Insurance Company Corporate Governance Workshop September 22, 2015 - - PDF document

Insurance Company Corporate Governance Workshop

September 22, 2015

Harrisburg, PA

Insurance Company Corporate Governance Workshop Table of Contents

A. Agenda B. Speaker Presentation Materials C. Deputy Insurance Commissioner Stephen J. Johnson’s 12/16/2014 Memo to Insurers: Developments in Financial Regulatory Items for 2015 D. NAIC Materials:

• White Paper on High-Level Corporate Governance Principles for Use in

U.S. Insurance Regulation (Not Formally Adopted)

• Proposed Responses to a Comparative Analysis of Existing U.S. Corporate

Governance Requirements

• Corporate Governance Annual Disclosure Model Act
• Corporate Governance Annual Disclosure Model Regulation
• Form F – Enterprise Risk Report
• Own Risk and Solvency Assessment (ORSA) Guidance Manual
• Own Risk and Solvency Assessment (ORSA) Feedback Pilot Projects

Observations:

• 2012-2013 Feedback
• 2014 Feedback

E. Speaker Biographies

Insurance Company Corporate Governance Workshop September 22, 2015 Agenda

8:30 – 9:00 a.m. Registration 9:00 a.m. Welcome / Introductions

Joel C. Hopkins, Esq. Member - Insurance Practice of Saul Ewing LLP

9:05 – 9:35 a.m. The New World Order in Insurance Regulation: What Boards and Management Need to Know & Why; What the Regulator is Expecting

Stephen J. Johnson, CPA

Deputy Insurance Commissioner, Office of Corporate & Financial Regulation, Pennsylvania Insurance Department

9:35 – 10:00 a.m. Corporate Governance Annual Disclosure: What All Insurers Need to Know and Should Be Doing Now

Frances R. Roggenbaum, Esq. Co-Chair - Insurance Practice of Saul Ewing LLP

10:00 – 11:00 a.m. Keys to an Effective Board – Education, Selection & Succession

• Board Education: It’s Not Just Duty of Care

Constance B. Foster, Esq. Member - Insurance Practice of Saul Ewing LLP

• The Nominating & Compensation Committee – The Cornerstone of

Corporate Governance

David G. DelBiondo, CPA Regulatory Specialist, INS Regulatory Insurance Services, Inc.

• Assuring Leadership for the Future: The Board’s Role in Succession

Planning

Nancy Dering Mock, President, Nancy Dering, Inc.

11:00 – 11:15 a.m. BREAK 11:15 – Noon The Board’s Role in Risk Management & ERM

• G. Lawrence Buhl, CPA

Retired Audit Partner at Ernst & Young

Noon – 12:30 p.m. Q&A Session with Regulators

• Stephen J. Johnson, CPA, Pennsylvania Insurance Department
• Kimberly A. Rankin, Director, Bureau of Company Licensing & Financial Analysis,

Pennsylvania Insurance Department

• Annette B. Szady, CPA, Director, Bureau of Financial Examinations, Pennsylvania

Insurance Department

12:30 – 12:45 p.m. 12:45 p.m. Concluding Thoughts From Your Regulator: Boards Can Never Fall Asleep

Stephen J. Johnson, CPA, Pennsylvania Insurance Department

Lunch

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 1 -

The New World Order in Insurance Regulation: What Boards and Management Need to Know and Why What the Regulator is Expecting

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 2 -

This presentation is all about change

– How many years did it take radio to reach 50M users? 38 years – How many years did it take Google to reach 50M users? 6 years – How many years did it take Facebook to reach 50M users? 3.5 years – How many years did it take iPad to reach 50M users? 1.5 years – How many years did it take Google + to reach 50M users? 88 days

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 3 -

What is Happening in the Regulatory World

– There have been seismic shifts in regulatory approach by the NAIC and Insurance Departments – Retrospective Prospective – Company Enterprise – Financial Statement Governance – Rules Principles – Regulators are expecting more Board involvement in this new regulatory approach – Is your management ready?

