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Corporate governance post-Penrose Michael Culligan Presented at a seminar of the Society of Actuaries in Ireland “Life Assurance – A brave new world”. 20 May 2004. Penrose Report. Penrose Report into Equitable Life Commissioned in August 2001

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Corporate governance post-PenroseMichael CulliganPresented at a seminar of the Society of Actuaries in Ireland“Life Assurance – A brave new world”

20 May 2004

penrose report
Penrose Report
  • Penrose Report into Equitable Life
  • Commissioned in August 2001
  • To investigate and report into Equitable Life and identify any wider lessons for conduct/regulation of life assurance
  • Report delivered in March 2004
  • Quite a wait…but well-received when eventually published
  • Critical of
    • management & directors
    • regulators
    • actuarial profession
  • 800 pages long!
corporate governance 1
Corporate governance (1)
  • System by which companies are directed and controlled
  • Boards of directors are responsible for the governance of their companies.
  • Shareholders’ role is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place
  • Responsibilities of the Board include
    • setting the company’s strategic aims
    • providing the leadership to put them into effect
    • supervising the management of the business; and,
    • reporting to shareholders on their stewardship.
  • The Board’s actions are subject to laws, regulations and the shareholders in general meeting.
slide4

Corporate governance (2)

  • So, it’s about how corporations are governed
    • “Does exactly what it say on the tin”!
  • Clear that the Board is placed squarely at the centre of things
  • This applies to all companies
  • But, life assurance companies are “special”
    • bring their own issues
    • can prove tricky to accommodate within generic framework
  • True of mutuals in particular
    • don’t intend to consider mutuals
    • Penrose absolutely scathing on their structures
    • UK Treasury has launched independent review
  • Will focus on shareholder-owned companies
agenda
Agenda
  • Current corporate governance structures
  • Issues raised by Penrose
  • Recent UK regulatory changes
  • Possible implications for the Irish regulatory regime
  • Conclusions
irish corporate governance 1
Irish corporate governance (1)
  • Every company has a Board of Directors
    • No rules re size (other than min. 2 people)
    • No rules re qualifications
    • No single statement of directors’ responsibilities
  • Normally, a mix of execs and non-execs
    • No distinction in law
    • No law governing the mix (but code for listed companies)
  • Clear rationale for appointing non-execs
    • Can make a valuable contribution to decision making process
    • Can help to formulate strategy
    • Most importantly, bring an element of independence and objectivity
irish corporate governance 2
Irish corporate governance (2)
  • For life offices, IFSRA have power of veto over Board appointments
    • Board nominations subject to IFSRA approval
    • “Fit and proper” test
  • For new companies, approval of initial Board is part of overall approval process
    • Subsequent nominations subject to approval as above
  • Allows IFSRA to influence:
    • make-up of Board
    • skills, knowledge and experience of Board as a whole
    • balance between execs and non-execs
  • Influence may be more theoretical than practical
irish corporate governance 3
Irish corporate governance (3)
  • Generally held that Board is responsible for all aspects of the company’s business
  • IAIS core principle on corporate governance:
    • “…the board is the focal point…”
    • ”…it is ultimately accountable and responsible…”
  • IFSRA also clear about role of the Board:
    • “…ultimate responsibility lies with the Board and senior management”
irish corporate governance 4
Irish corporate governance (4)
  • Position complicated by the statutory Appointed Actuary role
  • Appointed Actuary has Board as his/her principal
    • but also has a duty to IFSRA and to policyholders
  • Appointed Actuary’s annual investigation not subject to Board sign-off
  • Also, not subject to audit
  • Means that almost all of the liabilities side of the balance sheet (in IFSRA Returns) is dictated by one individual
agenda1
Agenda
  • Current corporate governance structures
  • Issues raised by Penrose
  • Recent UK regulatory changes
  • Possible implications for the Irish regulatory regime
  • Conclusions
penrose introduction
Penrose – introduction
  • UK arrangements were broadly similar to those outlined for Ireland
    • formed backdrop to Penrose’s report
  • Will examine his conclusions in relation to corporate governance
  • His report dealt with one company, but many findings have more general application
  • Report covered a range of governance issues
    • role of directors
    • role of audit committee
    • role of actuaries etc
  • Will concentrate on role of directors
penrose on directors 1
Penrose – on directors (1)
  • Composition of Equitable Board
    • gradual shift from non-execs to execs
  • Penrose clearly viewed strongnon-exec presence as desirable
  • Also clearly viewed Board’s as having ultimate responsibility for all matters
  • However, problems with this in practice
    • skills and experience of actuarial matters?
    • able to make independent judgements on actuarial issues?
penrose on directors 2
Penrose – on directors (2)

Penrose saw four main problems:

  • non-execs “ill-equipped to manage a life office by training or expertise”
  • directors “totally dependent on actuarial advice”
  • directors unable to “assess the advice…and challenge the actuaries”
  • actuaries on the Board inhibited by professional guidance
  • Criticisms cover Board’s oversight of all actuarial work
penrose on directors 3
Penrose – on directors (3)
  • Not everyone agreed with his conclusions
    • representations from some non-execs
    • felt that his criticisms set unrealistic standards for non-execs
  • But, Penrose did not accept this
    • difference between ability to do technical actuarial calculations and ability to understand the results of actuarial work
  • Also, further representations from some non-execs
    • “absurd” to expect non-execs to challenge actuaries when auditors and regulators had not
  • Penrose’s response:
    • to accept this line of argument would have profound significance for the governance of life offices
summary of current position
Summary of current position

