Institute of Corporate Governance of Uganda

1
Institute of Corporate Governance of Uganda

• CORPORATE GOVERNANCE, LEGAL REQUIREMENTS AND THE
  POST-ECON. CRISIS ENVIRONMENT
• PRESENTATION TO INSURANCE REGULATORS
  SUPERVISORS-E.A MEMBER STATES, MALAWI ZAMBIA
• 9TH MARCH,2011
• COMMONWEALTH RESORT HOTEL, MUNYONYO,
• RICHARD WEJULI WABWIRE
• CORA CONSULT

2
Overview of presentation

• Rationale of Corporate Governance for Insurance
  Industry
• Definition of Corporate Governance
• Importance of Corp Governance, in general and for
  insurance industry
• What makes Corporate Governance imperative
• The Legal and Institutional framework for
  insurance regulation
• Core governance principles in insurance
  Regulation
• Post Global financial crisis environment- impact,
  learnings and trends
• Indicators of poor Corporate Governance
• Conclusion

3
What is corporate governance

• The system by which corporations are directed,
  controlled and held to account -Institute of
  Corporate Governance of Uganda
• The means by which members of the board and
  senior management are held accountable and
  responsible for their actions -International
  Association of Insurance Supervisors

4
What is corporate governance

• set of processes, customs, policies and
  systems by which companies are directed,
  administered or controlled. Sir Adrian
  Cadbury-Chairman-Cadbury Schweppes/ Cadbury
  Committee
• ......... a mechanism through which boards and
  directors are able to direct, monitor and
  supervise the conduct and operation of the
  corporation and its management in a manner that
  ensures appropriate levels of authority,
  accountability, stewardship, leadership,
  direction and control.-IFC

5
Corporate Governance is about.

• Direction control
  supervision
• responsibility openness
  integrity
• Monitor authority
  transparency
• accountability stewardship
  leadership

6
Importance of good corporate governance

• Enhances efficiency, profitability and
  sustainability
• Increases shareholder value
• Encourages innovation and value addition
• Enhances confidence, loyalty, stakeholder support
  and corporate profile
• Investors will pay a premium for well-governed
  companies

7
What makes corporate governance imperative

• Endemic corporate ethical scandals- fight against
  corruption, bribery and abuse of corporate power
  
• Public perceptions of corporate greed and short
  termism
• The need to make corporations viable destinations
  for investment in a competitive global market
• Institutional investor pressure
• The realisation that good corporate governance
  has an economic and political payoff
• Risk management initiative by corporations.

8
What makes corporate governance imperative

• Pressure on Directors
• Their roles are increasingly becoming more
  complex, more professional and more demanding.
• Directors need to clearly understand their
  business, roles, duties, responsibilities and
  liabilities
• They need to keep up to date with global
  developments and implications e.g. global
  economic crisis/environmental issues.
• They need to have adequate knowledge of the
  business they direct.

9
What makes corporate governance imperative

• Risk of legal liabilities must act lawfully and
  in good faith in the exercise of their functions.
• Donor/Development partner pressure
• Environmental concerns (lessons from BP oil
  spillage)
• Employee retention -employees are increasingly
  concerned about the profile of their employers
  since it impacts on their own profiles

10
What makes corporate governance imperative

• Increased stakeholder activism
• Is the business legitimate, accountable and
  sustainable
• Is there transparent corporate reporting
• Are stakeholder rights recognised/respected
• fairness and equitable treatment of all
  stakeholders
• ICT-internet and social networking media- amazing
  velocity of information flow and gravitation of
  opinion and following (Tunisia, Egypt, Iran)

11
.

• In today's environment, Corporate Governance is
  not a luxury but a dire necessity to locate and
  weed out corporate crime-

12
Why is Corporate Governance critical for
insurance ?

• Corporate governance is in itself, a core
  principle of the supervisory framework for the
  insurance industry.-IAIS
• It is a handmaid for effective oversight and
  regulation.
• It is therefore imperative for regulators and
  supervisors to fully appreciate the fundamentals
  of corporate governance i.e. put it in context,
  understand its principles, best practices, risk
  management issues, board dynamics etc .

