The specific duties identified above are designed to address conflicts of interests that arise between the interests of the individual members of the Board and those of the insurer and policyholders. The insurer should include these duties as part of the terms of engagement of the individual Board Members.

The supervisor should be satisfied that individual Board Members understand the nature and scope of their duties and how they impact on the way in which the member discharges his/her respective roles and responsibilities. A Board member should consider his/her ability to discharge the roles and responsibilities in a manner as would be expected of a reasonably prudent person placed in a similar position. He/she should act on a fully informed basis, and for this purpose continually seek and acquire information as necessary.

Where a member of the Board of an insurer has common membership on the Board of any other entity within or outside the insurer’s group, there should be clear and well defined procedures regarding the member’s duty of loyalty to the insurer. These may include appropriate disclosure and in some instances shareholder approval of such overlapping roles. In the event of a material conflict with the interests of the insurer, the member should disclose such conflicts promptly to the Board of the insurer and its stakeholders as appropriate, and be required to decline to vote or take any decisions in any matters in which he/she has an interest.  

It is the Board’s responsibility to ensure that the insurer has appropriate systems and functions for risk management and internal controls and to provide oversight to ensure that these systems and the functions that oversee them are operating effectively and as intended. The responsibilities of the Board are described further in ICP 8 (Risk Management and Internal Controls).

Sound remuneration policy and practices are part of the corporate governance framework of an insurer. This standard and guidance are neither intended to unduly restrict nor reduce an insurer’s ability to attract and retain skilled talent by prescribing any particular form or level of individual remuneration. Rather, they aim to promote the alignment of remuneration policies with the long term interests of insurers to avoid excessive risk taking, thereby promoting sound overall governance of insurers and fair treatment of customers.

As a part of effective risk management, an insurer should adopt and implement a prudent and effective remuneration policy. Such a policy should not encourage individuals, particularly members of the Board and Senior Management, Key Persons in Control Functions and major risk-taking staff, to take inappropriate or excessive risks, especially where performance-based variable remuneration is used.

The Board, particularly members of the remuneration committee where one exists, should collectively have the requisite competencies to make informed and independent judgments on the suitability of an insurer’s remuneration policy. Such competencies include skills, such as a sufficient understanding of the relationship between risk and remuneration practices. The remuneration committee, where established, should have an adequate representation of non-executive members to promote objectivity in decision-making.

• the components of the overall remuneration policy, particularly the use and balance of fixed and variable components;
• the performance criteria and their application for the purposes of determining remuneration payments;
• the remuneration of the members of the Board, Senior Management and major risk-taking staff; and
• any reports or disclosures on the insurer’s remuneration practices provided to the supervisor or the public.

The Board should ensure that in structuring, implementing and reviewing the insurer’s remuneration policy, the decision-making process identifies and manages conflicts of interests and is properly documented. Members of the Board should not be placed in a position of actual or perceived conflicts of interests in respect of remuneration decisions.

The Board should also ensure that the relevant Key Persons in Control Functions are involved in the remuneration policy-setting and monitoring process to ensure that remuneration practices do not create incentives for excessive or inappropriate risk taking, are carried out consistently with established policies and promote alignment of risks and rewards across the organisation. Similarly, the remuneration and risk management committees of the Board, if such committees exist, should interact closely with each other and provide input to the Board on the incentives created by the remuneration system and their effect on risk-taking behaviour.

• predominantly based on the effective achievement of the objectives appropriate to such control functions. Performance measures for staff in control functions should represent the right balance between objective assessments of the control environment (eg the conduct of the relationship between the control functions and executive management) and outputs delivered by the control functions, including their impact, quality and efficiency in supporting the oversight of risks. Such output measures may include recommendations made and implemented to reduce risks, reduction in number of compliance breaches and measures adopted to promptly rectify identified breaches, results of external quality reviews and losses recovered or avoided through audits of high risk areas;
• not linked to the performance of any business units which are subject to their control or oversight. For example, where risk and compliance functions are embedded in a business unit, a clear distinction should be drawn between the remuneration policy applicable to staff undertaking control functions and other staff in the business unit, such as through the separation of the pools from which remuneration is paid to the two groups of staff; and
• adequate as an overall package to attract and retain staff with the requisite skills, knowledge and expertise to discharge those control functions effectively and to increase their competence and performance.

Where any control function is outsourced, the remuneration terms under the agreement with the service provider should be consistent with the objectives and approved parameters of the insurer’s remuneration policy.

Variable remuneration should be performance-based using measures of individual, unit or group performance that do not create incentives for inappropriate risk taking.