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 4 -

What are we trying to do differently:

• Group vs. Legal Entity Supervision
• Corporate Governance
• Risk Management
• Enterprise Level
• Legal Entity Level
• Inter-Connectivity Risks
• Control Environment
• Capital Management
• Strategic Management (Prospective Risk)
• Verification of all of this-the Risk Focus Exam Process

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 5 -

Have you ever read the

• NAIC’s White Paper on High Level Corporate Governance Principles
• NAIC’s Comparative Analysis of Existing U.S. Corporate Governance

Requirements

• NAIC’s Model Corporate Governance Manual Disclosure Model Act and

Model Regulation

• Exhibits L & M on the NAIC’s Financial Examiners Handbook
• Exhibit L – Branded Risk Classification
• Exhibit M- Understanding the Corporate Governance Structure

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 6 -
• Form F – Enterprise Risk Report
• NAIC’s Own Risk and Solvency Assessment Guidance Manual
• NAIC’s Own Risk and Solvency Assessment Feedback Pilot Projects

Observations

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 7 -

What are Regulators Looking at Now

– Corporate Governance – Group level as well as Legal entity level

• NAIC’s Model Corporate Governance Annual Disclosure Model Act and Regulation (my

hope is to be live 1/1/2016)

• Interviews with Chairman of the Board and Head of Audit Committee as part of

Financial Examinations

• Importance of Audit Committee

– Enterprise Risk Management (ERM)

• How does the process work?
• Is it effective?
• Is it used by Management and Boards?
• ERM is Scalable
• Prospective Risks
• “Risk Management became Risk Justification”

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 8 -

What are Regulators Looking at Now

– Own Risk and Solvency Assessment (ORSA)

• NAIC Guidance Manual
• NAIC Pilot Program
• NAIC Model Law is live as of 1/1/2015 in PA

– Control Environment

• Board’s need to take on more responsibility
• Effective or not
• Boards need to make certain representations to Insurance Departments

within Amended Holding Company Law

• Internal Audit Function Requirement (Revisions to NAIC’s Model CPA

Audit Regulation)

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 9 -

What are Regulators Looking at Now

– Capital Management

• How is this done by Management and Boards
• Effective or not
• Group Capital (ORSA)

– Strategic Management

• Does the Board have a plan?
• Prospective Risks

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 10 -

Why are Regulators Doing This?

• It is a better regulatory process-looking out of the front of the car

window (prospective risk) then looking out of the back window.

• AIG-Reputational Risk/Group Risk
• My International Friends (EU, IAIS, G-20)

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 11 -

What Boards Should Be Doing About All This Change

• Get educated
• Set up a Risk Committee of the Board
• Should we hire or designate a Chief Risk Officer (CRO Council of

North America)

• Is the Board receiving proper Risk Summary Reports from

Management

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 12 -

What Boards Should Be Doing About All This Change (Cont’d.)

• How does the Board know that the Company’s ERM System is working
• AIG-Derivatives operation
• JPMorgan Chase $2B trading loss (Now $5.8B)
• UBS-Rogue Trader
• How do we learn from the ERM failure?

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 13 -

What Boards Should Be Doing About All This Change (Cont’d.)

• Boards need more individuals with an Insurance Regulatory Background-

Where do we find them?

• Should the CEO and Chairman of the Board be split roles?
• Is your Board receiving updates on Regulatory Issues (Regulatory Risk)?
• Has your Board ever thought about inviting your Domestic Regulatory to
• ne of your Board Meetings?

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 14 -

Other Resources for Corporate Governance

• The Society of Corporate Secretaries and Governance Professionals

(http://www.governanceprofessionals.org)

• The National Association of Corporate Directors

(http://www.nacdonline.org)

• The Business Roundtable has a Corporate Governance Committee

(http://www.businessroundtable.org/issues/corporate- governance/committee)

• The Conference Board Commission (http://www.conference-

board.org/pdf_free/sr-0304.pdf)

• The Organisation for Economic Co-operation and Development (OECD)

(http://www.oecd.org/corporate/)

Corporate Governance Annual Disclosure (CGAD):

What All Insurers Need to Know and Should Be Doing Now

Insurance Company Corporate Governance Workshop September 22, 2015

Fran Roggenbaum, Esq. Saul Ewing LLP 717.257.7526 froggenbaum@saul.com

Seismic Shifts in Regulatory Approach: No “Regulating at a Snail’s Pace”

• NAIC’s Solvency Modernization Initiative – begun in 2008; near

immediate action from onset of financial crisis

• Numerous new requirements & changes to regulatory approach since

then – and continuing

• Warrants a new “dictionary” of insurance buzzwords & acronyms: risk-

focused – ORSA – enterprise risk – ERM – suitability – and more

• A number being addressed by today’s speakers
• All relevant to the upcoming CGAD requirement

2

Corporate Governance Annual Disclosure

Model Law & Regulation adopted by the NAIC at its Fall 2014 Meeting Assuming adoption by state legislatures, the first CGAD filing (a confidential filing) would be due by June 1, 2016 Cited as one of the top insurance regulatory trends for 2015 Likelihood of adoption in PA – VERY HIGH:

• A proposed NAIC accreditation standard
• “It is the Department’s goal to adopt the NAIC Model Law as quickly as

possible after the NAIC’s adoption.”