13
The legal and institutional framework

• Across our jurisdictions, the Insurance laws
  require that Insurers are bodies corporate
  (Insurance Act s.4. Uganda, s.22 Kenya and s24
  Tanzania)
• i.e. entities separate from the owners and
  capable of contracting, suing and being sued etc
• Consequently insurers are subject to governance
  requirements stipulated by the provisions of the
  Insurance Acts and the Company laws

14
Legal Institutional framework

• The laws and corporate governance standards and
  practices are enforced under an industry specific
  Regulatory framework
• The Insurance Acts of the respective
  jurisdictions- Tanzania, Uganda, Kenya, Zambia
  Rwanda
• Regulations/subsidiary legislation enacted under
  the Acts
• Company Laws
• These laws set out the bedrock for corporate
  governance standards.
• The Ministries of Finance exercise
  political/policy oversight on the industry
• In some of the jurisdictions, the Central Bank
  has direct supervision over the insurance
  industry

15
Legal institutional framework

• The Insurance Acts establish
• Kenya -Insurance Regulatory Authority
• Tanzania -Tanzania Insurance Regulatory Authority
• Uganda -Insurance Commission
• In Uganda, the Act also envisages the formation
  of and requires subscription to insurance
  industry professional Associations
• In Tanzania, the Act provides for the services of
  an industry Ombudsman

16
legal and institutional framework

• Insurance business is required to be conducted by
  duly incorporated corporate entities
• In Kenya, Uganda and Tanzania, no person can be
  registered to carry on insurer business unless
  that person is a body corporate incorporated
  under the companies Act
• There are additional requirements for a minimum
  prescribed portion of ownership to be held by
  citizens of some of the jurisdictions.

17
Legal framework- principle legislation on
insurance

• The Insurance Act, Cap 213, Laws of Uganda An
  Act to amend and consolidate the law relating to
  insurance and to regulate the business of
  insurance
• The Insurance Act, Cap 487, Laws of Kenya An
  Act of Parliament to amend and consolidate the
  laws relating to insurance and to regulate the
  business of insurance
• The Insurance Act, 2009, Laws of Tanzania-An Act
  to establish the Tanzania Insurance Regulatory
  Authority, to provide for its functions in
  regulating and supervising insurance business.
• The Insurance Act-Zambia An Act to make
  provision relating to the carrying on of
  insurance business.

18
Core governance principles in Insurance
legislation

• Governance
• Suitability of persons
• Changes in control and portfolio transfers
• Internal control
• On-site inspection
• Risk assessment and management
• Information, disclosure and transparency.

19
Corporate Governance

• CG framework recognizes and protects the rights
  of all interested parties.
• Consequently, the Regulators role is to require
  compliance with all applicable corporate
  governance standards, principles and practices by
  the insurer
• The Insurance legislation from the different
  jurisdictions broadly grants a wide ranging
  mandate of governance over the insurance industry
  policy holder protection.

20
Corporate Governance

• Insurance Act-Kenya s 3A ..to ensure the
  effective administration, regulation and control
  of insurance, to formulate and enforce
  standards..license,.protect the interests of
  insurance policy holders and beneficiaries.
• Insurance Act-Tz s 6to promote and maintain
  an efficient, fair, safe and stable insurance
  market.,to regulate and coordinate
  activitieseffect supervision and monitor
  insurers.formulate standards in the conduct of
  business
• Insurance Act-Ug s 15to ensure effective
  administration, supervision, regulation and
  control of business of insurance, license.
  provide a bureau to which complaints may be
  made.ensure strict compliance with this Act and
  any other law relating to insurance..

