OECD Guidelines on Insurer Governance

image of OECD Guidelines on Insurer Governance

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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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).

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