Deputy Commissioner Steve Johnson’s 12/10/2013 “State of the Union” Letter (addressed again in 2014) 3

Corporate Governance Annual Disclosure What I Will Talk About Today

• Who it applies to
• What it is – what it isn’t
• Why?????
• Whose governance is reported on (when insurer is part of a group of

companies)

• What must be addressed in the filing
• Where the filing is made
• What regulators will/may do with the filing

WHAT YOU SHOULD BE DOING

NOW

4

Corporate Governance Annual Disclosure Who It Applies To

ALL INSURERS / INSURER GROUPS There are no exemptions to this requirement (applies to all insurers / insurer groups -- regardless of size or organizational type / structure -- even small insurers, fraternals & standalone mutuals that may be exempt from other requirements like the ORSA & Insurance Holding Companies Act provisions)

5

Corporate Governance Annual Disclosure What It Is

A filing that includes detailed narrative and documentation to respond to “inquiries” under 4 key areas:

• Governance framework & structure
• Policies & practices of the Board & Board committees
• Policies & practices for directing senior management
• Oversight of critical risk areas

For the stated purpose of providing to insurance regulators a summary of the corporate governance structure, policies and practices to permit the regulator to gain and maintain an understanding of the governance framework of an insurer / insurer group.

6

Corporate Governance Annual Disclosure What It Is

The CGAD filing will provide detail behind the required governance and internal control statements that insurers have been making (and certifying) on the Form B Registration Statement since implementation of the recent revisions to the Insurance Holding Companies Act.

• That the insurer’s board of directors oversees corporate governance and internal

controls; and

• That the insurer’s officers or senior management have approved,

implemented and will continue to maintain and monitor corporate governance and internal control procedures.

7

Corporate Governance Annual Disclosure What It Is

The CGAD must go beyond the governance documents to provide information on actual practices and, in some cases, rationale for and suitability of those practices.

No specified form/format:

• CGAD is not a “check the box” filing nor is it responding to a “questionnaire/survey” -- and

there is no specified form/format like exists for, e.g., Form B (Registration Statement) & Form F (Enterprise Risk Report).

• Instead, you have “discretion regarding the appropriate format [and are] permitted to

customize the CGAD to provide the most relevant information necessary” to permit the regulator to gain an understanding of your governance structure, policies & practices. 8

Corporate Governance Annual Disclosure What It Isn’t

• CGAD Act specifically states that it is not intended to be construed to

prescribe or impose corporate governance standards and internal procedures beyond that which is already required under state law

• With a Caveat: CGAD Act also states that it shall not be construed to

limit the regulator’s authority under the state’s examination law

9

Corporate Governance Annual Disclosure Why? “Lessons Learned”

Financial Crisis Inquiry Commission: “An essential cause of the financial and economic crisis was appallingly bad risk management by the leaders of some of the largest financial institutions in the United States and Europe. Each failed firm that the Commission examined failed in part because its leaders poorly managed risk.” AIG: Testimony of Sarah Dahlgren (NY Fed. Reserve Bank official) in Starr International Co., Inc. v. U.S.) as reported by Law 360: “This need [to monitor how AIG used its loan] was reinforced in the team’s initial meetings with the company, which left her with the impression that the company’s management was “shell-shocked” and indicated to Fed staffers that the decentralized nature of AIG’s control over its various units meant it was unable to answer even some basic questions about its operations . . . “

10

CGAD for Groups of Companies

(Whether an Insurer Group or Not)

Whose Governance Is Reported On

UCP, intermediate holding company, individual insurer -- you make the choice based upon the structure of your system of governance, but encouraged to make disclosures at:

• Level at which risk appetite is determined; or
• Level at which earnings, capital, liquidity, operations and reputation of insurer are
• verseen & at which supervision of these factors are coordinated and exercised; or
• Level at which legal liability for failure of corporate governance duties would be

placed

Must disclose choice in the CGAD

11

Corporate Governance Annual Disclosure What Must Be Included – A Few Examples

Governance Framework & Structure

• Rationale for Board size & structure
• Duties of the Board & each committee – and how each is governed (e.g. bylaws,

charters, informal mandates, etc.)

