ICP 7: Suitability of Persons - iaisweb.org€¦ · ICP 7: Suitability of Persons Basic-level Module A Core Curriculum for Insurance Supervisors

ICP 7: Suitability of Persons

Basic-level Module

A Core Curriculum for Insurance Supervisors

Copyright © 2006 International Association of Insurance Supervisors (IAIS).All rights reserved.

The material in this module is copyrighted. It may be used for training by competent organizations with permission. Please contact the IAIS to seek permission.

This paper has been prepared by Mr. Martin Roberts. Martin Roberts is a senior consultant specializing in financial regulation. He was director of the Insurance Firms Division and a senior insurance advisor at the Financial Services Authority (FSA), which he joined in 1999. While at the FSA, he was a member of the Executive Committee and chairman of the Techni-cal Committee of the International Association of Insurance Supervisors (IAIS). He repre-sented the IAIS in the Financial Stability Forum and represented the FSA in the European Union Insurance Committee and in the European Union Insurance Supervisors Conference, including a year as president in 2001. Before joining the FSA, he was a senior civil servant in the U.K. Department of the Treasury and U.K. Department of Trade and Industry.

The paper was reviewed by Álvaro A. Clarke De la Cerda and C. Quinn López. Álvaro A. Clarke De la Cerda is the principal partner at Clarke & Associates and professor of law at the Universidad de Chile, Faculty of Law and Faculty of Economics. He has held various se-nior government positions in Chile, including chairman of the Superintendencia de Valores y Seguros (the Insurance and Securities Supervisor) and vice minister of finance. He was president of the Asociación de Supervisores de Seguros de América Latina (ASSAL) between 2001 and 2003. C. Quinn López is chief counsel to the New Mexico Superintendent of Insur-ance in Santa Fe, New Mexico. Prior to his work with the State of New Mexico, he worked for Metropolitan Life Insurance Company in New York City in the Ethics and Compliance Department. He has more than eight years of experience in the insurance industry and insur-ance regulation.

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Contents

About the Core Curriculum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Overview of Learning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

A. Introduction: Why Fit and Proper Controls Are Important . . . . . . . . . . . . . . . . . . . . 1

B. Key Individuals to Whom Fit and Proper Controls Should Apply . . . . . . . . . . . . . . . 5

C. Integrity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

D. Appropriate Competence, Experience, and Qualifications . . . . . . . . . . . . . . . . . . . . . 9

E. A Balanced Board and Management Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

F. Responsibilities of Insurance Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

G. Responsibilities of the Supervisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

H. Required Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

I. Cooperation between Supervisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

J. Dealing with Unsuitable Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Insurance Supervision Core Curriculum

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K. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

L. References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Appendix I. Case Study: Equitable Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Appendix II. Answer Key . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Case Studies

Case Study 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Case Study 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Case Study 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Case Study 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Case Study 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Case Study 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Case Study 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Case Study 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Case Study 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

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About theCore Curriculum

A financially-sound insurance sector contributes to economic growth and well-be-ing by supporting the management of risk, allocation of resources and mobilization of long-term savings. The Insurance Core Principles (ICPs), developed by the Inter-national Association of Insurance Supervisors (IAIS), is one of the key international standards relevant for sound financial systems. Effective implementation of the ICPs requires skilled and knowledgeable insurance supervisors.

Recognizing this need, the World Bank and the IAIS partnered in 2002 to develop a “Core Curriculum” for insurance supervisors. The Core Curriculum project, funded and supported by various sources, supports the learning process of both new and ex-perienced supervisors. The ICPs provide the structure for the Core Curriculum, which consists of a set of modules that summarize the most relevant aspects of each topic, focus on the practical application of supervisory concepts and cross-reference existing literature.

The Core Curriculum is designed to help those studying it to:

• Recognize the risks that arise from insurance operations• Know the techniques and tools used by private and public sector professionals

to identify, measure, and manage these risks• Operate effectively within a supervisory organization• Understand the ICPs and other IAIS principles, standards and guidance• Recommend techniques and tools to help your jurisdiction observe the ICPs

and other IAIS principles, standards and guidance• Identify the constraints and identify and prioritize supervisory techniques and

tools to best manage the existing risks in light of these constraints.

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Overview ofLearning Objectives

Overview

Insurance core principle (ICP) 7 of the International Association of Insurance Supervi-sors (IAIS) provides that

The significant owners, board members, senior management, auditors, and actuar-ies of an insurer are fit and proper to fulfill their roles. This requires that they pos-sess the appropriate integrity, competency, experience, and qualifications.

This module discusses the importance of ICP 7 in relation to the key objective of insurance supervision: the protection of insurance policyholders. It sets out the role that supervisors should play in assessing suitability—defined as appropriate integrity, competence, experience, and qualifications—and describes how this may be done. It gives examples of the situations that may arise and of the actions that supervisors should consider.

The module presents activities for you to complete every few pages. These are in-tended to provide a checkpoint from time to time so that you can absorb and under-stand the material more readily. The questions posed do not have hard-and-fast right answers. They are designed to illustrate the sort of issues that supervisors are likely to encounter and to give practice in identifying the issues to be considered. You are en-couraged to complete each of these activities before proceeding with the next section of the text. An answer key in Appendix II sets out some of the points that you might consider when responding to the questions in each question set.


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Some of the exercises are based on case studies in the module. Use the facts in the specific case study to answer the questions but use information in the whole module to decide how to use those facts. Remember, there are seldom clear-cut “right” and “wrong” answers. In assessing fitness and propriety, supervisors often have to reach difficult judgments, which involve weighing complex and sometimes conflicting con-siderations to judge what action is open to them.

Learning Objectives

As a result of studying this module, the person working through the material should be able to:

• Explain the objectives of fit and proper requirements and the risks to super-visory objectives if unsuitable persons (both natural and legal) control, direct, manage, or otherwise exert influence over supervised insurance companies

• Enumerate the positions typically considered to be key functionaries of an in-surer

• Explain what is meant by the term “significant owner”• Explain what constitutes unsuitability and how this may differ according to cir-

cumstances and describe the criteria that should be considered when assessing the fitness and propriety of an individual

• Summarize the types of information that a supervisor might request in order to assess the fitness and propriety of an individual

• Assess the adequacy of the policies and procedures established by a particular insurer to ensure the fitness and propriety of its key functionaries

• Explain why a supervisory authority would contact another supervisory author-ity or a law enforcement agency when assessing fitness and propriety

• Describe the criteria that might be used to assess the fitness and propriety of an auditor or actuary

• Explain how a supervisory authority could consider the requirements of profes-sional bodies of which auditors or actuaries are members when assessing their fitness and propriety

• Illustrate the remedial measures and sanctions that a supervisory authority might take in cases where key functionaries do not meet the relevant suitability standards

• Summarize the requirements of ICP 7.

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Basic-level Module

A. Introduction: Why Fit and Proper Controls Are Important

Insurance is particularly open to abuse and risk if controlled or managed by unsuitable persons. By nature, insurance generally involves up-front payment for a promise that may not be called until a considerable time—sometimes many years—later. This makes it particularly vulnerable to fraud and reckless management. In effect, policyholders entrust their premiums to insurance companies, either as investments or as payment for protection for themselves or their families against the financial consequences of uncertain future events. If insurance companies were under the control of dishonest or unscrupulous individuals, it would be all too easy for those individuals to abuse the trust placed in them by policyholders and to steal the money placed with them, to use it for their own purposes, or to use it in ways calculated to maximize returns to the own-ers without paying appropriate attention to the risks to which policyholders’ funds are being exposed.

While insurance supervisors can, and do, monitor the financial position of insur-ance undertakings and have powers that enable them to intervene to protect consum-ers, where appropriate, this cannot be a total safeguard. In non-life insurance, events can move so fast that supervisory intervention cannot be relied on to avert a collapse. In life insurance, where events may be less rapid, inappropriate action by managers or con-trollers can adversely affect investment performance so that, even where the solvency of the company remains intact, returns to policyholders can be damaged.

Fraud and recklessness are not the only potential problems. Insurance is a com-plex business in which insurers assume and pool risks in return for the receipt of premiums. The business of assessing, pricing, managing, and establishing technical


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Company A wrote commercial liability business. It was a newly established company, and it grew rapidly, mainly be-cause its premium rates were lower than those of more established players in this market. The company was privately owned, and the principal shareholder—a successful property developer—was also the (nonexecutive) chairman of the company. Its experienced and com-petent chief executive officer (CEO) left to join another company, and the com-pany proposed to promote as the new CEO the chairman’s younger brother, who was currently the marketing direc-tor. He was a qualified accountant, and, after qualifying and before joining the company, he had worked in two other insurance companies, mainly in sales and marketing. He had no criminal con-victions and had never been associated with any company that had failed. The supervisor accepted him as suitable to be the new CEO. There was no reason to doubt his integrity. He was profes-sionally qualified and had worked in the insurance industry, without incident, for more than 10 years. Moreover, he was familiar with the business of the company he was to lead.

Under his leadership, the company continued to grow, helped by very com-petitive premium rates. He became concerned that the value of claims was increasing beyond predicted levels but took the view that the company could not significantly raise its premium rates without losing market share. He decid-ed that the way to handle the increase in the value of claims was to continue to expand the company’s income and

to wait for industry rates to increase generally, before raising the company’s own premiums. Meanwhile, the compa-ny sought to delay payment of claims wherever possible.