In summary:

  • Regulators want to emphasise primacy of Board
  • But, practical problems with ability of Boards to oversee the actuarial function independently
  • And, non-executives may feel it unreasonablefor them to understand and take responsibilityfor actuarial matters
  • How do we square this circle?
possible options
Possible options

Two possible options:

  • regulator ensures that Boards have requisite actuarial skills
  • regulator makes clear to Boards that they are ultimately responsible and should take necessary actuarial advice
  • Potentially a third option
    • regulator bypasses the Board and takes direct responsibility for overseeing actuarial function
    • not realistic
  • Regulator unlikely to go for first option
  • Second option provides potential way forward
agenda2
Agenda
  • Current corporate governance structures
  • Issues raised by Penrose
  • Recent UK regulatory changes
  • Possible implications for the Irish regulatory regime
  • Conclusions
developments in the uk 1
Developments in the UK (1)
  • Fundamental overhaul of regulation by FSA
  • CP167 on governance issues
    • final proposals published in June 2003 (after consultation)
  • Driven/influenced by with-profits issues
    • not going to focus on with-profits issues
    • focus on issues affecting all insurers
  • First main change is the removal of the Appointed Actuary role
  • New role – “Actuarial Function Holder” (AFH) – created instead
    • AFH’s role is to advise directors on actuarial issues
    • can be either employee or external consultant
    • may a director, but not be CEO or Chairman
developments in the uk 2
Developments in the UK (2)
  • Directors are responsible for the methods and assumptions
    • AFH’s role is an advisory one
  • Returns to FSA will include a cert. from the Board re value of long-term liabilities
  • Other major change is extension of audit
    • long-term liabilities now to be subject to review by actuary advising the auditors (“Reviewing Actuary”)
  • Peer review of AFH?
  • In summary, new regime brings fundamental change
    • Appointed Actuary’s sole responsibility removed
uk developments vs penrose
UK developments vs. Penrose
  • How well do these measures address Penrose’s criticisms?
  • Penrose less concerned with detail of new proposals than with overall result
  • Key question for him was how to ensure “independent and effective actuarial audit”
  • New UK system achieves this (through auditors’ Reviewing Actuary)
  • But, is change from AA to AFH really necessary?
  • Would peer review of the AFH really addmuch value?
agenda3
Agenda
  • Current corporate governance structures
  • Issues raised by Penrose
  • Recent UK regulatory changes
  • Possible implications for the Irish regulatory regime
  • Conclusions
implications for ireland
Implications for Ireland?
  • Historically close ties with UK
    • industry
    • actuarial profession
  • Given scale and high-profile nature of UK changes, likely to put it on the agenda in Ireland
  • Society of Actuaries in Ireland (SAI) conscious of this
  • Society has developed a set of proposals for discussion with IFSRA
  • Proposals intended to address criticisms of existing regime
  • Echo broad thrust of UK changes, but differ in certain key respects
sai s proposals 1
SAI’s proposals (1)
  • Position of Appointed Actuary to be retained
    • AA to retain responsibility for deciding on methodology and assumptions
    • AA to continue to sign off as at present
  • Scope of directors’ certificate to IFSRA to be extended
    • to include certifying the value of long-term liabilities
  • Wording of auditors’ certificate to IFSRA to be changed
    • remove reliance on AA’s certificate
    • matter for auditors to decide amount and source of actuarial advice they need
sai s proposals 2
SAI’s proposals (2)
  • Proposals have much to recommend them
  • Clearly extend responsibility for signing off on long-term liabilities to Board and to auditors
  • But, are not unnecessarily prescriptive about nature or amount of actuarial advice each should take
    • Directors free to engage independent actuarial advice if desired
    • Auditors would almost certainly take some advice, but this is left to them to decide
  • Less prescription is important practical point
    • UK approach would bring significant extra cost for little extra benefit?
    • Take example of purely unit-linked office
  • Proposals form solid base for dialogue withIFSRA
agenda4
Agenda
  • Current corporate governance structures
  • Issues raised by Penrose
  • Recent UK regulatory changes
  • Possible implications for the Irish regulatory regime
  • Conclusions
summary and conclusions
Summary and conclusions
  • Current corporate governance structures increasingly seen as problematic
  • But, considerable practical difficulties with reconciling primacy of Board with actuarial expertise of directors
  • Question is how to square this circle
  • Conclusion is that Boards must be expected to take advice on actuarial matters (whether internally or externally)
  • UK proposals address this issue
  • SAI’s proposals also address this issue, but in a slightly different (and less prescriptive) way
  • Current regime seems destined to change – let’s see what happens!
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Corporate governance post-PenroseMichael CulliganPresented at a seminar of the Society of Actuaries in Ireland“Life Assurance – A brave new world”

20 May 2004

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