• How the Board’s leadership is structured (including a discussion of the roles of the

CEO & Board chair)

12

Corporate Governance Annual Disclosure What Must Be Included – A Few Examples

Policies & Practices of Most Senior Governing Entity & Committees

• How the qualifications, expertise & experience of each Board member meets the

needs of the insurer / insurer group

• Number of meetings of the Board & its committees and information on director

attendance

• How the insurer/insurer group identifies, nominates & elects members to the Board

& its committees (including a discussion on any term limits & how the election & re-election process works)

• Processes for Board to evaluate the performance of the Board & its committees;

measures taken to improve performance – including training programs

13

Corporate Governance Annual Disclosure What Must Be Included – A Few Examples

Policies & Practices for Directing Senior Management

• Processes/practices (suitability standards) for determining whether officers &

key persons in control functions have appropriate background, experience & integrity to fulfill roles

• Plans for CEO and senior management succession
• Processes for performance evaluation, compensation and corrective action (must

include sufficient information for an understanding how the

• rganization ensures that compensation programs do not encourage

and/or reward excessive risk taking)

14

Corporate Governance Annual Disclosure What Must Be Included – A Few Examples

Oversight of Critical Risk Areas

Processes by which the Board, its committees and senior management ensure an appropriate amount of oversight of critical risk areas (i.e. risk management, actuarial, investments, reinsurance, business strategy/finance, compliance, financial reporting/internal auditing, and market conduct), including:

• How oversight and responsibilities are delegated between the Board, its

committees and management

• How the Board is kept informed of strategic plans, associated risks, and monitoring

and management of risks

• Frequency at which information on each critical risk areas is reported to and

reviewed by management and the Board

15

Corporate Governance Annual Disclosure Where the Filing is Made

• If You Are Not Part of a Group of Insurers: With your domestic

regulator.

• If You Are Part of an Insurer Group: With the lead state regulator of

the group (as determined by the NAIC’s Financial Analysis Handbook), BUT . . .

As has occurred with other requirements, must verify the relevant state’s provisions (e.g. at least one state (New York) did not adopt the lead state approach for the Form F Enterprise Risk Report)

16

Corporate Governance Annual Disclosure What Regulators Will/May Do with the Filing

• Will review to gain – and maintain – an understanding of the corporate

governance framework of an insurer/insurer group

• And, because CGAD Act provides that it shall not be construed to limit

the regulator’s authority under the state’s examination law:

• May request additional information
• May retain, at the insurer’s expense, 3rd party consultants (including

attorneys, actuaries, accountants & other experts) as necessary to assist in reviewing the CGAD & related information or an insurer’s compliance with the CGAD requirements

17

Corporate Governance Annual Disclosure What Regulators May Do with the Filing

Important to note several relevant provisions in the “Standards to Define Insurers Deemed to Be in Hazardous Condition” regulation, including:

• A standard on whether the management of an insurer (officers & directors) fails to

possess and demonstrate competence, fitness and reputation deemed necessary to serve the insurer; and

• Authority to issue an order to an insurer to correct deficiencies in corporate

governance practices and adopt & utilize practices acceptable to the Commissioner.

18

Corporate Governance Annual Disclosure What You Should Be Doing NOW

Learn about all that you must report on in the CGAD

• Could you provide now rational, logical and meaningful information on all of

the CGAD inquiries?

• Is your governance structure appropriate for your needs and objectives?
• Do your governance documents accurately say what you want them to say?
• Are your actual practices/policies/procedures in accordance with your

governance documents?

• Are your governance structure, documents, policies and practices effective?

19

Corporate Governance Annual Disclosure What You Should Be Doing NOW

Change takes time . . .

If you have not recently analyzed the appropriateness & effectiveness of your corporate governance structure, documents, policies and practices for your operations, the time to do so is now and not when the filing is imminent.

20

Questions?

