In 2014, the Financial Condition Committee of the National Association of Insurance Commissioners (“NAIC”) completed an almost five year study on corporate governance in the insurance business. Both a Corporate Governance Annual Disclosure Model Act and supporting Model Regulation were adopted. The underlying purpose was said to be to allow insurance regulators to receive on an annual basis additional information on corporate governance of insurers domiciled in the United States.1 Generally speaking, under the Model Act, to the extent the Model Act has been adopted in an insurer’s home state, the filing of detailed information describing governance practices will be required. While relatively few states have adopted the Model Act at this point, it is anticipated that these filings in states which have done so will commence on or about June 1, 2016. Information in the filing will enjoy confidentiality protection to encourage open and transparent disclosures by insurers to their regulators.
In Louisiana, legislation substantially similar to the Model Act was adopted by means of Act 304 of the 2015 legislature mandated to be effective as of January 1, 2016 (the “Louisiana Act”).2 As of September 9, 2015, Louisiana was one of only five states to have adopted legislation comparable to the Model Act. The other states are California, Indiana, Iowa and Vermont. Rhode Island is considering adoption, but no other state had taken action on the Model Act as of that date.
Louisiana has followed through and has also adopted Regulation 104 (the “Louisiana Regulation”) which is substantially similar to the Model Regulation. Even before the adoption of the Louisiana Act and Louisiana Regulation, the Louisiana Department of Insurance (the “LDOI”) manifested a keen interest in insurer corporate governance. This is in keeping with the fact that the five year review process of this subject matter by the NAIC took place, in part, during Louisiana Insurance Commissioner James J. “Jim” Donelon’s leadership tenure in the NAIC.3 Commissioner Donelon’s staff has also been heavily involved in NAIC work during this period.
The LDOI’s interest prior to the adoption of the Louisiana Act and the Louisiana Regulation took the form of written and oral questions to board members and executives of domestic insurers on governance, structure and practices. These included inquiries into the actual composition and structure of boards of directors, number and percentage of outside directors not affiliated with ownership or management, background and experience of directors, and numerous questions designed to test the board’s knowledge of operations, risk assessment and strategic direction of the insurer. Similar questions were also asked of upper management. A financial examination essentially covers a past time period and looks at the insurer in the “rearview mirror” in an effort to determine its financial prospects and direction. With more and better information on governance, regulators can look forward and make a better and more complete determination of an insurer’s financial prospects and direction by better understanding management, structure, experience and knowledge. Clearly, Louisiana has been one of the leaders in this area in the United States.
The Model Act and Model Regulation and reporting thereunder constitute an attempt to ensure that applicable regulators have a comprehensive understanding of the corporate governance structure, policies and practices utilized by the insurer.4 This will include such things as:
- The insurer’s corporate governance framework and structure, including duties and structure of the board of directors and its committees;
- Policies and practices of its board of directors and significant committees, including appointment practices, the frequency of meetings held and review procedures;
- The policies and practices directing senior management, including a description of defined suitability standards, the insurer’s code of conduct and ethics, performance evaluation and compensation practices and succession planning; and
- The processes by which the board of directors, its committees and senior management ensure an appropriate level of oversight to the critical risk areas impacting the insurer’s business activities, including risk management practices, the actuarial function and investment, reinsurance and business strategy decision-making processes.5
While a complete description of the filing requirements and content requirements for the filing under the Louisiana Regulation are beyond the scope of this article, some of its highlights include the filing of a document referred to as the Corporate Governance Annual Disclosure or CGAD on an annual basis by an insurer subject to its application. There are no size exemptions under the Louisiana Act or the Louisiana Regulation. Indeed, a health maintenance organization is deemed to be an insurer for purposes of a CGAD filing.
The CGAD filing must take place no later than June 1st of each calendar year and must contain information described in Section 207 of the Louisiana Regulation.6 The filing must include an attestation by the Chief Executive Officer or Corporate Secretary stating that, to the best of that individual’s belief and knowledge, the insurer has implemented the corporate governance practices cited therein and a copy of the CGAD has been provided to the insurer’s board of directors.7 The insurer has some discretion with respect to the appropriate format and, as of the date of publication of this article, the LDOI has advised that it does not intend to prepare a template or a form for purposes of this filing.8 The insurer is required to file such a CGAD report annually.
As to the content of the CGAD, the insurer must describe its corporate governance framework and structure including the board and various committees with oversight responsibility.9 The duties of the board and each of its significant committees must be discussed, including how they are governed, whether through bylaws, charters, informal mandates, etc.10 The filing must include information on the qualifications, expertise and experience of board members and how it meets the needs of the insurer, along with information on independence from management, the nomination process and board diversity.11
Policies and procedures for directing senior management must be described, including appropriate background experience and integrity to perform their roles.12 Information on the insurer’s code of business conduct and ethics, compliance with laws, rules and regulations, and proactive reporting of any illegal or unethical behavior should be included.13
Processes for performance evaluation, compensation and corrective action to ensure effective senior management should be detailed along with the board’s role in overseeing management compensation and practices.14 Further, the insurer’s process for board, committee and senior management succession is to be provided.15
The insurer must describe the processes by which the board, its committees and senior management ensure the appropriate amount of oversight to critical risk areas, including how such responsibilities are delegated between the board, its committees and senior management, how the board is kept informed of the insurer’s strategic plans and associated risks.16 The description should allow the LDOI to understand the frequency at which information on each critical risk area is reported to and reviewed by senior management and the board.
This article contains but a mere synopsis of the detail that must be included within the CGAD filing each year. There are considerably more detailed and more specific questions which must be answered and with respect to which narrative must be provided. The process of review and completing the filing is useful because it allows the insurer to understand what the regulators believe constitute best practices for the corporate governance of insurers. This was one of the specific intentions of the NAIC Model Act and Model Regulation, in effect, to encourage and move insurers toward governance best practices.17 An insurer which finds itself year over year not having answers to the questions implicit in the contents section of the CGAD filing might well conclude that they are not in compliance with best practices.
1. Press Release, NAIC Committee Adopts Corporate Governance Models, National Association of Insurance Commissioners and the Center for Insurance Policy Research Release, August 18, 2014 [hereinafter Press Release].
2. La. R.S. 22:691.51, et seq.
3. Among other positions in the NAIC during this period, Commissioner Donelon served as NAIC President in 2013.
4. Press Release.
6. Reg. 104, LAC 37:XIII.201, et seq. (“Corporate Governance Annual Disclosure”).
7. Id. at § 37:XIII.205.B.
8. The authors have prepared such a template to aid insurers subject to the filing requirement to make this filing, and that template can be secured by contacting one of the authors at the contact information listed above.
9. Reg. 104, LAC 37:XIII.207.B.
10. Id. at 37:XIII.207.B.1.
11. Id. at 37:XIII.207.C.
12. Id. at 37:XIII.207.D.1.
13. Id. at 37:XIII.207.D.2.
14. Id. at 37:XIII.207.D.3.
15. Id. at 37:XIII.207.D.4.
16. Id. at 37:XIII.207.E.
17. Press Release.