21
Corporate Governance

• The board (by whatever name called)is the focal
  point of the corporate governance system.
• The Board is therefore ultimately accountable and
  responsible for the compliance, performance and
  conduct of the business
• It is a legal imperative for insures to have
  Boards of directors and to submit the particulars
  and any changes of directors to the Regulator.

22
Corporate Governance

• Regulators therefore need to have mechanisms in
  place by which they can require and ascertain
  compliance, by the Board, with the laws and
  with corporate governance practices.
• Regulators should ascertain and ensure that
• Insurer Boards have in place mechanisms for, and
  that they do independently monitor risk.
• the Insurer establishes standards of business and
  ethical behavior conduct for directors, senior
  management and others.

23
Corporate Governance.the Regulator should ensure
that

• The Insurer complies with all relevant laws,
  regulations and established codes of conduct
• The insurer identifies officers with
  responsibility for ensuring compliance with
  legislation and corporate governance standards
• The insurer board has knowledge, skills,
  experience and commitment to oversee the insurer
  business effectively.
• The insurer Board communicates with the regulator
  as required.
• The Board Sets out policies that address
  conflicts of interest etc

24
Suitability of persons- key functionaries

• Initial and on-going assessment of the
  suitability of insurers is a critical aspect of
  supervision and regulation
• The key functionaries i.e. significant owners,
  board members, senior management, auditors and
  actuaries should be suitable/fit and proper for
  their roles.
• Prior to licensing, the Regulators you should
  satisfy themselves as to
• competence and integrity of the administration
  and management of the applicant

25
Suitability of persons- key functionaries

• The Financial Status and antecedents of the
  applicant and
• Adequacy of the applicants capital structure,
  earning prospects, etc and
• Whether the public interest would be served by
  granting the license.

26
Suitability of persons- competence and integrity

• Insurers are required to furnish details of their
  directors (executive and non-executive) and
  technical personnel to the regulator
• The following persons cannot be officials or
  directors of insurance companies
• Person who has been responsible for mismanagement
  of an insurance company, financial institution,
  insurance or security brokerage firm or any other
  investment concern
• Ex-convict of any offence involving fraud or
  dishonesty
• Adjudged bankrupt

27
Suitability of persons- competence and integrity

• Insurance Act of Kenya-s27/27A Qualification of
  Board members- knowledge, experience in
  insurance, actuarial studies, accounting, finance
  or banking.
• Insurance Act of Uganda-s30 Factors to be
  considered in an application for a grant of
  license -the competence and integrity of the
  proposed management and administration, the
  financial status and antecedents of the
  applicant..

28
Suitability of persons- capital structure

• The jurisdictions set a minimum capital
  requirement to enable one to be licensed as an
  insurer.
• Distinctions are drawn between requirements for
  local and foreign companies.
• The laws of Kenya also require that a certain
  percentage of the paid-up capital must be held by
  a citizen of Kenya
• Kenya Insurance Act requires that share capital
  must consist of only ordinary shares of single
  face value

.
29
Suitability of persons

• The Insurance Act of Kenya also requires that
• 1/3 of board are Kenyan citizens
• Board has at least 5 members
• All members of the board must write to the
  commissioner accepting appointment

30
Suitability of persons- proof

• The onus to prove suitability of the key
  functionaries lies with the insurer
• Proof can be by submission of documentary
  attestation to virtue or quality claimed or
  inquired into by the Regulator.
• Auditors and Actuaries should be checked for
  professional qualifications and proficiency,
  practical experience and knowledge update
• For Auditors, actuaries etc you may refer to
  professional bodies for verification of
  suitability

31
Suitability of persons- role of the regulator

• It is the role of the Regulator to ascertain that
  the key functionaries (Board and Management)
  posses the appropriate integrity, competency,
  experience and formal qualifications, no conflict
  of interests at all times.
• Regulators should continually assess fitness and
  propriety of the key functionaries on an on-going
  basis and not as a one-off event.