21

Board Education It’s Not Just Duty of CARE

1

Corporate Governance Workshop September 22, 2015

Constance B. Foster, Esq. Saul Ewing LLP 717.238.7560 cfoster@saul.com

Duty of Care is the Foundation

• f Board Education

________________________

2

• Fiduciary duty of care creates two obligations for every Board member:
• Decision making (process)
• Oversight (substance)
• Board Educational Programs should focus on both
• Importance of Board Education reinforced by new governance disclosure

requirements

Elements of a Board Education Program ________________________

3

• Systematic and relevant to Board responsibilities
• Enhance oversight and decisionmaking in key functional areas
• Regulatory Requirements
• Financial Performance
• Operational
• Strategic Planning

Regulatory ________________________

4

• Governance Requirements including Insurance Holding Companies Act
• Financial Regulation
• Compliance / Internal Audit Requirements

Financial ________________________

5

• Operational Results
• Future Projections
• Risk Evaluation and Mitigation

Operational ________________________

6

• Understanding Products and Their Performance
• Benchmarking Competitors
• Threats (i.e. cyber)
• Intercompany Agreements

Strategic Planning ________________________

7

• Best Practices
• Preparation
• Implementing / Monitoring
• Amending

New Board Member Orientation ________________________

8

• Key Documents
• Governance
• Strategic Plan
• Code of Ethics
• Meeting with Management
• Specific Current Issues
• Role in Strategic Plan

Board Education Plan ________________________

9

• Approved by Board Annually
• Target Specific Number of Hours and Subject Areas

Sources ________________________

10

1.Trade Associations 2.Third Parties (Attorney, Auditors, Actuarial) 3.Internal 4.Regulatory Updates such as Insurance Company Governance Workshops

Board Evaluations ________________________

11

• Should be Annual
• Develop List of Characteristics of Highly Effective Board Members
• Evaluate against established criteria
• Confidential
• Review by Board Chair with report to Board together with action items

if needed

• Review both Individual and Board performance
• Should assess effectiveness of Board systems, policies and procedures

Group Supervision

July 31, 2012

INS Regulatory Insurance Services, Inc.

• 1 -

Corporate Governance Workshops

The INS Companies 2015

The Nominating and Compensation Committee – The Cornerstone of Corporate Governance

David DelBiondo, CPA (717) 805-0852 dgdelby@gmail.com September 22, 2015

Group Supervision

July 31, 2012

INS Regulatory Insurance Services, Inc.

• 2 -

Corporate Governance Workshops

The INS Companies 2015

Today’s Topics

– Purpose – Design – Board Member’s Perspective – Regulator’s Perspective

Group Supervision

July 31, 2012

INS Regulatory Insurance Services, Inc.

• 3 -

Corporate Governance Workshops

The INS Companies 2015

Purpose of the Nominating and Compensation Committee

– Assist the Board with Director Nominations, Orientation and Professional Development – Recommend the Selection and Compensation of the Principal Officers of the Company – Evaluate the Performance of the Principal Officers of the Company

Group Supervision

July 31, 2012

INS Regulatory Insurance Services, Inc.

• 4 -

Corporate Governance Workshops

The INS Companies 2015

Design of the Nominating and Compensation Committee

– Written Charter Identifying Responsibilities and Authority

• f the Committee for both Nominating and Compensation

– How are Potential Board Members Identified, Current Board Members Educated and Evaluated – Executive Compensation Must Align with the Company’s ERM, Business and Strategic Plan

Group Supervision

July 31, 2012

INS Regulatory Insurance Services, Inc.

• 5 -

Corporate Governance Workshops

The INS Companies 2015

Design of the Nominating and Compensation Committee

– Does Executive Compensation Include both Performance and Incentive Compensation – Use of Market-based Benchmarks, Risk Adjustments and Clawbacks – Eligibility and Funding

Group Supervision

July 31, 2012

INS Regulatory Insurance Services, Inc.

• 6 -

Corporate Governance Workshops

The INS Companies 2015

Board Member’s Perspective on the Nominating and Compensation Committee

– The Board Needs to Have the Breadth and Depth of Experience Needed Including Succession – Goals and Objectives Should Include Individual and Organizational Performance – Incentive Compensation Goals and Objectives Must be Timely and Measurable – Are Adjustments “Normal Course of Business” or “Extraordinary”

Group Supervision

July 31, 2012

INS Regulatory Insurance Services, Inc.