Ultimately, the company failed. The CEO, whose insurance experience did not include responsibility for under-writing or claims provisioning, did not appreciate the need to review the ade-quacy of the provisions when the value of claims increased or recognize that delays in making payments and the increase in income only served to dis-guise the growing problems. No retail consumers lost money as a direct re-sult of the company’s failure, but it led to the insolvency of a number of com-mercial customers, whose claims could not be met. More than 1,000 employ-ees of these companies lost their jobs, and a number of employees and former employees with outstanding claims for injuries suffered at work lost the com-pensation they should have received.

The CEO was an honest man, but his lack of relevant experience led him to misunderstand the risks to which the company was exposed and to take inappropriate action when problems were detected. In deciding to appoint him as CEO, the company failed to con-sider properly the requirements for the job and probably was overly influenced by the chairman, his brother. Similarly, the supervisor placed too much weight on the fact that he had experience in the insurance industry without consid-ering carefully whether it was sufficient for the particular role involved.

Case Study 1


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provisions for those risks is highly specialized and difficult and thus requires high levels of competence. Moreover, insurance companies operate in a highly regulated en-vironment, calling for a high level of understanding of regulatory law and compliance. Competence in these fields tends to reduce risks. By contrast, mistakes in these areas can lead to problems that may only become apparent some time afterward. A study carried out by a committee of the European insurance supervisors conference, known as the London Group report, looked at insurance failures and “near misses” and found that most insurers that get into difficulty do so because of a failure of management, typically in relation to the assessment and pricing (underwriting) of risk or to the de-velopment of and provisioning for claims (Committee of the Conference of Insurance Supervisory Services 2002).

Unsuitability may take one (or both) of two main forms. Persons who lack integ-rity are likely to abuse the trust that policyholders place in them and their companies. Persons who lack appropriate competence, experience, or qualifications are likely to mismanage the business, exposing policyholders to an unacceptable level of risk that their claims cannot be met or that their savings will not perform in line with what they might reasonably expect.

Much of the focus of insurance regulation is on the financial health of supervised insurance companies, on their solvency, and on their ability to meet claims as they become due. Insurance laws and regulations pay considerable attention to prudent valuation of assets and liabilities, capital adequacy and solvency margin requirements, technical provisioning standards, and product design. In many jurisdictions, insurance laws also provide protection against unfair trade practices, misleading advertising, and poor advice. Although all of this is important, it is, in many respects, a fall-back safe-guard that serves to protect policyholders from the consequences of the inappropriate actions of management. But the first line of defense is to ensure that insurance compa-nies are honestly and competently managed by fit and proper owners and managers.

As case study 1 shows, assessing the suitability of individuals who seek to own, con-trol, or manage insurance businesses, or who are already doing so, is one of the most important supervisory functions. Only insurance businesses that are honestly and com-petently run and that make full and adequate disclosure to the market and to the super-visor can be relied on to meet their obligations to policyholders. The consequences of insurance failure can be catastrophic for policyholders and for the wider community.


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Do you agree or disagree with the following statements? Circle the answer that most nearly accords with your view. Explain the reasons for your an-swer.

1. Fitness and propriety are all about honesty.

a. Agree strongly

b. Agree

c. Not sure

d. Disagree

e. Disagree strongly.

2. Policyholders are at risk if insurance companies are controlled or managed by individuals who lack insurance experience.

a. Agree strongly

b. Agree

c. Not sure

d. Disagree

e. Disagree strongly.

3. The only purpose of fit and proper controls is to protect retail policyholders.

a. Agree strongly

b. Agree

c. Not sure

d. Disagree

e. Disagree strongly

Q1


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B. Key Individuals to Whom Fit and Proper Controls Should Apply

Supervisors seek to ensure that insurance companies are soundly and prudently man-aged. To do so, they should take a close interest in and assess the fitness and propriety of any individuals capable of exerting significant influence over the affairs of a regulated insurance company and of affecting whether it is, or is not, managed in a sound and prudent manner. These are likely to include significant owners, directors, and senior managers as well as key advisers.

Significant owners

Ownership of (or ability to control the voting rights of) all, or a significant proportion of, the shares of an insurance company, whether directly or indirectly through an interme-diate company or a nominee, can enable a significant owner (whether an individual or a corporate entity) to exercise considerable influence over management of the company. Acquiring such ownership, or indirect interest or control, should be subject to regulatory approval, an important part of which is an assessment of the fitness and propriety of the individual or corporate owner concerned. A significant owner is likely to be able to exert considerable influence even where he is not a majority owner, and for this reason insur-ance law in many jurisdictions prohibits individuals from acquiring more than a speci-fied proportion of a company’s share capital (or of voting rights where these are different) without prior approval from the supervisor. Typically, such control is exercised at the 20 percent level, with further restrictions where an owner proposes to increase his level of participation.

Directors and senior managers

Those most directly able to influence the way in which insurance companies are run are likely to be members of the governing body and senior managers. In a unitary board structure, all directors—whether executive or nonexecutive—are likely to be able to exert such influence, and they should all be the subject of fit and proper controls. (How-ever, in jurisdictions where a two-tier board structure is in place and the supervisory board has no involvement in executive decisionmaking, it may not be necessary to sub-ject board members to fit and proper controls, particularly where they are elected as representatives of the employees.) Many senior managers are also members of the gov-erning body. Even where they are not, they may have enough responsibility to require an assessment of their suitability. In many jurisdictions, holding key appointments re-quires prior approval, or the supervisor must be notified of appointments to allow an assessment to be made and action taken where the appointment is judged to be unsuit-


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able. Examples of such appointments include the chief executive officer, chief finance officer, chief underwriter, and chief actuary.

Key advisers

Some advisers also exert considerable influence over the affairs of insurance companies. Auditors and, in some jurisdictions, actuaries who validate financial information pro-vided to the market and to the supervisor are of particular importance (see IAIS 2003a). In addition to their obligations to the company, they often have quasi-supervisory func-tions and are obliged to alert the supervisor to matters that might be of concern. It is essential, therefore, that such advisers should themselves be honest and competent. In most jurisdictions, the relevant law prescribes the qualifications that such key advisers must have, and this is reinforced by the professional codes (and disciplinary procedures) of the professional bodies to which they belong. Legislation or professional codes may also govern issues such as relevant experience, conflicts of interest, and so on. None-theless, supervisors should take a close interest in the appointment and actions of key advisers and be prepared to take appropriate action, where necessary.

For each of the following questions, which responses are correct? Circle your choices. More than one may apply.

1. Which of the following would normally be subject to fit and proper controls?

a. Directors

b. Majority shareholders

c. Sales representatives

Heads of the following key functions:

d. Underwriting

e. Internal audit

f. Actuarial services.

2. Who constitutes “significant owners”?

a. All corporate shareholders

b. Majority shareholders

3. List any others that you think should be included.

Q2


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C. Integrity

Insurance is built on mutual trust. Insurance companies are entitled to expect that the policyholder has disclosed all the information relevant to the risk and may not be li-able to pay claims if relevant information has been withheld. Equally, policyholders are entitled to expect that their insurers will treat them honestly and fairly, consistent with the terms and conditions set forth in the underlying contract. Many policyholders rely on insurers, or their agents or representatives, to help them make decisions on the purchase of insurance products suitable to their needs. If they make a valid claim or if their policy reaches maturity, all policyholders rely on their insurer to honor its prom-ises and pay the appropriate benefits. Their position differs from that of the company, however, in that the company can protect itself against lack of integrity on the part of policyholders. Policyholders cannot protect themselves against dishonesty on the part of insurers and must rely on insurance supervisors to ensure that insurance companies are honestly run. This protection extends not simply to dishonesty, such as a refusal to meet valid claims, but also to unfair contracts, which are designed to disadvantage the policyholder, who cannot negotiate the contract on an individual basis and may not understand what often are complex and opaque documents. (Individual insurance contracts are unilateral as opposed to bilateral. Insurance companies are masters of the contract, and, in most jurisdictions, contractual ambiguity is construed in favor of the policyholder.)

Where insurance companies are owned or managed by people who are dishonest or who lack integrity, policyholders are always at risk. This may occur because dishonest owners and managers undertake the following:

A struggling life insurer came under the control of an ambitious CEO who attempted to turn the company around through an aggressive approach to sell-ing life insurance as a savings medium. He invested the funds heavily in junk bonds—non-investment-grade bonds offering high returns but exposed to high risk of default—and marketed the company’s products through a commis-sion-based sales force with the prom-ise of high returns, but without proper disclosure of the risks involved. This strategy ultimately failed. It did produce considerable volumes of new business,

attracted by the promised high rates of return, but instead of the high returns expected, the company’s investments suffered significant losses. Moreover, the company was undercapitalized for the high levels of new business that it wrote. As these problems became ap-parent, the CEO concealed the true po-sition from the regulator and from the company’s board, hoping that an upturn in investment performance would solve the problems. When the company even-tually became insolvent, thousands of small savers lost their investments.

Case Study 2


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• Sell them products that do not meet their needs or misrepresent the nature or effectiveness of the products concerned

• Misappropriate funds so that they are not available to pay policy benefits when needed

• Expand their business by deliberately or recklessly underpricing risk, exposing policyholders to the risk that the company will not be able to meet claims

• Take too much money out of the business (either by distributing “profits” or paying excessive salaries) and, as a result, holding back insufficient funds to meet claims

• Use insurance funds to support other business ventures, with the danger that they may be lost and thus not available to pay claims

• Conceal problems from supervisors and the market, so that they are able to continue taking on new business for longer, or in greater volumes, than they should. This might, typically, involve releasing public and regulatory financial information that understates liabilities or overstates asset values.