32
Suitability of persons- role of the regulator

• The Regulator/supervisory authorities have the
  discretion to disqualify the appointment of key
  functionaries including auditors and actuaries
  who do not meet proper requirements
• Where necessary, Regulators should share
  information with other entities to ascertain
  suitability of key functionaries- but caution-be
  mindful of ethical, confidentiality and legal
  compliance issues.

33
Changes in control

• Whereas the companies laws allow for acquisition
  and transfer of shareholding,- generally without
  limitation.
• The Insurance legislation puts some limitation to
  shareholding and changes in shareholding which
  may affect control of insurer companies

34
Changes in control

• Insurance Act of Kenya s23(4A) no person shall
  be beneficially entitled, directly or indirectly,
  to more than25 of the listed share capital or
  voting rights of an insurer..or entitles to
  appoint more than 25 of the Board of
  Directors.to receive more than 25 of the
  aggregate dividends of an insurer in any FY..
• Insurance Act of Uganda s38 ..any insurance
  company.shall not make any modification in its
  memorandum or articles of association or other
  document under which the company was established
  without approval of the commission

35
Changes in control

• These provisions of the law are a check on the
  unfettered acquisition of significant ownership
  or other interest in an insurer company that may
  result in one person or entity having control
  over the company.
• What should the Regulator do?
• Exercise prudent discretion to grant or deny
  desired changes.
• ensure that changes do not undermine policy
  holders benefit expectations or policy value.
• The Regulator must be satisfied that the changed
  status meets the minimum criteria and standards
  applicable to the pre-change circumstances (i.e.
  licensing, benefits, value etc)

36
Internal control

• Insurers are required to have in place adequate
  control frameworks.
• Purpose of internal control should be to ensure
  that
• The insurers business is conducted in a prudent
  manner consistent with the policies and company
  strategies
• Transactions are only entered into transparently
  and with appropriate authorities
• Assets are safeguarded
• All records (accounting etc) provide complete,
  accurate, verifiable and timely information
• Management is able to identify, assess, manage
  and control business risks
• A system of internal controls provides a
  systematic and disciplined approach to business
  execution and enhances regulatory compliance.

37
Internal control- what should the Regulator
require?

• Internal controls should address accounting
  procedures and management information
• That the insurer should have an in-house
  /internal audit function which ensures compliance
  and review of policies and procedures and
  constantly reviews robustness of controls,
  policies etc
• The audit function should have reporting lines to
  insurers board, unfettered access to insurer
  business and be sufficiently resourced
• Evidence of proper records keeping and management
• Insurer Board and management oversight over
  conduct of market activities
• There should be oversight and reporting systems
  that allow the Board and management to
  effectively monitor and where appropriate,
  control operations.

38
Internal control- what should the Regulator
require?

• The Insurance Act of Kenya s56 - The accounts of
  every insurer shall be audited annually by an
  auditor
• The Insurance Act of Kenya S9 - limitations on
  insurer lending to or investing in related
  company
• The Insurance Act of UgandaS43 - loans to
  associate companies prohibited
• The Insurance Act of Uganda S42- loans to own
  officers or directors by insurer restricted.
• The Insurance Act of Kenya S71- limitation on
  management expenses
• The Insurance Act of Kenya S69 restrictions on
  form of directors and managers remuneration

39
On-site inspection

• The objective of on-site inspection should be to
  examine and ascertain compliance, by the insurer,
  with legislative and supervisory requirements.
• The Regulators are widely mandated to conduct
  inspections to examine the business of insurers
  for regulatory compliance and to gather industry
  information.
• Insurance Act of Tanzania s142 the commissioner
  may for the purpose of ensuring compliance
  ..conduct on site inspection of any person
  registered under this Act
• Insurance Act of Kenya s67 and Insurance Act of
  Uganda s56 likewise provide for inspection by
  the Supervisor or a duly authorized person