• 7 -

Corporate Governance Workshops

The INS Companies 2015

Regulator’s Perspective on the Nominating and Compensation Committee

– What Causes Troubled Companies and Insolvencies – Risk-focused Financial Surveillance, Form F, ORSA and Corporate Governance Disclosure – Effective Board Oversight (Independence) and Management Decision Making

Group Supervision

July 31, 2012

INS Regulatory Insurance Services, Inc.

• 8 -

Corporate Governance Workshops

The INS Companies 2015

Is the Nominating and Compensation Committee the Cornerstone of Corporate Governance

– ERM – Corporate Strategic Plan – Establish Goals and Objectives and Associated Compensation – Select Board Members and Officers

Group Supervision

July 31, 2012

INS Regulatory Insurance Services, Inc.

• 9 -

Corporate Governance Workshops

The INS Companies 2015

Questions

Insurance Company Corporate Governance Workshop September 22, 2015

• G. Lawrence Buhl, CPA

Retired Audit Partner at Ernst & Young

1

The Board’s Role in Risk Management & ERM

Responsibilities of the Board of Directors

2

 CEO  Fiduciary  Counsel  Mission

Approval and Oversight

Approval & Oversight of What?

3

Strategy Policy Governance Tactics

And Risk Tolerance is Inherent In All

But Management Establishes and the Board Oversees

Risk, So There’s No Confusion

4

 Management’s job - assess & manage risk exposures  The Board - charged with responsibility to oversee risk

Not a new responsibility for any Company of any size Now expected to be formalized Responsibility for oversight of selected risks can be delegated to Board Committees, either the Audit Committee or another

Risk Management Involves

5

Standards Controls Limits Guidelines Policies

ERM Involves

Discipline Framework Definition Inventory Evaluation

The ERM Process

6

 Risk Appetite Statement  Risk Inventory  Key Risk Identification and Risk Level Evaluation  Inherent Risk Assessment  Residual Risk Profile  Develop Key Risk Indicators  Identify Risk Owners—1st Line of Defense  Formalize the 2nd Line of Defense  Develop Guidelines for Independent Review—3rd Line  Establish Reporting Vehicle to Sr. Mgmt & Board

What’s It Take To Oversee Risk?

7

 Development of the Risk Appetite Statement  Three Lines of Defense-Where Does the Board Fit  Ensure a Formalized RM Process  Who is CRO  Alliance with CRO/Internal Audit/Actuarial/CPAs  Understand the Details of the Business  Understand the Risk Inventory and Evaluation

Risk Inventory

8

Interest rate Counterparty Financing Operational Liquidity Reputation Accounting Compensation Capital Governance Underwriting Product & Pricing Regulatory Legal Reinsurance Extreme events Credit Loss management Vendor Investment Servicer/Manager IT security IT strategic IT implementation IT operations Compliance Cybersecurity People Market conduct Business Continuity Ratings Financial Reporting Succession Tax Intercompany Fraud ERM

What’s Involved in Board Risk Oversight

9

 Audit Committee  Finance Committee  Compensation Committee  Nominating & Governance Committee  The Board

Risk Inventory

10

Interest rate Counterparty Financing Operational Liquidity Reputation Accounting Compensation Capital Governance Underwriting Product & Pricing Regulatory Legal Reinsurance Extreme events Credit Loss management Vendor Investment Servicer/Manager IT security IT strategic IT implementation IT operations Compliance Cybersecurity People Market conduct Business Continuity Ratings Financial Reporting Succession Tax Intercompany Fraud ERM

What’s Involved in Board Risk Oversight

11

 Audit Committee  Finance Committee  Compensation Committee  Nominating & Governance Committee  The Board --------- OR  A newly established Risk Oversight

Committee

The Risk Oversight Agenda

12

• Compliance with Policies and Guidelines within the ERM Plan
• ERM Dashboard Reports re Changes/Activities
• Current Underwriting—Geography, Product, Pricing,
• Existing Portfolio Implications
• IT Matters—Strategy, Implementation, Technology, Cyberrisks
• Business Continuity
• ORSA
• Deep Dives—Vendors & Servicers; Reinsurance Programs;

Legal; Compliance; Model Risk

• WCGW—Black Swan; The Unexpected; Extreme Events;

Catastrophes, Stress Testing/Correlation

• Operational

Do You Need A Board Risk Committee?

13

 How important is Risk Tolerance to the Board

Oversight Responsibilities, compared to Policy, Governance, Strategy, and Tactics ?