Such dishonest persons may also damage society more generally—for example, by using their companies, or allowing them to be used, to launder money or for other dishonest purposes.

Complete this exercise by referring to the facts in case study 2. Circle your choices. More than one may be valid.

1. What actions do you think the supervisor might take after the events described in case study 2?

a. Disciplinary action

b. Referral to the relevant authority for possible criminal investigation and sanction

c. Cooperation with other supervisory authorities so that any further appointment is made only with full knowledge of all the facts.

2. Are any other actions possible? Please list.

Q3


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D. Appropriate Competence, Experience, and Qualifications

Insurance, whether life or non-life, is a highly complex business. To succeed, it requires a high level of skill and competence across a range of areas. At the highest levels, insur-ance directors and managers must be familiar with issues in numerous areas:

• Environmental issues. Increasing globalization, the blurring of boundaries be-tween insurance and other financial services, demographic developments, technological advances (especially in medicine), rapid regulatory changes, and changing public expectations all contribute to an increasingly complex environ-ment in which insurance companies have to operate.

• Structure and strategy. Senior insurance managers need to understand the im-pact of business structure on its operations. Examples include the limitations that the structure may impose on raising new capital, if required, or the pres-sures that may arise as a result of shareholder pressures to pay dividends or to maintain share values. The executive must also have knowledge about merg-ers, acquisitions, holding companies, and strategic alliances.

• Marketing and distribution. Product design and development, marketing, and distribution are all essential to successful insurance operations. A responsible marketing and distribution program will limit a company’s legal liabilities.

• Solvency and profitability. Senior managers should understand the issues in-volved in underwriting, assessing risk, and pricing products; in provisioning for claims and forecasting the development of claims; in managing risk, including through diversification, coinsurance, reinsurance, and asset-liability matching; and in managing investments.

• Administration. As in any business, insurance managers must understand how to administer their business efficiently. They must use information technology effectively to ensure that policy and customer service and claims administration are handled in the most efficient manner.

• Regulatory compliance. Paramount is the need to comply with applicable laws and regulations, to conduct ethical sales and marketing practices, and to main-tain open, transparent, and effective communication with insurance regulators.

Adequate competence, experience, and qualifications must be brought to bear across all of these areas. In addition, insurance companies need to be run with sys-tems and controls that enable directors and senior managers to manage performance in all areas of the business. These must be such that they can identify any areas of risk that may develop (for example, from inappropriate sales practices, underpricing, and adverse trends in claims development, among others), assess the implications for the business, and take appropriate and timely action.

Lack of appropriate skills in these areas is likely to impede the ability of managers to understand and control the risks inherent in insurance business and hence lead to


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failure of the business itself. However, the range of functions and specialties is so wide that, except in very small companies offering a limited range of simple products, it is unlikely that any one individual will cover all of them in depth. The company’s board of directors is responsible for ensuring that the management team as a whole has the right range of competencies and that the relevant individuals, such as the finance direc-tor, head of underwriting, and head of compliance, have the appropriate experience and qualifications. For the most senior positions (CEO, chairman of the board, and so forth), breadth of experience, rather than specific qualifications, often is necessary. Wide competence is necessary to ensure that all the necessary roles and responsibilities within the management team are properly defined and allocated to individuals com-petent to fulfill them and that their work is effectively overseen by the board through well-defined reporting and accountability structures.

In the United Kingdom, inappropriate sales (misselling) of personal pension products, during the 1990s, contrary to regulatory requirements, led the regula-tor to require a comprehensive review of all such sales across the industry. Companies were required to compen-sate policyholders to whom policies had been missold. The total cost to the industry amounted to an estimated £14 billion. To a large extent, this issue

reflected inadequate understanding of regulatory requirements and a failure of management to exercise proper con-trol over the sales forces. Even though individual compliance teams were often adequately competent, senior manage-ment and directors failed, through lack of regulatory understanding, to recog-nize the importance of the issues. As a result, compliance was not accorded a sufficiently high priority.

Case Study 3


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Poor product design, with inadequate understanding of the risks involved and the provisioning required to meet them, has caused major problems in the U.K. life industry. At a time of high inflation, personal pension products were sold with the guarantee that the proceeds could be converted to an annuity with a guaranteed rate. The potential for infla-tion and investment returns to fall sig-nificantly below levels current when the policies were sold was not appreciated. As a result of the cost of meeting these guarantees, a number of companies had to close (although none became

insolvent) and investment returns to policyholders fell short of expectations. These problems did not result from failing to appoint experienced and well-qualified senior managers and directors, many of whom were qualified actuaries. Rather it resulted from relying too heav-ily on the actuaries without adequate challenge from those with wider experi-ence. It is an example of directors and owners being too specialized, without the breadth of competence and expe-rience necessary to exercise effective oversight.

Case Study 4

Mrs. A was a formidable figure in the insurance industry. A qualified and ex-perienced actuary of many years stand-ing, she had been the senior partner in a firm of consultants that advised both life and general business insurers. Al-though she had obtained her qualifica-tions as a life actuary, she had moved into general business early in her ca-reer.

Toward the end of her career, she was offered, and accepted, the post of CEO of a long-established life insurer, following the unexpected death of the previous CEO. Aware of her reputation as a leading figure in the profession, and as a strong-minded and forceful in-dividual well able to exert appropriate control over the company, the regulator approved her appointment.

Her appointment was not a suc-cess. The previous CEO had long ex-

perience of managing life insurers and understood the importance of manag-ing the sales force and ensuring com-pliance with regulatory requirements. Mrs. A was less familiar with this, and, although business levels increased, rapid turnover in both the sales force and the compliance team led to a rapid and dramatic fall in compliance stan-dards. Since the previous CEO had tak-en personal responsibility for oversight of regulatory compliance, an area in which no one else on the board had par-ticular expertise, this drop in standards went unnoticed for some time. Eventu-ally, following a number of complaints by policyholders who had been poorly advised by the company and a formal investigation by the regulator, signifi-cant breaches of regulatory require-ments were discovered. The company faced a substantial bid for compen-

Case Study 5

continued


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sation and suffered major damage to its reputation. More important, many consumers suffered considerable hard-ship (although they were subsequently compensated for this) as a result of the misleading advice they had received and the inappropriate products they had bought.

Mrs. A was a highly competent and experienced insurance professional. Her integrity was unquestionable. But she failed to recognize, as did the in-surance supervisor, that the skills and experience she brought to the company were different from those of her prede-

cessor. Although her general integrity and experience were suitable for the post she occupied, she was unable to bridge the gap in the overall skill and experience occasioned by her prede-cessor’s death. Neither she nor the supervisor was alert to the need for a balanced board and management team. Had they been, they would have recog-nized that she was unsuitable for the job, at least without action to address the deficit in the board’s collective skill and understanding of compliance man-agement.

Case Study 5 (continued)


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1. What actions do you think the supervisor might take after the events described in case study 5?

a. Disciplinary action

b. Referral to her professional body for possible disciplinary action

c. Cooperation with other supervisory authorities so that any further appointment is made only with knowledge of full facts.

2. Are any other actions possible? Please list.

Q4

E. A Balanced Board and Management Team

The issues discussed here are closely related to the broader issue of governance.1 While ICP 7, the subject of this module, concerns the suitability of individuals, consideration of individuals cannot be undertaken in a vacuum. Just as it is important to assess the suitability of an individual in relation to the specific role he is to play, so it is important to consider suitability in relation to the context in which the role is to be performed. The range of skills and experience needed to run even a relatively small insurance business is such that the full range is unlikely to be found in one person. In any event, experience shows that where one individual is dominant (whether because he is the most competent or the most forceful), problems are more likely to arise. Inappropriate decisions (whether arising from dishonesty or poor judgment) are less likely to be anticipated and chal-lenged, and the consequences of such decisions are less likely to be understood.

Accordingly, in considering the suitability of persons to control or manage insur-ance businesses, supervisors should consider not only the individual concerned, and the specific function he is to perform, but also how the overall board or management team is likely to function with him as a member.

1. There is a close relationship between several IAIS standards in this general area. IAIS (2004) provides a useful guide to this. See the module on ICP 9, which deals with the need for appropriate governance structures to ensure adequate checks and balances, accountability of key individuals, transparency of decisionmaking, and so forth.


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F. Responsibilities of Insurance Companies

The primary obligation to ensure that firms are soundly and prudently managed falls on insurance companies themselves, and in some jurisdictions, this is explicitly recog-nized in insurance laws and rules. An essential part of this is that insurance companies must establish effective governance systems and take all the necessary steps to ensure that their governing bodies and senior management teams comprise persons of integ-rity, with appropriate skills and experience. As part of their authorization and ongoing monitoring procedures, supervisors should assess what action insurance companies themselves must take to ensure that key individuals are fit and proper (see appendix I for the case of Equitable Life Assurance Society, in which the lack of fit and proper controls played a major role). In particular, supervisors should consider whether com-panies have undertaken the following:

• Identified what skills and experience are required collectively by their govern-ing body and senior management team

• Allocated specific responsibilities to members of their governing body and se-nior managers

• Drawn up appropriate job descriptions, indicating the skills and experience re-quired for each role

• Put in place effective procedures to ensure that, where they are looking to fill va-cancies, specific consideration is given to the skills and experience required for the role under consideration. (Where used, executive search consultants should be fully briefed on the requirements of the role.)

