Cultural change must come from the top

Gabriel Bernardino, chair, EIOPA on the importance of the tone from the top in setting organisational culture.

The Solvency II Directive requires all insurance and reinsurance companies to have an effective system of governance in place, which is proportionate to the nature, scale and complexity of the business.

The system of governance must provide for sound and prudent management of the business without unduly restricting it from choosing its own organisational structure. Solvency II promotes sound and robust behaviour to manage and reduce risks by implementing well-defined governance systems.

The European Insurance and Occupational Pensions Authority (EIOPA) is equally concerned with ways of tracking and monitoring the implementation of these systems of governance.

Elements of a good governance system

Good governance is one of the best tools to achieve policyholder protection and sound business practices. The coming years will be instrumental in delivering these outcomes.

In our view an effective and proportionate governance system should incorporate the following characteristics:

  • An adequate and transparent organisational structure with a clear allocation and appropriate segregation of responsibilities and an effective system for ensuring the transmission of information. The governance system must be effective and adequate and needs to be subject to regular review.
  • Appropriate written policies: Companies must have written policies in place, including in relation to risk management. They also need to take appropriate steps to ensure continuity and regularity in the performance of their activities.
  • At least four established key functions with segregation of responsibilities and independent from each other: This includes not only the person who exercises the key function but also the staff who deal with the respective tasks.
  • Implementation of contingency plans for the whole company and for the appointment of the Members of Administrative, Management and Supervisory Bodies (AMSB)[1] and key function holders.
  • No negative impact on the governance system and no operational risks due to the outsourcing of key tasks or functions.

Monitoring implementation

In pursuing its goal to achieve consistent supervisory practices, EIOPA monitors the implementation of Solvency II with particular attention to the governance system.

As of January 2016, after the full application of Solvency II, EIOPA has started to conduct peer reviews in the area of governance. The governance system, including the implementation of the risk management system as well as the Own Risk and Solvency Assessment (ORSA) form key parts of the agenda of the supervisors’ colleges.

A supervisory handbook

In many cases, developing and implementing the appropriate and effective governance system requires a cultural change, which needs to start with a clear tone from the top.

EIOPA is also developing a Handbook of good supervisory practices in Solvency II. The chapters on the AMSB and its responsibilities of the key functions and the ORSA governance are already developed and are available for supervisors to use it in day-to-day supervision.

The Handbook is being developed on a step by step basis, setting out good risk-based supervisory practices in different areas of Solvency II based on applicable regulation and guidelines.

The Handbook addresses issues such as the supervision of the AMBS, its effectiveness, and skills and expertise to supervise fitness and propriety.

Ensuring effective implementation

Solvency II governance requirements are important, but equally if not more important, is the implementation of the requirements.

These cannot be viewed as a “compliance exercise” or a regulatory burden. Companies need to look at Solvency II as a tool to foster a true risk culture in the organisation.

Good governance means good management and this is certainly also good for the conduct of business. Getting all this right is an investment and should not be seen as a cost.

Managing cultural change

In many cases, developing and implementing the appropriate and effective governance system requires a cultural change, which needs to start with a clear tone from the top. This is not an instantaneous move. It takes time, commitment and effort.

Senior management has a fundamental role to play here. It needs to set, communicate and enforce a culture that consistently influences, directs and aligns with the strategy and objectives of the business.

Good governance is for good business

Good governance is one of the best tools to achieve policyholder protection and sound business practices. The coming years will be instrumental in delivering these outcomes.

[1] The term Administrative, Management and Supervisory Bodies (AMSB) is used to collectively describe the different types of Boards and management structures across the European Union.

 


‘The Governance Trap: Tracking Behaviour and Change’ is the second event in a series of collaborations between Solvency II Wire and the Centre for Analysis of Risk and Regulation (CARR) at the London School of Economics.

The event was held in London on 3 November 2016, hosted by   Dentons.
If you’d like to learn more about or read articles from the first event in this series, The Governance Trap and the Future of Regulation, please click here.

To receive the next article in the series directly to your inbox and subscribe to the Solvency II Wire mailing list for free, click here.

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