 How complicated is the business?  Can the Board do it?  Does the Board have time and inclination?  Can the Audit Committee do it?  Can Other Committees do more?

What Can Go Wrong

14

ALM Collectability Loss Environment Litigation Liquidity Lapses Catastrophes Concentrations Outsourcing Expertise Evolution Intercompany

Risk Oversight Responsibility

15

Risk Culture & Appetite & Process & Inventory

 Is Risk Management getting the right attention and priority

and effort and focus?

 How should Risk Management be reported to the Board  Are risks and rewards balanced and appropriate?  Is the right information being provided timely and

transparently and completely? To All?

 Are risks aligned with Capital and Liquidity?

Top 10 Risks

16

 Regulatory Concerns  Economic Conditions  Cyberthreats  Succession/Recruiting  Cultural Response to Risk  Aversion to Change  IT Security and Privacy  Reputational Risk Defense  Customer Preference Changes  Meeting Performance Expectations

ASSURING LEADERSHIP FOR THE FUTURE:

THE BOARD’S ROLE IN SUCCESSION PLANNING

Presented to Corporate Governance Workshop By: Nancy Dering Mock (717) 579-1004 nancy@nancydering.com September 22, 2015

Corporate Governance Workshop

1

Definition and Purpose

Definition

• Having the right people in the right jobs at the right time
• Developing and selecting leaders for the future of the organization
• Overseeing a smooth transition from outgoing to incoming leaders

Purpose

• Building a “pipeline” of future leaders for the organization
• Assuring the best “fit” for the leaders of an organization
• Minimizing disruption in the organization from transitions
• Ultimately, assuring the continuing success of the organization

2

Corporate Governance Workshop

Distinctions

• Executive Succession: Assuring the ongoing performance of an
• rganization through a process of developing a talent pool, effectively

selecting and orienting the highest quality successor and preparing him or her and the organization for success.

• Replacement Hiring: Waiting until a position becomes available and

beginning a search process at that time.

• Emergency Leadership Plan: A plan that identifies contingency selections

in the case of an unexpected, temporary or permanent loss of an executive.

• Interim Executive Selection: Appointing an Executive to “bridge” the

departure of one executive and the appointment of the successor. This individual may or may not be considered as a candidate for the permanent position.

3

Corporate Governance Workshop

Developing Internal Talent

• Identify key executive and management positions
• Identify key leadership and management competencies for each
• Identify potential candidates for each position, exercising caution in implying a

commitment or selecting an “heir apparent”

• Design developmental opportunities:
• Executive Education
• Rotational Assignments
• Cross-Boundary Experiences
• Special Assignments
• Develop Individual Development Plan for each potential candidate
• Track progress
• Continually invite “high potentials” to prepare for increasingly responsible positions

4

Corporate Governance Workshop

Preparing for a Leadership Succession

• 1. Clarify the position requirements, roles, expectations and competencies.
• 2. Design and implement performance evaluation process based on competencies.
• 3. Determine where the organization wants to go: Vision, Mission, Strategy,

Change.

• 4. Conduct an Organization Assessment: Operations, Financials, Talent and

Culture.

• 5. Create an Executive Profile based on the above.
• 6. Develop selection criteria based on the above.
• 7. Prepare a Communications Plan.
• 8. Establish accountability for Board, Transition Committee and Staff in the

process.

5

Corporate Governance Workshop

Benefits of a Comprehensive Approach

• Communicates clear sense of direction to both internal and external

constituencies

• Reduces anxiety among employees
• Ensures a good “fit” and a smooth transition
• Selection aligns with future markets, strategies and challenges
• If process is open to internal candidates, it helps employees see
• pportunities for career advancement, identifies potential internal talent, and

identifies needs for internal leadership development

• Helps maintain your company’s reputation, image and credibility

6

Corporate Governance Workshop

Use of Executive Search Consultant

• Contributes to process viewed as thorough and objective
• Has deeper knowledge and experience from other searches
• Will guide the development of the Executive Profile
• Has the time to thoroughly recruit and evaluate candidates
• Widens the candidate pool beyond job announcements, word of mouth, mailings
• Save time of the Board in weeding out less qualified candidates
• May conduct initial interviews
• Will assist in development of interview process, questions, format, etc.
• May conduct background and reference checking
• May assist in negotiating terms of employment

7

Corporate Governance Workshop

Components of an Executive Profile

• 1. Organization Background: History, Mission, Milestones, Previous

Leader(s)