Companies should, of course, also seek to establish that potential appointments to such positions have the necessary integrity, in addition to the appropriate skills and ex-perience. Their procedures should therefore include obtaining references from former employers and checking the veracity of statements about academic and professional qualifications, membership in professional bodies, and so forth.

Although insurance companies have responsibility to check the fitness and pro-priety of potential appointments to senior positions, supervisors should not rely on companies’ own procedures alone. In particular,

• Insurance companies are unlikely to have access to the full range of information available to supervisors. For example, information about criminal offenses may not be available publicly but generally is available to supervisors. Similarly, in-formation from other supervisory authorities may be highly relevant to a fit and proper assessment but normally is not available except to the supervisor.

• Where a third party seeks to become a significant owner, the company may not know this until after the event. If the proposed acquisition is known to the com-pany, it may not be welcome. Although the proposed owner will need to seek


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approval from the supervisory authority, it generally is not possible or appropri-ate to expect the company to undertake the necessary checks.


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G. Responsibilities of the Supervisor

Determining suitability involves assessing an individual’s integrity, competence, experi-ence, and qualifications. It also involves taking into account special factors concerning owners and corporate controllers as well as auditors and actuaries. While insurance companies must take primary responsibility for ensuring the suitability of individuals, supervisory authorities are responsible both for ensuring that they do so and for per-forming their own assessments of suitability.

Mr. B applies for authorization of a small general business insurer that will write personal lines. In addition to being the majority shareholder, he is to be the CEO. The business plan submitted with the application is well conceived, and the level of capital appears adequate for the business to be written. Mr. B’s curriculum vita shows that he has had experience as the CEO of a similar com-pany (in a different jurisdiction), which appears to have been successful.

On Mr. B’s curriculum vita, his name is shown with letters after it, indi-cating membership in a relevant profes-sional body. However, as part of your standard enquiries, you ask the profes-

sional body to confirm this. You are told that, although he used to be a member, he has been “struck off” after a dis-ciplinary hearing. The offense involved was relatively small, and Mr. B is en-titled to reapply for membership after five years.

Your enquiries show that Mr. B:• Acted improperly on a previous

occasion and was disciplined by his professional body

• Did not disclose this fact to you; indeed he apparently tried to mis-lead you by claiming a profession-al status to which he is no longer entitled.

Case Study 7

A prominent individual is nominated to you as a proposed nonexecutive direc-tor of a large insurer that writes mainly personal lines business. You become

aware that 10 years ago he was con-victed of a criminal offense: purposely failing to pay his fare on a train. This is evidence of dishonesty.

Case Study 6


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Integrity

Integrity is difficult to assess. Lack of integrity is normally only evident from actual mis-conduct. Determining that an individual is likely to be dishonest before he or she has done anything wrong is almost impossible. Therefore, in assessing integrity, supervisors have to look for evidence of previous misconduct, including:

• Previous convictions for offenses involving fraud or dishonesty• Association with others convicted of such offenses (for example, fellow directors

in the same company)• Involvement in companies that have become insolvent, particularly if there has

been more than one insolvency• Serious criticism or penalty imposed by a regulator or other public authority or

by a professional body.

In some cases—for example, a conviction for fraud—a decision on integrity is straightforward.2 But in others, more difficult issues of judgment arise. In such cases, it may be necessary to seek additional information and comments from the relevant regu-lator, public authority, or professional body and to apply consistent criteria in reaching a decision.

Issues to consider are likely to include the following:

• How much time has passed since the relevant incident? Have there been any recurrences?

• How serious was the incident? Generally speaking, any form of dishonesty is likely to warrant an objection. But some forms may be relatively trivial, so that, particularly if committed a long time ago, they may appropriately be overlooked.

• How relevant is the incident to the particular function to be carried out? For example, involvement in a previous insolvency would be highly relevant to a prospective chief executive or finance director, but it might be less relevant to a prospective sales and marketing director.

2. Procedure in the United States provides a good model, although it is prescribed more precisely than is likely to be the case in many jurisdictions. The Violent Crime Control and Law Enforcement Act of 1994, 18 U.S.C. §§ 1033 and 1034, is a federal law that is applicable to “integrity” issues. In pertinent part, it requires any individual proposing to engage in the business of insurance who has been convicted of any criminal felony involving dishonesty, breach of trust, or other prescribed offense to obtain the written consent of the state regulatory official (that is, the insurance superintendent or commissioner). The state insurance commissioner is authorized to grant or withhold written consent to transact the business of insurance in the state to any person convicted of any criminal felony. Individuals participating in the business of insurance without obtaining the superintendent’s written consent shall be fined or imprisoned for not more than five years. Decisions on whether or not to grant consent to engage in the business of insurance typically are handled on a case-by-case basis. Factors to be considered may include the nature and severity of the conviction; the date of the conviction; injury or loss caused by the crime; relation of the crime to the business of insurance; completion of parole or probation; issuance of any pardon; nature and strength of letters attesting to character; business and personal record before and after the crime; whether and to what extent material false statements were made in an application, renewal, or other documents filed with the commissioner; and whether and to what extent any material false misstatements were made in applications or other documents filed with other state or federal agencies.


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• How open was the individual about the incident? If he failed to respond cor-rectly to a question from the supervisor, and the incident was picked up from questions put to others, this suggests that he should not be trusted. If he was open about the incident and provided full (and verifiable) details, it may be more appropriate to give him the benefit of any doubt.

Appropriate competence, experience, and qualifications

By contrast with assessing integrity, assessing competence, experience, and qualifica-tions ought to be more straightforward. These are objective qualities that can be reliably tested by reference to the individual’s history of achievements. But doing so is still not an easy matter.

The responsibility of the supervisor is twofold:

• To assess individual senior managers in relation to the specific role they are to play. If an individual is to be responsible for underwriting and setting the pa-rameters within which insurance risks are to be assessed, priced, and accepted, has that individual demonstrated through his or her experience that he or she is competent in this field? Does he or she have appropriate qualifications? In some cases—for example, for certain actuarial or audit functions—insurance law and regulations may prescribe a minimum level of experience and required qualifi-cations.

• To assess, in relation to more senior positions, whether the individual has the nec-essary breadth of experience and general competence to oversee the work of others carrying out more specialist functions. In this case, particular qualifications, such as those of an actuary or an accountant, or experience in such specialist areas, while valuable, is not necessarily enough. Evidence of broader experience and competence is normally required.

Mr. C joined the insurance industry when he left school. He worked his way up through a variety of jobs and gained considerable experience with under-writing and with claims management. He has no professional qualifications.

However, his practical experience, most recently as head of underwriting at a small personal lines insurer, is consid-erable. He is now proposed as the CEO of a similar company.

Case Study 8


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For the following question, which responses are correct? Circle your choices. More than one may be valid.

1. Assuming that, according to the legislation in your jurisdiction, the applicant in case study 6 is not automatically disqualified, which, if any, of the following is relevant to your consideration?

a. He disclosed this conviction to you himself.

b. He did not disclose it on his application form; you discovered it from routine enquiries to the relevant government agency.

c. What he said to you when you asked him about this.

d. It was a long time ago.

e. It was a trivial offense.

f. He is a prominent person.

2. How do you decide whether to accept Mr. B as CEO of the proposed new company described in case study 7?

3. In case study 8, does Mr. C’s lack of professional qualifications make him unsuitable? What risks would his appointment create?

4. What factors are relevant to your decision as supervisor?

Q5

Company B is a venture capital fund. It specializes in investing in underper-forming companies, which it seeks to turn around by introducing new man-agement and streamlining operations by closing down or selling off unprofit-able parts of the business. It generally looks to sell its acquisitions after two to three years and to achieve a return on its investments commensurate with the high levels of risk involved.

While it has a reputation for being somewhat unscrupulous, particularly in its handling of the employees of the companies acquired, neither the com-pany nor its owners or managers has ever been found to have done anything unlawful.

Company B has applied to take con-trol of a small and rather unsuccessful life insurer. It has never taken over a financial services company before.

Case Study 9


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The level of skills and experience to be expected should be appropriate to the size and complexity of the business concerned. It would be unrealistic and unreasonable to expect the managers of a small insurer writing personal lines to have the same range of skills and experience as required for a complex multinational operation writing a full range of business, from complex commercial liability and pollution business to house-hold insurance. Similarly, it would be naive to think that experience in running a small and simple business is appropriate to meet the requirements of a large and complex operation.

In considering skills and experience, professional qualifications and experience are both relevant. Qualifications, on their own, are not a reliable indicator of competence. Similarly, experience as an adviser, even at a senior level, may not indicate ability to manage and be an effective decisionmaker.

No individual is perfect. But where an individual lacks some particular quality, this may be acceptable if that quality is to be found elsewhere in the board or management team. What is to be avoided is a team that is, collectively, short of the necessary quali-ties.

