews
with Board members to validate and corroborate that the minutes are an accurate reflection of
the Board discussions and decision-making.
70.
Given the critical nature of minutes to both the insurer and the supervisor, thesupervisor may consider providing guidance on how to draft minutes, in particular expectations
on the level of detail. For example, the Central Bank of Ireland stipulates the following inrespect of the Board minutes:“Detailed minutes of all board meetings shall be prepared with all decisions,discussions and points for further action being documented. Dissensions or
18 See G. Shawn Varges,

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negative votes shall be documented in terms acceptable to the dissenting personor negative voter. The minutes of meetings shall provide sufficient detail toevidence appropriate board attention, the substance of discussions and theiroutcome and shall be agreed at the subsequent board meeting.” 19

9Behavioural aspects of the Board’s functioning71.
In addition to the supervision of formal arrangements related to the role andcomposition of the Board, supervisors should be aware of potential challenges that may beposed by behavioural aspects of the functioning of the Board. The supervisor may find it
difficult to assess those aspects of functioning of the Board and to determine when and what
measures should be taken. Such developments within the Board are often intangible and may
be subject to supervisory judgement.
72.
The supervisor should consider ways to assess behavioural aspects, such as
developing indicators for assessing the Board functioning. For example, De Nederlandsche
Bank (DNB) uses the following risk indicators of behavioural factors in assessment of theBoard’s decision making in the supervised institutions 20.
Behavioural and culture
focus in decision making

Indicators

Impeding group patterns

1. Strain for consensus. What is the level of dissent? Do groupmembers take minority views? Do they maintain these views whenfacing an opposing majority?
2. Information-sharing bias. Do group members contribute previously
unshared and unique information?
3. Conflict. Is the group conflict prone? What is the nature of theconflict: task or emotional? Are there group norms about how to deal
with conflicts? Is the group confident with respect to solving conflicts?

Quality of challenge

1. Structure. Did the group use deliberate process interventions toenhance constructive challenge?
2. Leadership style. Did the leader create a facilitating climate andencouraged others to participate? Did the leader invite others to
speak up? Or did he or she impose his or her preferred solution, while
dismissing other's input.
3. Level of dissent. What is the level of dissent? Do group members
take minority point of views? Do they maintain these views when
faced with an opposing majority? 4. Depth of discussion. Did thediscussion evolve around a selection of topics, thereby leaving otherimportant information out of consideration? Was the frame of the
problem and its potential positive and negative consequences
discussed?

19 Central Bank of Ireland, Corporate Governance Requirements for Insurance Undertakings, 2015, p. 32.

20 De Nederlandsche Bank, Supervision of Behaviour and Culture. Foundations, practice and future developments,

p. 117, https://www.dnb.nl/binaries/Supervision%20of%20Behaviour%20and%20Culture_tcm46-334417.pdf
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73.
Supervisors should take into account a broad range of potential behaviouralconditions. A. Brown and B. Balasingham identified the following common root caused
leadership issues (at the Board or Senior Management level) that led ultimately to failures,
distress and impairments of some insurers 21:
HubrisExtreme pride or arrogance. The desire to be the best led to new risk andapproaches outside the insurer’s expertise, an overestimation of one’s own
competence or capabilities, especially when the person exhibiting it is in aposition of power.

MyopiaNo real vision, blindly following the market practice. Diverging from strategy
so as to have the latest and best.

Abuse of power/
Lack of courage

Using power and authority for personal interest at the cost of otherstakeholders. Extreme pressure often led to poor decision making, and often
less ethical practices.

Stuck in the past

Lack of desire to change or accept the need to change despite overwhelming
evidence.

Cronyism

Blind trust – people put in senior roles and kept in roles even if wrong fit for
the role or situation.

