FINANCIAL SERVICES

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FINANCIAL SERVICES
Non-executive directors in the Insurance Industry
Steve Roder, Partner In Charge, Financial
Services KPMG China and Hong Kong SAR July 12 2005
ADVISORY
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All governance is not alike

• Banks play an important role in Germany.
• The government is an important stakeholder in
  France.
• Employees have an important role in the
  Netherlands and Germany.
• Shareholders have a key role in Australia,
  Canada, the United Kingdom, and the United
  States.
• Families have a central role in many Asian
  countries.
• Economic and cultural differences have influenced
  governance.
• Source KPMG A New Focus on Governance

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Directionally consistent more governance not
less
International triggering events
HK CG initiatives
Global accountingscandals
UK Cadbury Report
2004
2003
1993 - 2000
2001
2002

• Amendments to Listing Rules for CG issues
• Revised Code on CG Practices
• Requirement of CG Report

• HKEx Consultation on CG issues

• HKEx Consultation Conclusions on CG
  issues
• FSTB Corporate Action Plan
• SCCLR CG proposals (phase 2)

• SCCLR CG proposals (phase 1)

• Code of best practices
• Disclosure in Annual Reports
• Guidelines on INEDs
• Requirements on
• directors

Source Hong Kong Exchanges and Clearing
Governance in HK listed companies is an example.
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D O Liability premiums
US 8 billion Europe 1 billion Asia 100
million Source Swiss Re, Asia Insurance
Review February 2005
An indicator of the level of director discomfort?
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Asia can expect some of the same

• Asian companies listing in US or Europe
• Sarbanes Oxley applies to foreign registrants
• Opening up of government and family owned
  companies

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Accounting scandals have thrown a spotlight on
governance
Audit committees are meeting 8-10 times a year
instead of 4 The documentation and paperwork
. is off the charts You dont have the free
lunch like you had . Source Business Week
The Boss on the sidelines April 2005
NEDs are under increased pressure
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Increasing governance requirements laid down by
regulators

• Australia APRA draft Prudential Standard
• Hong Kong Office of the Commissioner of
  Insurance Guidance Note
• Singapore MAS Guidelines
• All require NEDs . seeking to protect
  beneficiaries.

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APRA leading the way in Insurance Reform
.. duty as the prudential regulator to look
after the interests of beneficiaries . and
ensure their interests are not compromised .
.. appreciably different from that of ASX
which is responsible for ensuring the operation
of a transparent accessible and accountable
market .. APRA needs to be confident that
governance arrangements are robust. Source
Governance for APRA regulated institutions, May
2005
Taking governance beyond the listed company
benchmark.
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APRA .. Expecting great things
The chairperson of the board should be an
independent non-executive director. A majority
of the Board Audit Committee must be independent
non-executive directors. The Board Risk
Committee members should be non-executive
directors. At least one independent
non-executive director on the Board should have
financial expertise Source Governance for
APRA regulated institutions, May 2005
NEDs will be very prominent in the governance of
all insurers.
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Insurance NEDs have it tough

• Business model
• Global structures
• Jargon

It takes years to get up to speed Public
Co NED, May 2005
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What makes it tough?

• Premium before claim
• - insureds only find out later if key get value
  for money
• High technical content
• - matched only by derivatives activity in the
  banking arena
• Long tail exposure the black box
• Manufacturers just count the inventory and
  reconcilethe cash Public Co NED, May 2005

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A plethora of audit committees?
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Different committees with different requirements
and knowledge
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Is it that simple at subsidiary level?
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Global Product
Global HR
Global IT
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Legal structure ? Management structure?
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A serious shortage of suitable talent .
SITUATION VACANT NED .. Insurance Industry
made worse through trepidation and the need to
refresh the Board
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Advice for NEDs

• Line of sight transparency over drivers of value
  and associated risks

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Example of Audit Committee Input

• Analysis of key assumptions underlying the
  financials and whether they are appropriate

Helping NEDs understand the risks and judgements
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Example of Audit Committee Input
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Advice for NEDs

• Line of sight transparency over drivers of value
  and associated risks
• Understand the full range of reporting
  responsibilities different regulators,
  different forms of GAAP
• Ensure access and dialogue with key personnel,
  regardless of group structure
• Clarify communications between audit committees
  in the same group
• Access to independent advice
• Arrangements for continuous briefing and
  learning
• Plenty of D O cover