• 2. Critical Leadership Issues: Current and Future, including Strategic

Overview

• 3. Key Responsibilities and Accountability
• 4. Desired Skills, Characteristics and Competencies
• 5. Ideal Experience
• 6. Compensation
• 7. Guidance for Candidates

8

Corporate Governance Workshop

Elements of a Communications Plan

• Announcement of Executive’s departure, years of service and highlights of

his or her accomplishments

• Announcement of Search Committee, process and projected schedule
• Strategies for widely circulating the Executive Profile to encourage

applicants and referrals

• Updates to keep people informed of the process until final selection
• Formal announcement of appointment of new executive, internal and

external stakeholders, partners and media

• Share relevant information about the transition, including special events,

key initiatives, “messages from the new executive” for 3-12 months

9

Corporate Governance Workshop

Blueprint for the Transition

• Define role and timeframes of outgoing Executive throughout the process
• Define role of Committee and Board throughout the process
• Provide a written Orientation Plan
• Develop Briefing Book for new Executive
• Develop list of key internal and external individuals
• Encourage new Executive to conduct informational interviews
• Agree on written goals and expectations for new Executive for 6 month

period

• Consider Executive Education and/or Coaching

10

Corporate Governance Workshop

Pitfalls in Executive Succession

• Deferring to the current Executive or Search Consultant to lead the

process

• Requirements that are boilerplate or needlessly narrow the candidate

pool

• Failing to seek adequate information from a wide range of references
• Hiring a replacement, not a successor
• Providing more information to some candidates than others
• Failing to disclose vital information regarding organization’s challenges
• Keeping Elvis in the building
• Lack of effective communications throughout the process

11

Corporate Governance Workshop

Board Succession Planning

• Definition: Assuring a high performing board through a process of identifying,

developing, recruiting and orienting effective board members.

• Accountability: Nominating/Governance/Board Development Committee of

the Board with guidance and input from Executive staff

• Advantages:

1) Assures pool of competent and willing potential board members at all times 2) Reflects favorably on organization and enhances likelihood of agreement to serve 3) Spells out expectations of board members before election 4) Insures diversity of background, skills, experience and perspectives among board

12

Corporate Governance Workshop

Key Elements of Board Succession Planning

• Develop Job Description and Expectations of Board Members
• Identify appointments to committees that will prepare possible board candidates
• Develop Profile of Current board membership: strengths, representation of

industries, backgrounds, specific skills (i.e., accounting, public relations, law, etc.)

• Identify gaps and set priorities for board recruitment
• Keep running list of possible candidates and develop/cultivate/engage those

individuals

• Be truthful about expectations in recruitment
• Require an interview with the Committee or Board Chair as part of the process
• Upon election, conduct thorough orientation and emphasize ongoing expectations

to stay current in industry, market and economic dynamics affecting the

• rganization and its strategies.

13

Corporate Governance Workshop

Additional Succession Planning Resources

• Chief Executive Succession Planning, Nancy R. Axelrod
• Succession Planning Basics, Christee Gabour Atwood
• Succession Planning and Management, David Berke
• The Practitioner’s Guide to Governance as Leadership, Cathy Trower

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Corporate Governance Workshop

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 1 -

Concluding Thoughts From Your Regulator: Boards Can Never Fall Asleep

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 2 -
• What Can Happen if a Board is Asleep at the

Switch

• Information discussed today and the new regulatory model is to

prevent Boards from falling asleep

• Boards should never stop getting educated and asking the right

questions

• What questions were never asked by Boards in the past that should

have been:  Why are we always reserving at the low end of the actuary’s range?  Why are our reserves always deficient?  Why does our actuary not give the Board a presentation?

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 3 -
• Questions (Cont’d.)

 Why do we take so much risk on our investments?  How do we know we are pricing right?  Why do we do business with reinsurers we never heard of?  What are we doing about our RBC being below 300%?  How often do we waive our underwriting standards?  Why are we using an accounting firm we never heard of?  Why are we expanding so fast?

Insurance Company Corporate Governance Workshop

September 22, 2015

Stephen J. Johnson, CPA, Deputy Insurance Commissioner

Office of Corporate and Financial Regulation

• 4 -
• Questions (Cont’d.)

 Why did we get into a new line of business?  Do we need to change management?  What is our future?

Insolvency