74.
The supervisor may encounter challenges related to behavioural aspects of thefunctioning of the Board, such as those described below.
9.1 Overly-dominant personality of the Chair or CEO
75.
In some cases one person can dominate the discussions and decision-making processof an insurer in a negative way. This may arise not necessarily because of combining functions
or certain flaws of the governance structure, but because of an overly-dominant personality.
This situation may be difficult to be observed by the supervisor, and it may be challenging to
respond in a proper way.
76.
The supervisor should consider how to respond to situations where it observes anoverly-dominant personality in a Chair or CEO, such as:•

Engaging the Chair or CEO to convey the supervisor’s observations and expectations,in order to foster an internal dialogue within the insurer, with the proper involvement of
all relevant parties;•

Assess whether relevant Key Persons in Control Functions have direct access to theBoard and respective Board committees, to achieve open communication and effective
challenge, and whether they make use of this direct access in reality;•

Conduct dialogues with Board members, including non-executive directors andselected management members (can be one-on-one engagement), to understand the
dynamics of the Board and Senior Management;

21A. Brown and B. Balasingham, Leadership and Life Insurance failures – What can we learn about Financial

Leadership, Paper presented to the Actuaries Institute Actuaries Summit, 21-22 May 2013, Sydney,
https://www.actuaries.asn.au/Library/Events/SUM/2013/Sum2013PaperAndrew%20Brown%20Bimal%20Balasingham.pdf
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•In jurisdictions where appropriate, attend Board meetings as an observer and review
the agendas and minutes. This may help the supervisor to assess the way in which theBoard operates and the level of challenge within the Board and from the Board
members to Senior Management. Alternatively, the supervisor could have an
independent behavioral expert attend a Board meeting as an observer to provide anassessment.

•

Conduct on-site inspections with the purpose of determining whether the problems withan overly-dominant personality is applicable for a particular insurer;•

Require the insurer to undertake a board effectiveness review and consider making
improvements to the way that the Board operates and makes decisions. The
supervisor should review whether the insurer implements the recommendations ofsuch reviews;•

Mount increased supervisory challenges on material matters (e.g. ask for the rationale
and challenge the Board’s thinking on why they do certain things);•

Review the insurer’s whistleblowing policy framework for its employees or any otherpersons to raise genuine concerns about possible improprieties at the earliest
opportunity, and in an appropriate way; or•Conduct exit interviews with Board members who resign, retire or otherwise exit theinsurer.

9.2 Involvement of the Chair or CEO in the Board Committee functioning
77.
ICP 7.3.5 stipulates: “it is good practice for the Chair of the Board to be a non-executive
Board member and not serve as chair of any Board committee”. Even if the Chair or CEO
does not serve as chair of Board committees, or even if he/she is not a member of acommittee, it may happen that he/she attends all meetings of a selected or all Board
committees, for the entire duration of the meetings.
78.
It may also happen that Chairs or CEOs inappropriately involve themselves during thecommittees’ meetings; for example, going beyond presenting information and answering
questions and inserting views and opinions into the discussions. As a result of dominating thediscussions by the Chair or CEO, committee members may not be able to discuss freely
without the influence of the Chair or CEO, and may be discouraged from taking any active
participation in the discussions. In these circumstances, the balance of power and decisionmaking may shift to this individual.
79.
The supervisor may address the above mentioned challenges in a variety of ways,
such as:•Require the insurer to set out clear policies on the membership and functioning ofBoard and its committees. If such policies already exist, the supervisor should review
them to assess whether they may prevent the Chair or CEO from dominating thediscussions within the Board committees. The supervisor may obtain copies of theBoard and Board committee attendance schedules and minutes to assess whether the
discussion at the meetings is dominated by a particular individual. Alternatively, if they
have the authority to do so, the supervisor may instruct the Board that the Chair or
CEO cannot be a member of the Board committees;

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•

Require or recommend the Board and its committees to have a majority of nonexecutive directors;•

Require or recommend the Board committees to be chaired by a non-executive
director;•

Require at least some members of a Board committee (in particular the chair) to haveexpertise in the subject matter covered by the committee (e.g. audit/finance experience
for the audit committee);•

Attend the Board committee’s meetings, or monitor them on the basis of their agendas
and minutes, to assess if they are being dominated by the Chair or CEO; or•

Conduct on-site inspections with the purpose of determining whether the problems
described above are applicable to a particular insurer;•

Discuss functioning of the Board committees with the Board members and Senior
Management.

