OECD Guidelines on Insurer Governance

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Author(s):
OECD
28 Nov 2011
Pages:
92
ISBN:
9789264129320 (PDF) ;9789264129313(print)
http://dx.doi.org/10.1787/9789264129320-en

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The OECD Guidelines on Insurer Governance offer a comprehensive set of principles on the governance of insurers that are intended to provide guidance and serve as a reference point for insurers, governmental authorities, and other relevant stakeholders in OECD and non-OECD countries. As financial institutions whose business is the acceptance and management of insurable risk, insurers should have sound governance and risk management practices so that they will be in a position to provide promised benefits to policyholders and beneficiaries and thus fulfil their insurance function in the economy.

The Guidelines on Insurer Governance emphasise the following key elements of insurer governance: an expected prudent approach to business and financial strategies; a well developed risk culture and risk management and internal control systems, supported by effective and independent control functions and integrated firm-wide reporting; sound compensation arrangements; a high level of financial expertise among board members and within senior management; and policies and procedures that ensure proper treatment of customers and policyholders. The Guidelines complement the OECD Principles of Corporate Governance, one of the twelve key Financial Stability Board standards for sound financial systems. 

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  • Foreword
    The OECD Guidelines on Insurer Governance were established as an OECD Recommendation in 2005. This publication reproduces the revised Guidelines on Insurer Governance agreed by the Council on 19 May 2011.
  • Recommendation of the Council on Guidelineson Insurer Governance
    Considering that OECD Ministers agreed in 2002 that implementation of best practices in corporate and financial governance entails an appropriate mix of incentives, balanced between regulation and self–regulation, and that such governance should be improved to enhance transparency and accountability and thereby strengthen investor confidence and the stability and resilience of financial markets;
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    • Introduction
      The following guidelines are applicable to any insurer licensed to underwrite life, non–life and reinsurance policies and take into account the specificities of the sector. They are designed in light of the overriding objective of an insurance undertaking, which is to provide benefits to the insured in accordance with the contracts concluded with them, and satisfy its shareholders (member–policyholders in the case of mutual insurers). Given the specificity of the reinsurance business, some guidelines relating to stakeholder protection may not be fully applicable.
    • Governance structure
      The governance structure should have an appropriate allocation of oversight and administrative responsibilities, stipulate and delineate clearly the duties, responsibilities and qualifications of persons having responsibilities, and protect the rights of shareholders (or member–policyholders) and the interests of policyholders.
    • Internal governance mechanisms
      Insurers should have appropriate control, incentive and communication mechanisms and internal organisational structures that encourage sound and prudent internal decision–making and promote the efficiency and transparency of operations.
    • Groups and conglomerates
      Group or conglomerate (hereafter "group") ownership, structures, arrangements and relations should be transparent to all entities within the group and related shareholders as well as to external stakeholders, and should be well understood by boards of directors and key executives.
    • Stakeholder protection
      The governance framework for insurers should ensure an appropriate protection of the interests and rights of stakeholders (including policyholders, employees, creditors, supervisors and consumers) through proper disclosure and market conduct, effective governance and redress mechanisms, and respect for the rights and expectations of shareholders (or member– policyholders) and participating policyholders.
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    • Rationale for the Guidelines
      As financial institutions whose business is the acceptance and management of insurable risk, insurers are expected to have sound governance practices and effective risk management so that they will be in a position to provide promised benefits to policyholders (and any relevant beneficiaries) and thus fulfil their insurance function in the economy. Moreover, given that the insurance business is in many instances, due to its complexity, characterised by important asymmetries of information and potential related imbalances in power between buyers and sellers, there is an expectation that insurers will treat their customers and policyholders fairly, with appropriate internal policies, processes and procedures to ensure this outcome.
    • Some specificities of the insurance sector
      As in the case of ordinary corporations, there may be a potential misalignment of interests between owners and managers at insurers given the difficulty in achieving perfect monitoring of management – symptomatic of the classic principal–agent problem. The nature and extent of the misalignment may vary depending on whether an entity is structured as a stock company or as a mutual insurer.6 In both cases, there is the potential divergence of interests arising from the separation of ownership from control, as managers of the insurer may pursue their own interests contrary to the interests of shareholders (in the case of stock companies) and member–policyholders (in the case of mutuals).
    • Detailed annotations
      The governance structure of an insurer should have an appropriate allocation of oversight and management responsibilities to provide for effective authority and efficient decision–making in the insurer, while ensuring adequate checks and balances and oversight so as to prevent poor or conflicted decision– making or mismanagement, establish proper accountability and sound incentives, and thereby protect shareholders (or member–policyholders) and the interests of policyholders and, as appropriate, other stakeholders such as employees. This allocation should be clearly established and made transparent internally and externally.
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