• There should be an appropriate mix of fixed and variable components, with adequate parameters set for allocating cash versus other forms of remuneration, such as shares. A variable component linked to performance that is too high relative to the fixed component may make it difficult for an insurer to reduce or eliminate variable remuneration in a poor financial year;
• The reward for performance should include an adjustment for the material current and future risks associated with performance. Since the time horizon of performance and associated risks can vary, the measurement of performance should, where practicable, be set in a multi-year framework to ensure that the measurement process is based on longer term performance;
• If the variable component of remuneration is significant, the major part of it should be deferred for an appropriate specified period. The deferral period should take account of the time frame within which risks associated with the relevant performance (such as the cost of capital required to support risks taken and associated uncertainties in the timing and the likelihood of future revenues and expenses) may materialise. The deferral period applied may vary depending on the level of seniority or responsibility of the relevant individuals and the nature of risks to which the insurer is exposed;
• The award of variable remuneration should contain provisions that enable the insurer, under certain circumstances, to apply malus or claw back arrangements in the case of subdued or negative financial performance of the insurer which is attributed to the excessive risk taking of the staff concerned and when risks of such performance have manifested after the award of variable remuneration; and
• Guaranteed variable remuneration should generally not be offered, as they are not consistent with sound risk management and performance-based rewards.

The variable component should be subject to prudent limits set under the  remuneration policy that are consistent with the insurer’s capital
management strategy and its ability to maintain a sound capital base taking account of the internal capital targets or regulatory capital
requirements of the insurer.

• be clearly defined and be objectively measurable;
• be based not only on financial but also on non-financial criteria as appropriate (such as compliance with regulation andinternal rules, achievement of risk management goals, adequate and timely follow up of internal audit recommendations as well as compliance with market conduct standards and fair treatment of customers;
• take account of not only the individual’s performance, but also the performance of the business unit concerned where relevant and the overall results of the insurer and the group; and
• not treat growth or volume as a criterion in isolation from other performance criteria.

• shares do not vest for a minimum specified period after their award (“vesting restrictions”);
• share options or other similar rights are not exercisable for a minimum specified period after their award (“holding restrictions”); and
• individuals are required to retain an appropriate proportion of the shares awarded until the end of their employment or other specified period beyond their employment (“retention restrictions”).

Subject to any applicable legal restrictions, it is appropriate that future vesting and holding restrictions for share-based remuneration remain operative even upon cessation of employment (ie there should be no undue acceleration of the vesting of share-based payments or curtailing of any holding restrictions).

Where an insurer provides discretionary pay-outs on termination of employment (“severance payments”, sometimes also referred to as “golden parachutes”), such payment should be subject to appropriate governance controls and limits. In any case, such pay-outs should be aligned with the insurer’s overall financial condition and performance over an appropriate time horizon. Severance payments should be related to performance over time; should not reward failure and should not be payable in the case of failure or threatened failure of the insurer, particularly to an individual whose actions have contributed to the failure or potential failure of the insurer.

•  overseeing the financial statements, financial reporting and disclosure processes;
•  monitoring whether accounting policies and practices of the insurer are operating as intended;
•  overseeing the internal audit process (reviews by internal audit of the insurer’s financial reporting controls) and reviewing the internal auditor’s plans and material findings; and
• reporting to the supervisor on significant issues concerning the financial reporting process, including actions taken to address or mitigate identified financial reporting risks.

The Board should ensure that significant findings and observations regarding weaknesses in the financial reporting process are promptly rectified. This should be supported by a formal process for reviewing and monitoring the implementation of recommendations by the external auditor.

• applies robust processes for approving, or recommending for approval, the appointment, reappointment, removal and remuneration of the external auditor;
• applies robust processes for monitoring and assessing the independence of the external auditor and to ensure that the appointed external auditor has the necessary knowledge, skills, expertise, integrity and resources to conduct the audit and meet any additional regulatory requirements;
• monitors and assesses the effectiveness of the external audit process throughout the audit cycle;
• investigates circumstances relating to the resignation or removal of an external auditor, and ensuring prompt actions are taken to mitigate any identified risks to the integrity of the financial reporting process, and
• reports to the supervisor on circumstances relating to the resignation or removal of the external auditor.