9.3 Interference in the Board’s responsibilities by the owner or founder80.
In some smaller insurers and family owned insurers, the founder and major
shareholder may act as CEO or a Board member, disregarding the Board as well as the roles
and responsibilities framework or matrix approved by the Board. In other cases the founder(and owner) may perform various conflicting roles within the insurer and justify it by having“skin in the game”. This type of informal interference may be difficult to be handledappropriately by the Board. In such a situation, even if all relevant formal arrangements are inplace, the balance of power within the insurer will be tilted to one specific individual.
81.
The supervisor should examine the conflicts of interest policy of the insurer. In
a number of jurisdictions, the supervisor provides standards on the roles and responsibilitiesof the lead independent director 22. In these jurisdictions where the above-mentioned conflictsof interest or potential conflicts of interest may arise in respect of the Chair, the leadindependent director should preside at the Board meetings or perform functions that cannot
be performed by the Chair.
9.4 “Groupthink” tendency
82.
The “groupthink” tendency is a behavioral aspect that may have negative
consequences on the functioning of the Board. This social constraint consists of the members’
strong wish to preserve the harmony of the group, which inclines them to avoid creating any
discordant arguments or schisms. In some cases, this “groupthink” tendency may occur whenparticular members of the Board are considered as “experts” in the area of their responsibility,
and their views or opinions are not challenged by other members. When this social constraint
is dominant, the group members engage in self-censorship of their doubts about whateverpolicy position seems to be preferred by the leader or by the majority of the group 23.
22 For example, in the United States, publicly listed companies with a non-independent Chair are required to elevate

one of their independent directors to the position of lead director.

23 Irving Lester Janis, Crucial Decisions: Leadership in Policymaking and Crisis Management, 1989, The Free

Press, p. 58 and next.

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83.
Determining the existence of “groupthink” is not easy. In order to do so, the supervisor
should consider different means of identifying “groupthink”, such as:•

Attending the meetings of the Board to assess how the members interact with eachother;•

Organising face-to-face meetings with the Board members and paying attention to
behavioural aspects during those meetings.

84.
The supervisor may address challenges related to “groupthink” tendency byrecommending or requesting the insurer to assess the following:•

Diversity of the Board not only in terms of formal qualifications and education, but also
in terms of thinking tendency, perspectives and approaching the problem;•

Maximum duration of the term of the Board member;•

Composition of the Board, consisting also of a proper number of independent directors.

9.5 Trust deficit at the Board level85.
A trust deficit may arise for instance when the Chair does not trust the ability of theappointed CEO, or when the Chair is a previous CEO and struggles to make the transition
from the CEO to the Chair’s position. Such a lack of trust may lead to a disregard of the
distinction between the oversight and management roles as defined in the insurer’s roles andresponsibilities framework.
86.
From a supervisory perspective, as mentioned under Section 4.1, the supervisor
should highlight its expectations for the key roles and responsibilities of the Board and Senior
Management. In some jurisdictions, the supervisor has the authority to remove a Chair or CEO
and replace him/her with a more appropriate person.
87.
The supervisor may request and obtain copies of the Board’s meeting minutes and the
Senior Management’s meeting minutes. In reviewing these minutes, the supervisor should
assess whether the Chair is providing leadership to the Board and the CEO is providing
leadership to the insurer. If the Chair is also providing leadership to the insurer by directing
day-to-day operations of the insurer, resulting in the overall balance of power residing with the
Chair, the supervisor should discuss the situation with the Board and take appropriate
measures, if necessary. Suspending, dismissing or disqualifying the Chair, either directly or
by ordering the insurer to take these measures, may also be considered.

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Conclusion
88.