40
On-site inspection- typical activities for
on-site inspection

• Evaluation of management and internal control
  system
• Evaluation of technical conduct of insurers
  business
• Evaluation of compliance with corporate
  governance standards
• Check sufficiency and adequacy of information
  given to consumers
• Assess regulatory compliance
• The Supervisor/Regulator should share their
  findings with the Insurer and also follow up to
  ensure implementation of the recommendations

41
On-site inspection - benefits of on-site
inspection

• Reliable verification of data
• Effective assessment of insurers management
  competence
• Effective assessment of impact of specific
  aspects of regulation
• Good for collecting benchmarking data
• The Cost of on-site inspection should be borne by
  supervising Authority

42
Insurance regulator has to put a premium on
supervision to build confidence Mon Feb 28,2011

• A firefighter at work IRA should institute
  risk-based and on and off-site supervision to
  tackle the perennial collapse of insurers.

43
Risk assessment and management

• Insurers are expected to identify, understand and
  manage risks that face them
• Look out for industry specific and generic risks
  e.g. underwriting risks , interest rates,
  operational, legal, organizational risks
• Insurers must have effective and prudent risk
  management systems in place DRP, Business
  continuity plans.
• Regulators must ensure appropriate Regulations
  are in place to contain risk. Eg prohibitions of
  loans to affiliates, directors etc
• Insurance Act of Uganda s98, Insurance Act of
  Kenya s1A and Insurance Act of Tanzania s11
  mandate the supervisors to make regulations in
  consultation with the minister or to so advise
  the minister

44
Risk assessment and management

• Regulators also play a critical role in risk
  management by reviewing and monitoring controls
  exercised by the insurer
• Ensure that insurers have in place
• Risk management policies
• Risk control systems
• Conduct regular review of market environment
• It is good corporate governance practice to have
  a fully fledged risk management function and to
  allot specific Board attention to risk management
  and control

45
Information, disclosure and transparency

• Company and insurance legislation across the
  jurisdictions is very elaborate and explicit on
  the requirement for disclosure of information -
  financial and non-financial
• Insurers are required to periodically and on
  demand disclose relevant information.
• Insurers are required to produce annual audited
  financial statements and avail them to
  stakeholders.
• It is the role of the Regulator to monitor the
  information disclosed and take necessary measures
  to ensure compliance with disclosure
  requirements.

46
Information, disclosure and transparency

• Information disclosed should be
• Accurate, complete, comprehensive, consistent and
  correct to facilitate market decisions
• Timely and up to date
• Accessible without undue access or delay
• The laws mandate the Regulators to take action,
  including prosecution, penalties etc to ensure
  effective and relevant disclosure Part VI
  Insurance Act Kenya, Part IV Insurance Act Uganda
  , Part III Insurance Act Tanzania
• Regular and proper disclosure facilitates market
  efficiency, fairness and stability

47
Post Financial crisis - learnings for Insurers

• In the wake of the financial crisis, many
  financial corporations suddenly seemed to be
  built like a park of cards and not grand castles.
  Eyes turned naturally to the firms architects,-
  the corporate Boards and directors and their role
  in contributing to the rapid losses

48
Post Financial crisis - learnings for Insurers

• Corporate governance lapses contributed
  significantly to the collapse of banks and
  financial institutions
• Director incompetence
• Directors did not understand the businesses they
  directed
• Failed to adequately identify, monitor and
  control risk
• Authorized difficult to understand high-risk
  transactions
• Failed to exercise independence of judgment in
  oversight
• Manipulative accounting policies thrived
• Disregard or lack of minority shareholder rights

49
Impact of crisis on Insurance

• The general consensus is that the insurance
  sector was not the source of financial
  instability.
• Only insurers who were a part of financial
  conglomerates e.g. AIG and Fortis were directly
  impacted, none the less
• Asset melt down
• Economic contraction leading to dampening of
  demand for cover, both corporate and household
• Claims settlements under Directors Officers
  (D)) as well as Errors Omissions(EO) policies
  
• Unrealized investment losses
• General economic slow down 2009- 2010, impacted
  the industry.