Special factors concerning owners and corporate controllers

Generally speaking, the same considerations apply to individuals who are proposed as directors and senior managers and those who apply to be, or to become, owners or con-trollers of insurance businesses. But some additional factors may be relevant:

• Are the proposed owners familiar with insurance operations and regulations? If they are not, they may be impatient of the level of conservatism and prudence that is appropriate to safeguard solvency. They may also be impatient of the need to ensure compliance with regulatory requirements (and the cost of doing so) and the need to maintain appropriate standards of product development and pricing.

• What source of funds will the new owners use to fund the acquisition? Is it legit-imate? If the acquisition is to be funded by borrowing, can the debt be serviced without putting the insurance company under undue pressure?

• Do the proposed owners have access to further capital should this be needed to support the business at some time in the future?

• What return on capital do the proposed owners expect to achieve? Some po-tential owners—for example, venture funds—may use a target rate of return on capital, which likely will only be achieved by exerting pressure on the company to distribute surplus at a level that would prejudice policyholders’ security.

• Over what period do the proposed owners expect to achieve their investment objectives? Some will look to move in, take out a high level of return over a short


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period, and then sell the business. This may not be consistent with the long-term nature of the business or the interests of policyholders.

• Where the new owner-controller is a company, what is its track record (and that of its owners and controllers)? While inquiries about a company may reveal nothing untoward about it, “looking through” to those behind it may reveal a different story. It is not uncommon for an individual who fails in one business venture (or whose business is closed through action by regulators) to start a new venture under a different name, sometimes in a different sector or a different jurisdiction.

Auditors and actuaries

Auditors and actuaries occupy special positions of influence over insurance companies and also have wider responsibilities to the public and to the supervisor, which make it particularly important that they should possess the skills and experience necessary to discharge their responsibilities and that they adhere to high standards of professional competence, conduct, and integrity. Although the professional bodies to which they typically belong often prescribe codes of conduct that they must observe, and breach of which may lead to disciplinary action, supervisors should not rely on membership in these bodies in considering whether individuals, or the firms to which they belong, meet the necessary standards. In some jurisdictions, the appointment of auditors or of actuaries to particular positions of influence is subject to the specific approval of the su-pervisory authority. In others, it is likely to be of relevance to the supervisor’s assessment of the overall governance of the company.

Complete this exercise by referring to the facts in case study 9.

1. What concerns might the supervisor have about the proposed owner?

2. Is it relevant that the insurance company is likely to be sold again within a short period?

3. What weight should be attached to the acquiring company’s reputation for being unscrupulous?

4. Is the high rate of return that the new owner expects to make a cause for concern?

5. Does it matter that this would be the new owner’s first insurance acquisition?

Q6


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In assessing whether those standards are met, supervisors should use criteria that are generally similar to those used for other specialist managers. These include the fol-lowing:

• Relevant skills and experience. Insurance is a complex and specialized subject. An auditor who is highly skilled and experienced in another sector is unlikely to be acceptable to lead the audit of an insurance company if he or she has no in-surance experience. Similarly, an actuary whose previous experience is limited to non-life insurance should not normally be acceptable to express an opinion on the valuation of life liabilities (and vice versa).

• Seniority and strength of character. While auditors and actuaries are in a position to exert considerable influence over the affairs of insurance companies, they may themselves come under considerable pressure from companies where their work leads to the identification of issues that may adversely affect the value of future operations. They need to have the self-confidence and strength of char-acter to withstand such pressure and to take appropriate action, which may, in extreme cases, require them to qualify the company’s accounts or to “whistle blow” to the supervisor. While such self-confidence and strength of character are often difficult to assess in advance, they often are lacking in those who are only recently qualified or who lack experience.

• Conduct. Supervisors should consider whether auditors and actuaries have demonstrated the appropriate qualities in their previous conduct. In particular, failure to draw attention to problems (whether in insurance or in other regu-lated sectors) should generally cast doubt on their suitability.

Additional criteria are also relevant to these key advisers. The nature of the roles played by auditors and actuaries makes it essential that they are able to operate with-out any conflict of interest and, in the case of auditors, with total independence. It is increasingly recognized (and in some jurisdictions this is reflected in the relevant legis-lation) that auditors should not act in relation to companies for whom their firms also provide consulting services. In jurisdictions where such conflicts are not prohibited by law, supervisors will wish to look particularly carefully at whether such conflicts, or potential conflicts, exist and whether they are such as to cast serious doubt on the suit-ability of the auditor or actuary concerned.


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1. If the individual in case study 1 were nominated to you as a possible CEO, which (if any) of the following would you consider properly describe him?

a. Lacks integrity

b. Lacks insurance expertise

c. Is inappropriately qualified

d. Possesses skills that do not measure up to the role proposed

e. Possesses skills and experience whose deficiencies are not adequately counterbalanced by skills and experience elsewhere in the board.

2. Are any other factors relevant? Please specify.

3. In the same case, what concerns might you have about the fact that the proposed CEO is the chairman’s brother? Please list.

Q7

Complete this exercise by referring to the facts in case study 2.

1. If the individual in case study 2 were nominated to you as a proposed CEO, what types of information would you seek? Please list.

Q8


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H. Required Information

When assessing the suitability of persons under consideration for a position, super-visors should use a standardized questionnaire designed to ensure that all relevant information is captured (for a detailed list of information that should normally be sought, see IAIS 2000, annex 1). In practice, this can be achieved most easily by re-quiring companies to provide this information to the supervisor in a standard format that should be confirmed both by the individual and by the company. Where the person concerned is a company or other corporate entity, appropriate information, including published and unpublished financial information, should be sought. In ad-dition, supervisors should seek information about the individuals who own, control, or manage the company.

Where individuals are proposed to take up board-level or senior management po-sitions, it is likely that they are already well known in the market. Subject to the need to safeguard confidentiality, information to supplement that provided on the prescribed format may be available from the following:

• Contacts in the market • Reputable agencies.

Wherever possible, supervisors should also undertake checks with relevant au-thorities independent of the person under consideration. These should include the fol-lowing:

• Criminal prosecutions and criminal records services• Insolvency records services• Professional bodies (where the person concerned claims membership or profes-

sional qualification)• Other supervisory authorities.

Additionally, routine Internet searches will often provide access to press reports, which may prompt further questions.


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I. Cooperation between Supervisors

ICP 5 requires that “the supervisory authority cooperates and shares information with other relevant supervisors, subject to confidentiality requirements.” Observance of ICP 5 is of crucial importance to effective implementation of ICP 7.

The boundaries between insurance and other financial services are becoming in-creasingly blurred. Not only are insurance companies often acquired by financial insti-tutions, often banks, in other sectors, but individuals frequently move from one sector to another or are active in more than one sector. Accordingly, supervisors often need to consult, or may themselves be consulted by, the supervisory bodies responsible for other financial service sectors. Moreover, insurance is increasingly an international business. Supervisors are likely to be asked to authorize persons who have not operated in their jurisdiction or in the insurance sector. In such cases, it is important to verify in-formation provided by the individuals themselves by undertaking further checks with the relevant authorities in the supervisor’s own or another jurisdiction. Similarly, where supervisors are approached for assistance by colleagues in another supervisory author-ity, they should provide all the assistance they can (subject to any legal requirements). This is likely to include both providing information from their open records and facili-tating access to information held by relevant bodies within their jurisdiction. Supervi-sors should not restrict themselves to formal written requests for factual information; instead, they should be ready to speak directly to the individual within the relevant supervisory authority who is best able to help them assess the person whose suitability is under consideration (see IAIS 2002 for standards on the exchange of information).


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J. Dealing with Unsuitable Persons

The options open to supervisors depend on the legal system of the jurisdiction in which they operate and the detailed provisions in the relevant legislation. According to ICP 7 (see IAIS 2003b), they must meet the following minimum requirements:

In cases where significant owners no longer meet fit and proper requirements, the supervisory body must be able to take appropriate action, including that the own-ers dispose of the insurer.

The supervisory authority disqualifies the appointment of key functionaries includ-ing auditors and actuaries that do not comply with fit and proper requirements.

These are significant powers, and their use is generally subject to important safe-guards, rights of appeal, and so on to protect those potentially affected by their inappro-priate use. In considering possible action to deal with an owner or senior manager who apparently fails to meet the required standards, supervisors are likely to have a range of options. They may include some, or all, of the following:

• A formal order prohibiting an unsuitable person from owning or controlling an insurance company or from holding any position of influence in the insurance (or wider financial services) industry

• Refusal to allow an unsuitable individual to take up a particular appointment or position of control or influence

• Agreement that an individual may take the position applied for, subject to speci-fied conditions

• Agreement that an individual may fill a position provided that, and for so long as, the board or management team are strengthened by the appointment of some-one with complementary skills and experience (most likely to happen when a new company is being authorized and when the whole board and management team are being considered at the same time)

• Agreement that an individual may fill only one of a limited range of positions.

Consideration is generally given to the suitability of individuals in connection with a new authorization, a change of control, or a new appointment. But assessing suitabil-ity should not be simply a one-off exercise. Doubts about an individual’s suitability may arise at any time, whether as a result of events within the supervised entity or outside or because of new information relating to an earlier period. Supervisors need to review the suitability of individuals in such circumstances and take appropriate action. In such cases, it may be appropriate to require the individual to give up the position in question or require the company to dismiss him.


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Where they judge that an individual is unsuitable, supervisors will always wish to consider whether formal action is permitted under the legislation in their jurisdic-tion. But this may often be either inappropriate or impracticable—for example, where unsuitability cannot be demonstrated with sufficient certainty. This does not mean that no action can or should be taken. Indeed, in the majority of cases where supervisors have good grounds for thinking that an individual does not meet the standards that might reasonably be expected, it will be difficult to prove this with the certainty that the relevant legislation or processes may require.