For a Board to be effective, two aspects may be deemed essential:•

Formal aspects, such as suitability, composition, allocation and delegation of
responsibilities;•

Behavioural aspects, such as dominance and too much influence, skills to challenge
and to cooperate, capacity for change and openness to diversity.

89.
As described in the Application Paper, the practices and tools for supervising these
two aspects can differ.
90.
Depending on the problems encountered, the supervisor should consider encouraging
insurers to apply tools such as: policies (succession, conflicts of interest, recruitment,delegation), diversity, self-assessments, profile for new candidates, processes (forrecruitment, Board functioning), roles and responsibilities map, independent Board members,
suitability matrix, information flows.
91.
Regarding the formal aspects, supervisors could make use of supervisory
requirements and off-site monitoring or on-site visits, while for the behavioural aspects on-site
visits, dialogues, interviews or observing Board meetings may be more effective.
92.
Tools supervisors may use in the context of behavioural aspects of the Board
functioning include: review policies, minutes and processes, dialogues/interviews, Board
effectiveness review, guidance, attend Board meetings, recommendations (e.g. majority of
independent members, individual and collective suitability).

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Sample Board composition grid: What skills and attributes
does your Board need?

In assessing their composition, boards and their nominating and governance committees need to thinkcritically about what skills and attributes the board currently has, and how they tie to oversight of thecompany. As companies’ strategies change and their business models evolve, it is imperative that board
composition be evaluated regularly to ensure that the right mix of skills are present to meet thecompany’s current needs. Many boards conduct a gap analysis that compares current director attributeswith those that it has identified as critical to effective oversight. They can then choose to fill any gaps
by recruiting new directors with such attributes or by consulting external advisors. Some companies
use a matrix in their proxy disclosures to graphically display to investors the particular attributes of eachdirector nominee.
(Source: Loop, Paula & Denicola, Paul, PricewaterhouseCoopers, “Investors and Board Composition”,
Harvard Law School Forum on Corporate Governance and Financial Regulation, May 26, 2016);

https://corpgov.law.harvard.edu/2016/05/26/investors-and-board-composition/#more-72983

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The DNB template for a matrix to assess the collective
competence of members of the management bodyThis suitability matrix is designed to provide a collective assessment of the knowledge, skills
and experience of the management body as a whole. A low score attributed to certain items
under analysis does not necessarily impact the individual assessment of a member. It is
expected that in a collegiate body there are appointees with different characteristics, including
different levels of knowledge, and different professional experiences.
The explanation of the matrix can be found under the following link: ‘Template for a matrix toassess the collective competence of members of the management body’
The table below presents an example of one of the modules. The entire matrix includes thefollowing modules:
A. GovernanceB. Competence of risk management, compliance and audit
C. Managerial competence
D. Products, services and markets within the institutions scope of activities
E. Sectoral and Financial Competence
F. Balanced and consistent decision-making
G. Overall picture of the collective suitability

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A. GovernanceThis section is meant to map how the responsibilities are divided within the management body in its management
function or in its supervisory function. This section can be tailored to the responsibilities within the organisation.

Please fill in a score for each member as follows:
L (Low) = is at a minimum aware of the subject

Is capable of assessing the setup and functioning of theadministrative organisation and internal control (AO and IC)
Is capable of setting up the compliance function and/or assessing its
setup, functioning and effectivenessIs capable of setting up the internal audit function and/or assessing its
setup, functioning and effectivenessIs capable of setting up the risk management function and/or
assessing its setup, functioning and effectivenessIs capable of understanding and implementing the remuneration
policy (either to the members of the management body in its
management function or institution-wide) and using incentives toinfluence behaviours
Is capable of understanding and implementing the policy onoutsourcing
Is capable of assessing whether the careful treatment of clients has
been safeguarded
Is capable of implementing a succession planningIs capable of assessing the setup and functioning of Human
Resources

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Name

Name

Name

Name

Name

Name

Name

Name

Name

Name

subject (expert)

Name

H (High) = can make a balanced independent judgement on theName

M (Medium) = has good understanding of the subject but is not expert