Finance

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Finance Investment Conference
abcd
Challenges to Best Practice in Corporate
Governance in Life Offices Graham Cottingham,
Brian Morrissey

• 22-24 June 2003
• The Caledonian Hilton Hotel, Edinburgh

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Agenda

• Introduction
• Emerging themes
• Life office challenges
• Value?
• Discussion

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Introduction

• High profile failures
• Emotional response - legislation
• but failures arose through illegal acts
• What about corporate culture and trust?
• Separation of ownership and control
• Actuaries responsible for both
• Wider opportunities to apply actuarial skills for
  the improvement of corporate governance

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Emerging Themes

• Regulatory focus on management and internal
  control
• senior management
• a regulatory regime built on senior management
  responsibilities is absolutely essentialexpect
  the CEO to ensure that there is a risk management
  structure and a control framework throughout the
  business which ought to identify aberrant
  behaviour, or at least prevent it going on
  unchecked for any length of time (Howard Davies)
• managers more generally
• requirement for supervisors to have direct access
  to the Board, and that they present to the Board
  their own unvarnished views of the risks the firm
  is running, and of how good the control systems
  are by comparison with the best of breed in their
  sector (Howard Davies)

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Emerging Themes

• Regulatory focus on management and internal
  control
• Executive reward
• overreaching into shareholders pockets has
  become common but few hands have been slapped
  when the compensation committee reports on a
  mega-grant of options to the CEO, it would be
  like belching at the dinner table for a director
  to suggest that the committee reconsider.
  (Warren Buffet)

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Emerging Themes

• Regulatory focus on management and internal
  control
• Executive reward
• Shareholder activism
• Quality of (independent) directors

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Life office challenges

• With profits
• Transparency and disclosure
• Current and anticipated returns and bonus levels
• Disclosure of Asset Share Values
• Relative positions of surrender values, ASVs and
  maturity values
• Mis-selling
• Shortfalls
• Equitable Life
• Defined benefit pension scheme shortfalls
• International inconsistencies in governance
  standards

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Life office challenges

• CP 167
• this package of measures will shine a
  searchlight into life insurers' boardrooms show
  how discretion is exercised in with-profits funds
  and ensure that boards and senior management are
  accountable not only for the decisions they take
  but also for ensuring that they obtain actuarial
  advice where appropriate demonstrate that they
  have given proper attention to policyholders'
  interests. (John Tiner)

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Life office challenges

• CP 167
• Appointed actuary - RIP, long live the
  actuarial function!
• Board responsibility for statutory figures
• With profits committee
• Principles and Practices of Financial Management
  (PPFM)
• Extended scope of regulatory returns audit
  expected
• Obscurity of insurance accounting
• Absorbing and responding to legion of reports,
  codes, regulations, laws, accounting
  standardsUK, EU...

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Life office challenges

• Ownership and control
• Policyholders
• Shareholders
• Other stakeholders
• Management
• Inadequate ability for policyholders to use
  voice rather than exit

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The Value of Good Corporate Governance

• Reputation
• Capital Markets exposure
• Empirical research into the value of best
  practice
• 11-16 outperformance in UK and US companies
• Clear evidence of long term reward strategies
  adding value
• Data sources
• DJSI
• FTSE4Good
• HCI
• Reservations
• Impact of market falls?
• Greater integration of different governance
  measures

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The Role of the Actuarial Profession

• Influence
• Responsibility
• Qualifications and experience
• Are YOU up to the challenge?

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Discussion

• Should the provision of greater voice be provided
  to policyholders? If so, how?
• What are the barriers to transparency and
  disclosure?
• Who should be driving change?
• What are your main corporate governance concerns?

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Corporate Governance Working Party

• There are many ways in which the Actuarial
  profession can make a positive contribution to
  improving Corporate Governance.
• The Corporate Governance Working Party was
  established last year to encourage research and
  discussion.
• New members are welcome - there is no shortage of
  subject matter!
• Graham.Cottingham_at_PolicyPlus.com 01225 473115