In such cases, supervisors should consider what else might be done to reduce the level of risk the appointment may pose. For example, informal action, with the agreement of the individual or company, may often prove an acceptable alternative. Thus it may be appropriate to remind a company of its responsibility to ensure the fitness and propriety of those who direct or manage its operation and to ask it to strengthen its board or man-agement team—for example, where this is necessary to prevent the company from being dominated by a powerful individual or to provide some additional check on an individual about whose integrity the supervisor may have doubts. Even where such informal action is not possible, the fact that the supervisor has assessed the suitability of the individual concerned and has concluded that there is cause for concern should assist in the effective supervision of the company. In those jurisdictions where supervisors carry out formal risk assessments of insurance companies, the assessment of suitability will form part of the overall risk profile of the company and will inform ongoing supervision. Even where this is not undertaken on a formal or systematic basis, supervisors should pay particular attention to any company where they have reason to be concerned about the integrity or competence of the owners, directors, or senior managers, perhaps carrying out on-site inspections more often than would otherwise be the case.


1. What actions might the supervisor reasonably have taken when the individual in case study 1 was nominated as the new CEO?

a. Refused approval

b. Required new appointments to be made to the board to remedy gaps in collective skills

c. Required the chairman to resign

d. Encouraged the company to strengthen its board

e. Noted that the board was weak and perhaps dominated by its chairman and supervised it more closely as a result.

2. Are there any others? Please list.

Q9


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K. Conclusions

Assessing the suitability of persons who are, or are to become, controllers or managers of insurance companies is one of the most important and most difficult functions of an insurance supervisor. The difficulty is not so much one of technical complexity—as it is, for example, in assessing the adequacy of an insurer’s claims provisions—but rather one of judgment. Very often, there is no right or wrong answer. It may seem obvious (and generally is) that an individual proved to have acted dishonestly in the past should not be allowed to hold a position of influence over the affairs of an insurer to whom poli-cyholders entrust their money. Yet even here issues may arise about the circumstances of the original offense, how long ago it took place, and so on. When it comes to issues of qualification and competence, the judgment may be even more difficult to make. It is likely to involve balancing a number of considerations. The nature of the role being taken on, the complexity of the business, the extent to which the individual concerned will operate independently, or as a member of a team, and the overall strengths and weaknesses of the team are all likely to be relevant factors.

Whatever judgment the supervisor comes to about suitability, reaching a decision on what action should be taken may also be problematic. While the disposition of in-dividuals who have been convicted of offenses involving dishonesty may be prescribed in insurance law or related regulations, this is rarely the case where the issue is one of competence rather than integrity. While it is always important for the supervisor to reach a considered view on an individual’s suitability, this should not be seen as a simple “yes” or “no” decision. Often where a supervisor has reservations about an individual’s suitability, these may not be such as to justify prohibiting the individual concerned from taking the position in question or requiring that he or she be removed from it. In such cases, it may be possible, either through formal action or by agreement with the company, to ensure that some other action is taken to reduce the risks involved—for example, by making further appointments to the board or restricting the functions to be carried out.

In all of this, supervisors should bear in mind that the relationship between insurer and policyholder is one of trust. The insurance company must be such that the trust is not misplaced, which means that it must be owned, directed, and managed by those in whom it is right to repose such trust. They must be honest, competent, and able to manage the affairs of the company in an increasingly complex and competitive environ-ment. Where insurance companies are managed by such persons, the responsibilities of the insurance supervisor should be easier to fulfill. Where they are not, insurance supervisors are likely to find themselves struggling to anticipate problems and to in-tervene to prevent policyholders from losing out. The risks of supervisory failure are correspondingly higher.


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L. References

Committee of the Conference of Insurance Supervisory Services of the Member States of the European Union. 2002. Prudential Supervision of Insurance Undertakings [the London Group Report]. London, December. Available at http://europa.eu.int/comm/internal_market/insurance/docs/solvency/solvency2-conference-report_en.pdf.

IAIS (International Association of Insurance Supervisors). 2000. Guidance Paper for Fit and Proper Principles and Their Application. Basel, October. Available at http://www.iaisweb.org.

———. 2002. Supervisory Standard on the Exchange of Information. Basel, January. Available at http://www.iaisweb.org.

———. 2003a. Guidance Paper on the Use of Actuaries as Part of a Supervisory Model. Basel, October. Available at http://www.iaisweb.org.

———. 2003b. Insurance Core Principles and Methodology. Basel, October. Available at http://www.iaisweb.org.

———. 2004. Compilation of Insurance Core Principles on Corporate Governance. Basel, January. Available at http://www.iaisweb.org.

Penrose, Right Honourable Lord. 2004. Report of the Inquiry into Equitable Life. Lon-don: Stationery Office by Order of the House of Commons, March 8. Available at http://www.hm-treasury.gov.uk/media/2722E/penrose_prelimhs.pdf.


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Appendix I. Case Study: Equitable Life

This case study was prepared from the account of events given in Penrose (2004), and comments on the role played by individuals are drawn from those expressed by Lord Penrose.3 This appendix highlights particular issues relevant to the matters covered by ICP 7.

The Equitable Life Assurance Society is a U.K. insurance company authorized to conduct long-term insurance business. It was founded as the Society for Equitable As-surances on Lives and Survivorships in 1762. (It is reputed to be the first life insurance company to have been run on actuarial principles). It is a mutual company, which means that it is owned by its policyholders, who are “members of the society,” rather than by shareholders. It is unusual in that it does not enjoy limited liability. Its members are li-able for its debts without any limitation. However, the company’s constitution provides that members’ liability in respect of insurance debts is not to exceed the value of the company’s assets. In recent years, until its closure to new business in late 2000, it grew rapidly. It enjoyed a solid reputation for the efficiency of its operations and the low level of its administrative expenses. Its pension products, which formed the bulk of its sales, offered a high level of flexibility, in terms of both the amounts of money that could be invested each year and the age at which policies could be converted to annuities. These features were particularly attractive to those with uncertain or erratic income levels or whose retirement date was uncertain. A high proportion of the company’s policyhold-ers came from occupations with such characteristics: politicians, journalists, members of the judiciary, and so forth.

From about 1957 to until the late 1980s, Equitable Life sold retirement annuity policies providing that, at maturity, the accrued value of the funds could be converted into an annuity at a “guaranteed annuity rate.” To benefit from the guarantee, an an-nuity had to be taken in a particularly restricted form: as a single life annuity, with no provision for a surviving husband or wife. The accrued value that could be converted in this way comprised two elements: a guaranteed amount and a discretionary final bonus, the amount of which was not guaranteed, but which was decided by the com-pany’s directors on actuarial advice. Equitable Life was not unique in selling policies of this sort: about 50 other companies in the United Kingdom did so. Equitable Life was unusual, however, in the high proportion of its business accounted for by such retire-ment policies.

Equitable Life was also unusual in the U.K. market in that it provided its policy-holders annually with a statement of their current “policy value.” This was, in effect, a projection of what the policy would be expected to pay out (that is, the sum of the guaranteed amount and the final bonus) on the basis of premiums paid in at that point.

3 The author does not necessarily endorse Lord Penrose’s account of events or his judgments or opinions. Neither the U.K. Financial Services Authority nor Her Majesty’s government was consulted in the preparation of this case study and should not be regarded as necessarily agreeing with any matters or views expressed or reported in it. Some of the individuals mentioned are involved in litigation in the United Kingdom and, for that reason, may not have given evidence to Lord Penrose. For this reason, his report, as summarized here, is not a definitive account.


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These annual statements made clear that this amount was not guaranteed, including a value attributable to the discretionary final bonus.

The guaranteed annuity rate provided in policies issued during the 1950s, 1960s, and 1980s varied somewhat, but they were all lower than the interest rates then prevail-ing, and it did not appear likely that they would “bite”—that is, the prevailing market rates were expected to be higher than the guaranteed rates so that policyholders would not need to rely on the “out of the money” guaranteed rate. In any event, no value was attributed to the guarantees in the valuation of the company’s liabilities, and no techni-cal provisions or other reserves were established to cover them.

During the early 1990s, interest rates declined sharply, albeit temporarily, and, for a short while, the guaranteed annuity rates were “in the money”—that is, they guaranteed a rate higher than that currently available in the market. The practical consequence was that annuities payable under policies that provided annuity rate guarantees, and where policyholders chose to enforce the guarantee, would be higher than those without such a guarantee or where the guarantee was not enforced. This was despite the fact that no difference had been made in the premiums levied for different types of policy. Be-cause no value had been attributed to the guarantees when the policies were issued, no charges were made for them.

It appears that Equitable Life had already decided that, in such an event:

• It would be unfair if payouts to policyholders who had paid the same premiums differed significantly because of the operation of the guarantees.

• It would be preferable to equalize the value of the payouts by paying out differ-ent levels of a discretionary final bonus, depending on whether the annuity was taken at the guaranteed or the market rate. This differential bonus policy (as it became known) was thought to be acceptable since the final bonus was not itself guaranteed, but payable at the discretion of the directors (as provided both in the policy documents and in the company’s articles of association).