50
Some victims of the financial crisis
51
The post-financial crisis environment-learnings
trends

• The Financial crisis did not question the basic
  business model of the insurance industry i.e.
  insurance risk underwriting- there was no
  shortage of cover or failure to meet policy
  obligations.
• None the less, the crisis has been a re-awakening
  call and a lesson on the importance of corporate
  governance and regulatory compliance
• There is a move to ensure that regulation is
  adequate and effective, Streamlining of
  supervisory activities across the financial
  sector

52
The post-financial crisis environment-learnings
trends

• The financial and insurance sectors are
  interdependent, insurance needs a strong,
  effective and efficient financial system to
  thrive.
• so reforms in the finance sector framework
  inevitably affect insurance.

53
The post-financial crisis environment-learnings
trends

• Regulatory convergence
• Industry is moving away from domestically focused
  regulation and supervision to face the reality
  of cross-border insurance operations.
• Solvency II Reforms international benchmark and
  reference model for insurance regulation.
• There is intent to close existing regional and
  international regulatory gaps and disparities..,
  EAC others Commonwealth workshop good start!.

54
The post-economic crisis environment-learnings
trends

• The Insurance industry is keen to establish
  clarity of distinction between mainstream
  financial sector activities and insurance to
  mitigate effects of inaccurate assumption that
  banks and insurers offer similar services and
  therefore also pose same risks to financial
  stability
• e.g. what would be the impact on the cost of
  insurance of introducing overly prudent capital
  requirements on insurers
• Uganda has currently tabled The Insurance
  (Amendment) Bill, 2010 to delink The Insurance
  Commission from supervision of the Central bank,
  enhance corporate governance etc
• The financial crisis has reinforced the
  importance of strong independent risk management
  initiatives across finance and insurance sectors

55
The post-economic crisis environment-learnings
trends

• Directors must now accept primary responsibility
  for corporate governance and performance
• Corporate governance is increasingly recognized
  and accepted as of key strategic and economic
  benefit to companies
• Debate for and against high-profile super star
  CEOs and managers OR responsible leadership is
  raging(NSSF, UWA ,NFA, MUK, MUBS, Banks etc)

56
King Another crisis looming

• THE governor of the Bank of England has warned of
  another banking crisis unless important reforms
  take place in the financial sector.
• In an interview with British newspaper "The Daily
  Telegraph", Mervyn King said that the problem of
  banks being "too big to fail" had "not been
  solved" and that imbalances in the banks "are
  beginning to grow again." March 05, 2011 1144PM

57
What should you be doing as a Supervisor/Regulator

• Provide guidance to Insurers on sound proactive
  corporate governance practices
• Consider corporate governance as one element of
  policy holder protection
• Determine whether Insurers have adopted
  effectively implement sound corporate governance
  policies practices
• Assess the quality of Insurers audit and control
  functions
• Bring to the board of directors and managements
  attention problems that you detect through your
  supervisory efforts
• Use your position to help avert another financial
  crisis- in your local jurisdiction, region or
  globally!

58
Indicators of poor corporate governance

• No distinction between ownership and management,
  especially in large companies.
• No distinction between Board and shareholders in
  large companies.
• Fused Chairman and Chief Executive.
• Domineering Chairman and CEO
• Poor human resource management.
• No clear understanding of the different roles of
  the Board and Management (Policy vs. Operations).
  
• Poor accounting/auditing practices
• Complex businesses
• Complex ownership structure
• Poor corporate communication policies (internal
  and external)

59
Conclusion

• Good governance entails a combination of
  statutory compliance and compliance with
  corporate governance principles and practices.

60
THANK YOU!