• Since the guaranteed annuities could be managed through this “differential bo-nus policy,” no additional value needed to be ascribed to them in the company’s mathematical provisions, and no reserve needed to be set up to cover them.

When interest rates again declined in the late 1990s, a number of policyholders whose policies included annuity rate guarantees became dissatisfied with the company’s approach and mounted a campaign to have it reversed. The company decided that the legitimacy of its approach should be tested in the court, and it funded a “representative action” by one of the policyholders to settle the issue. While the court decided in favor of the company, an appeal was lodged against this decision. The court of appeal found against the company (by a majority decision). A further appeal by the company to the House of Lords (the highest court in the United Kingdom) again found against the company and ordered that, in deciding what final bonus should be paid to policyhold-ers, no account should be taken of the annuity guarantee. In effect, it ruled that, while


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the cost of funding the guaranteed rates could be met by reducing the final bonuses, this reduction should apply to all policies and not just to those that included guarantees.

Faced with this decision, Equitable Life, rather than continue with what it regarded as an unfair (and commercially highly damaging) situation in which the court judg-ment had effectively “transferred value”—in the sum of about £1.5 billion—from poli-cies without annuity guarantees to those with guarantees, sought to secure additional capital to restore this lost value. As a mutual company, it could not raise money from it shareholders, so it decided to demutualize and find a buyer.

However, it failed to find a buyer. Investigation by potential purchasers revealed that the company was financially weaker than it appeared to be. Moreover, the com-pany was seeking to find a buyer at a time when the life industry was facing increasing problems and profitability was declining. When it became clear that no buyer could be found, the company decided to close to new business, sell some of the assets, and bring in a new management team to manage the runoff. This resulted in a realignment of notified policy values to underlying assets and the adoption of a more defensive in-vestment strategy (involving a move away from equities to fixed-interest investments). While the company remained solvent, policyholders saw significant deterioration in the perceived value of their policies. The concerns they expressed led to the estab-lishment of a formal inquiry—the Penrose Inquiry—which was undertaken by Lord Penrose, a senior commercial judge. Inquiries were also conducted (albeit some with a narrower focus), by the Parliamentary Commissioner for Administration, the Finan-cial Services Authority, the Institute of Actuaries, and the House of Commons Trea-sury Select Committee.

The Report of the Penrose Inquiry

Lord Penrose found the following:

• The differential bonus policy was introduced without external legal advice. It was devised instead by the actuarial department and the executive manage-ment.

• It was not clear that, when the board became aware of this policy (in the early 1990s when, for a short period, the guarantees were in the money), it properly understood or challenged it.

• Accordingly, no alternative policies were identified or considered, although at that time viable alternatives were available.

• The company pursued a deliberate expansionist policy during the 1990s. As part of this, it (a) set (and paid out) bonus levels at a higher level than was justifi-able by reference to the investment returns the company actually achieved, (b) disguised the weakness of the company’s financial position by a number of ac-tuarial and accounting devices, and (c) failed to reserve adequately. As a result,


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when the company faced the immediate problems caused by the decision of the House of Lords, it could neither ride out the storm on its own nor find a buyer.

In respect of the individuals involved, Lord Penrose reported the following:

• It was undesirable that the same person should have been, for a significant period in the late 1980s to mid-1990s, both chief executive and appointed actuary. (Ap-pointed actuary refers to an appointment post that the U.K. legislation requires life insurance companies to make. The appointee carries out certain statutory functions, including, in particular, the valuation of long-term liabilities.)

• The supervisor had expressed concern about this but had failed to insist that the roles be separated. (At the relevant time, under the U.K. legislation, the role of appointed actuary was not subject to fit and proper controls. The view was taken, when the individual concerned was proposed as chief executive, that nothing was known about him that would indicate any lack of integrity or competence: at that stage he was already the appointed actuary. There appeared to be no basis for ob-jecting to his appointment as chief executive and no powers to require him to step down as appointed actuary. This legislative position has since been changed.)

• The chief executive was “highly intelligent and articulate but manipulative … I note his own assessment of his approach, in discussion with regulators, as au-tocratic … [He] did not provide regular and accurate information to the board about the business risks inherent in the general actuarial management of the company… He did not inform the board of decisions … related to the recovery of the cost of annuity guarantees from terminal bonus [or] of the relevance of the prospective differential bonus policy… [or] of the risks to which policyhold-ers not entitled to annuity guarantees were exposed.”

• “None of the nonexecutive members of the board had relevant skills or experi-ence of actuarial principles or methodologies … They were generally experienced in the financial services sector, where they had specialist knowledge, in general finance, in investment, and [in] banking … They could not be expected to make independent judgements.” They were (a) ill equipped to manage a life office by training or experience, (b) totally dependent on actuarial advice, (c) ill prepared to take necessary decisions in any event because of the fragmented approach ad-opted to instructing them, and (d) incompetent to assess the advice objectively and to challenge the actuaries even if they had questions about the material sup-plied.

In relation to the key individuals, the practice of the company was the following:

• The highest executive positions were held by actuaries (the chief executive was formally, under the company’s constitution, called “the actuary”).


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• Appointment to the highest positions almost always came from internal candi-dates. Although apparently not a formal policy, there is no evidence that appoint-ments from outside the company were considered seriously. Thus, from at least the mid-1980s, the posts of chief executive and appointed actuary were held by individuals whose entire careers had been with the same company. (When the chief executive retired in 1997, the role of chief executive and appointed actuary was split. Both posts were filled by actuaries who had for many years worked for the retiring chief executive.)

Points for Discussion

Neither at the time of the appointment of the chief executive or subsequently was there any reason to doubt his integrity. He was a highly experienced actuary, in good stand-ing with his professional body. He was familiar with the company’s operations (and had been the appointed actuary for a number of years).

• Should the supervisor have identified any risks in his appointment, and, if so, should the supervisor have acted on them?

• Could (should) the supervisor have objected to this appointment?• If not, what other action might have been taken?• How might concern over the dual appointment of chief executive (to which fit

and proper controls applied) and appointed actuary (to which they did not) have been handled better?

The nonexecutive directors were all individuals of good reputation, with significant senior-level experience in the financial services sector. But they lacked life insurance ex-perience and were not competent to challenge the actuarial advice provided to them.

• Should directly relevant experience be an essential requirement for all nonex-ecutive directors?

• If it is acceptable that, in looking at nonexecutive directors, some may be re-garded as fit and proper even though they are not insurance experts, is it pos-sible to object to others on the basis that their appointment would mean that the nonexecutive part of the board, as a whole, lacked insurance expertise?

The company’s (informal) practice was to appoint internal candidates to fill the most senior executive positions.

• Should this have been acceptable?• Was the company fulfilling its responsibility to ensure the fitness and propriety

of those it appointed?• What action might have been open to the supervisor?


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Conclusions

There are probably no “correct” answers to these questions (although there may be some incorrect ones). But discussion of this actual case and the issues it posed for supervisors helps to illuminate the role of fit and proper controls in insurance company supervision and how the relevant issues can be identified and addressed.


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Set and question Suggested answer or consideration

Q1

� It is often thought that the main objective of fit and proper controls is to ensure that insurance companies are not owned or controlled by indi-viduals who will abuse the trust policyholders place in them. While this is a very important objective, it is not the only one. Policyholders need to be sure that the insurance company will be able to meet their claims. Those who save through insurance companies need to have confidence that their funds will be properly and prudently managed. Insurance is a complex business, and policyholders and others are at risk if companies are incompetently managed, as is likely to happen if the key individuals do not possess the necessary skills and experience.

� This is true, but insurance expertise may not be enough. An experienced insurance underwriter may not be a competent financial controller of an insurance company. In considering fitness and propriety, supervisors need to look for skills and experience that are relevant to the particular role the individual is to perform and to the overall balance of skills and experience available on the board and senior management team.

� Protecting retail policyholders is clearly a very important objective, but it is not the only one. Supervisors also seek to protect the public, corpo-rate policyholders, beneficiaries, and third-party claimants. Dishonest controllers or senior managers may use an insurance company (or allow it to be used) for other dishonest purposes (for example, to launder money). This may not directly threaten policyholders, but it is something that insurance supervisors are committed to prevent so far as is pos-sible. Although corporate policyholders may be in a better position than individuals to assess the reliability of insurers and to negotiate appro-priate policy terms, even they cannot completely protect themselves. Moreover, the consequences of the failure of an insurer to meet claims from corporate policyholders can extend beyond those policyholders themselves. Finally individuals other than policyholders also rely on insurers. The beneficiaries of policyholders also have a strong interest, as do third-party claimants (for example, under workers compensation or employee liability policies).

Appendix II. Answer Key


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Q2

� Different rules apply in different jurisdictions. Supervisors should familiarize themselves with the legislative provisions under which their own authority operates. However, supervisors should be generally aware of the range of functionaries that are typically subject to fit and proper controls, since they may be asked to provide information to colleagues in other jurisdictions. Moreover, even where formal fit and proper controls do not apply, supervisors may wish to assess the adequacy of insurance companies’ management as part of their overall risk assessment. Generally speaking, the test is the extent of influence that the individual may have over the affairs of the company. Thus all those listed in the case study would normally be regarded as appropriate for fit and proper controls, with the following exceptions. First, sales representa-tives are generally not considered as within the scope of fit and proper controls since, individually, they have little influence over the affairs of their company. However, in some jurisdictions, they may require specific approval by the supervisory authority where their function includes giving investment advice. In such cases, the focus of supervisory attention tends to be on competence to give such advice rather than on a full fit and proper test. Second, internal auditors are not normally subject to fit and proper controls, since the board (or a specific subcommittee) is gen-erally responsible for ensuring that effective internal audit arrangements are in place. Third, in jurisdictions with a two-tier board structure, mem-bers of the supervisory board may be outside the scope of fit and proper controls, given their limited influence over the day-to-day management of the company.

� Again the key test is the ability to exert influence. So material minority shareholdings and indirect ownership (through an intermediate company or nominee) may all amount to significant ownership. It is the degree of influence, rather than the status of the shareholder, that is relevant. Thus small shareholding by a corporate shareholder is no more likely to amount to significant ownership than is a similar holding by a private individual.

� Are there any others? Significant owners should normally be within the scope of the controls. This goes wider than majority shareholders. In many jurisdictions, key external advisers (particularly where they have responsibility to the supervisor and to the market generally) also require approval from the supervisor (either before being appointed to a specific company or before acting in the sector generally). The key examples here are auditors and (in those jurisdictions where this system exists) actuar-ies who have formal responsibility to value long-term liabilities and on whose valuation the auditor relies.


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Q3

� In the second case study, there is clear evidence of lack of integrity (as well as reckless conduct). The fact that the CEO chose to conceal infor-mation from the supervisor and from his own board, and thus prevent remedial action (if it was still possible), is particularly culpable. The action that could be taken would depend on detailed dis-covery of the facts and on the sanctions available in the relevant juris-diction. In many jurisdictions deliberately providing false information to the supervisory authority is a criminal offense, and a reference to the relevant criminal authority would appear justified. Alternatively, in juris-dictions where superiors have the appropriate powers and resources to carry out an investigation and to impose appropriate sanctions (for example, impose a fine or issue an order prohibiting the individual from holding similar positions in the future), this would seem an appropriate response. In essence, a clear message must be sent to the industry and to the public that the supervisor expects and will enforce high standards of integrity. Taking public action of this sort would simplify the task of ensur-ing that the individual does not simply move to another sector or jurisdic-tion; the supervisor should ensure that the details are properly recorded and are relayed to other supervisors in response to their enquiries. If public action is not taken (either because an investigation is inconclu-sive or because such public sanctions are not available), the supervisor should nonetheless ensure that the known facts of the case are recorded and—to the extent possible under the legislation under which the su-pervisory authority operates—passed to any other supervisory authority requesting the information. Even where the full information cannot be passed, enough information should be shared to enable another author-ity to put relevant questions to the individual.

� In such cases, the question should always be asked whether the board as a whole exercises adequate control. While information may have been concealed, it is easier to conceal information from directors who do not actively seek to understand and to maintain control over their companies’ affairs than from those who are more conscientious!

Q4

� In the fifth case study, there is no evidence of lack of integrity. But in this case an experienced, professionally qualified person took on a respon-sibility outside her area of competence and failed to take appropriate action to fill the gaps in her own knowledge. There is clearly no case here for a reference to the criminal investigation and prosecution authori-ties. However, depending on the powers and sanctions in the jurisdiction concerned, it may be appropriate to consider disciplinary action by the supervisory authority. It would also be appropriate to pass the relevant information to her professional body, so that it could consider whether action is appropriate. (This is perhaps unlikely, as she appears not to have been acting in her professional capacity as an actuary; in cases of serious error or misjudgment by an actuary in his or her professional capacity, or by an auditor, reference to the relevant professional body or professional standards authority should be considered.)

� See the comment under question 2 of Q3.


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Q5

� There is no “right” answer. It is a matter of judgment whether this inci-dent indicates fundamental dishonesty. However, you may reasonably think that this single offense can be overlooked if he disclosed it to you himself and did not seek to conceal it. If he did not disclose it himself, you would certainly want to raise the issue with him. If he sought to conceal this deliberately—for example, by answering a question untruth-fully—there would be a strong presumption that he is untrustworthy. The fact that he is a prominent public figure is not relevant.

� This case appears more straightforward than the sixth case study, but is it? (a) the professional offense was apparently not that serious, (b) the inclusion of letters after his name on his curriculum vita may have been unintentional, (c) unless you specifically asked whether he had ever been subject to disciplinary action, is it reasonable to expect him to volunteer this information? (d) he appears to have successfully managed a similar company in the past, without any evidence that he behaved improperly in that role. You may decide that Mr. B’s “deceit” in his application is suf-ficient grounds, in itself, for refusing his application. Even if you do not, you have evidence suggesting some lack of integrity. Action open to you includes the following: (a) seeking an explanation from Mr. B, (b) discuss-ing the situation with the supervisor in the jurisdiction in which he oper-ated before, and (c) seeking further information about the circumstances leading to the professional disciplinary action. Specifically, did they involve dishonesty or lack of integrity?

� It may appear that Mr. C’s practical experience outweighs his lack of pro-fessional qualifications, but what additional responsibilities will he have, as CEO, compared with his present post? Is there any evidence from his earlier posts that he has any experience that would be relevant to these responsibilities?

� How does Mr. C’s experience and lack of qualifications compare with that of the CEOs of similar small companies? Would it be realistic to expect the company to find someone with both experience and relevant quali-fications? To what extent will other senior managers or board members balance Mr. C’s deficiencies?

Q6

�–� Supervisors would wish to give particular attention to a number of factors in this case study. (a) None of the individuals appears to have any experi-ence of (or qualification in) insurance, (b) It seems likely that the new owners will get rid of, or at least “slim down,” the existing management team. Will this leave adequate management in place? (c) The new own-ers have no experience of running a financial services company. They are probably unfamiliar with the high standards that are rightly expected in this sector. (d) If the owners are unscrupulous in dealing with employees, they may deal with policyholders similarly. These considerations may not mean that the new owners are not fit and proper, but they are likely, at the least, to lead supervisors to look for some way of mitigating the risks involved.


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Q7

� On the facts as presented in the case study, there is no reason to doubt the individual’s integrity, although the supervisor would make appropri-ate enquiries of the criminal justice authorities, the professional body of which he is a member, and (if applicable) the supervisory authority responsible for any other sector or jurisdiction in which he has operated. He has a professional qualification that is relevant to insurance. But ac-countancy is, of course, a wide discipline. Although an accountant, even without insurance experience, should be familiar with some of the issues likely to arise, this is not enough, on its own, to compensate for his lack of specialist expertise. In fact, the individual does have some insur-ance expertise, but it is in a very narrow range. In particular, he has no expertise in key functions such as product design, risk assessment, and underwriting and provisioning. In these circumstances, it might be unrea-sonable to object to this individual as not being fit and proper. However, But it would be reasonable to consider whether others on the board have adequate compensating qualities, so that the board as a whole could exercise proper control over the company’s affairs.

� With an individual whose experience is limited to marketing and sales taking on the overall control of the company as CEO, the supervisor should look particularly carefully at the strength of the underwriting and provisioning controls. While there is no reason why such an individual should not make a good CEO, his previous experience might make him reluctant to set controls on prices and on levels of new business if this means losing business to competitors.

� There is no reason, in principle, why two brothers should not serve as chairman and CEO. Nevertheless, it is possible that the relationship has influenced the choice of CEO, and this might reasonably lead the su-pervisor to explore carefully the following: (a) whether the company has carefully defined the qualities lost when the previous CEO departed and the qualities it should seek in a new CEO, (b) whether the company has chosen a candidate on the basis of the qualities needed for that post and with regard to the collective skills and experience of that board, (c) what action, if any, the company has proposed to take to deal with any gap in skills and experience that the change at CEO level would create, and (d) whether the board is too dominated by the chairman.

Q8

� Check your list of routine required information against the list given in IAIS (2000, annex 1). In addition, in this particular case, the supervisor might reasonably ask to see the following: (a) the specification for the job prepared by the company, (b) details of the recruitment process and whether other candidates were considered, and (c) the board minutes concerning the proposed appointment.


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Q9

� The formal measures available to supervisors, and the procedures that have to be followed, will vary considerably between jurisdictions. But, generally speaking, blocking an appointment often requires specific grounds for action and is likely to be subject to an appeals process. On the facts given in the case study, it is unlikely that such action could be sustained. Similarly, requiring the chairman to resign would be difficult to justify (and would not resolve, and might possibly increase, the deficit in skills and experience on the board as a whole). Although it is important that boards collectively have the right range of skills and experience, it is generally difficult, if not impossible, to require new board appointments to have the full set of skills. Supervisors generally have considerable in-fluence over the companies they regulate. A discussion with the company about the need to ensure a fully effective board with the right mixture of skills and experience would be entirely appropriate. This case clearly demonstrates some causes for supervisory concern. Unless the com-pany is prepared to take action to address these concerns, heightened supervisory attention is justified.

� The facts as presented in the case study suggest two areas of concern, which are not directly related to the individual appointment: the pos-sibility of an overly dominant chairman and inadequate attention by the company itself to its responsibility to ensure the fitness and propriety of its key functionaries. It would be appropriate for the supervisor to raise these concerns with the company and to remind the directors, individu-ally and collectively, of their responsibilities and of the supervisor’s expectations of them.

Documents

ICP 7: Suitability of Persons - iaisweb.org€¦ · ICP 7: Suitability of Persons Basic-level Module A Core Curriculum for Insurance Supervisors