•  the terms of engagement of the external auditor are clear and appropriate to the scope of the audit and resources required to conduct the audit and specify the level of audit fees to be paid;
• the auditor undertakes a specific responsibility under the terms of engagement to perform the audit in accordance with relevant local and international audit standards;
• the external auditor complies with internationally accepted ethical and professional standards and, where applicable, the more stringent requirements applicable to audits of listed entities and public interest entities;
• there are adequate policies and a process to ensure the independence of the external auditor, including:
  • restrictions and conditions for the provision of non-audit services which are subject to approval by the Board;
  • periodic rotation of members of the audit team and/or audit firm as appropriate; and
  • safeguards to eliminate or reduce to an acceptable level identified threats to the independence of the external auditor.
• there is adequate dialogue with the external auditor on the scope and timing of the audit to understand the issues of risk, information on the insurer’s operating environment which is relevant to the audit, and any areas in which the Board may request for specific procedures to be carried out by the external auditor, whether as a part or an extension of the audit engagement; and
•  there is unrestricted access by the external auditor to information and persons within the insurer as necessary to conduct the audit.

• identify and assess the risks of material misstatement in the insurer’s financial statements, taking into consideration the complexities of insurance activities and the need for insurers to have a strong control environment;
• respond appropriately to the risks of material misstatement in the insurer’s financial statements; and
• develop appropriate relationships with the internal audit function and the actuarial function.

The Board should take appropriate actions where doubts arise as to the reliability of the external audit process.

• regular meetings between the Board and the external auditor during the audit cycle, including meetings without management present; and
• prompt communication of any information regarding internal control weaknesses or deficiencies of which the external auditor becomes aware.

The supervisor and the external auditor should have an effective relationship that includes appropriate communication channels for the exchange of information relevant to carrying out their respective statutory responsibilities.

Reports prepared by the external auditor for the insurer (eg management letters) should be made available to the supervisor by the insurer or the external auditor.

The supervisor should require the external auditor to report matters that are likely to be of material significance. This would include material fraud, suspicion of material fraud and regulatory breaches or other significant audit findings identified in the course of the audit. Such information should be provided to the supervisor without the need for prior consent of the insurer and the external auditor should be duly protected from liability for any information disclosed to the supervisor in good faith.

The supervisor should require a further audit by a different external auditor where necessary.

Communications with the supervisor should promote effective engagement of the supervisor on the governance of the insurer to enable informed judgments about the effectiveness of the Board and Senior Management in governing the insurer.

• the insurer’s overall strategic objectives, covering existing or prospective lines of business and how they are being or will be achieved;
• the insurer’s governance structures, such as allocation of oversight and management responsibilities between the Board and the Senior Management, and organisational structures, including reporting lines;
• members of the Board and any Board committees, including their respective expertise, qualifications, track-record, other positions held by such members, and whether such members are regarded as independent;
• processes in place for the Board to evaluate its own performance and any measures taken to improve the Board’s performance;
•  the general design, implementation and operation of the remuneration policy;
• major ownership and group structures, and any significant affiliations and alliances; and
• material related-party transactions.

In addition to information publicly available, the supervisor may require more detailed and additional information relating to the insurer’s corporate governance framework for supervisory purposes, which may include commercially sensitive information, such as assessments by the Board of the effectiveness of the insurer’s governance system, internal audit reports and more detailed information on the remuneration structures adopted by the insurer for the Board, Senior Management, Key Persons in Control Functions and major risk-taking staff. The insurer’s communication policies and strategies should enable such information to be provided to the supervisor in a timely and efficient manner. Supervisors should safeguard such information having due regard to the confidentiality of commercially sensitive information and applicable laws.

• the operation of risk adjustments, including examples of how the policy results in adjustments to remuneration for employees at different levels;
• how remuneration is related to performance (both financial and personal business conduct) over time; and
• valuation principles in respect of remuneration instruments.

• the total cost of remuneration awarded in the period, analysed according to the main components such as basic salary, variable remuneration and long-term awards;
• the total amount set aside in respect of deferred variable remuneration;
• adjustment to net income for the period in respect of variable remuneration awarded in previous periods;
• the total costs of all sign-on payments in the period and number of individuals to whom these relate; and
• the total costs of all severance payments in the period and number of individuals to whom these relate.

These amounts should be analysed by type of instrument (eg cash, shares, share options etc.) as applicable, and in a manner consistent with the key elements of the remuneration policy.

Senior Management should implement appropriate systems and controls, in accordance with the established risk appetite and corporate values and consistent with internal policies and processes.

• processes for engaging persons with appropriate competencies and integrity to discharge the functions under Senior Management, which include succession planning, ongoing training and procedures for termination;
• clear lines of accountability and channels of communication between persons in Senior Management and Key Persons in Control Functions;
• proper procedures for the delegation of Senior Management functions and monitoring whether delegated functions are carried out effectively and properly, in accordance with the same principles that apply to delegations by the Board (see Guidance 7.3.13 and 7.3.14);
• standards of conduct and codes of ethics for the Senior Management and other staff to promote a sound corporate culture, and the effective implementation on an ongoing basis of standards and codes (see ICP 8 Risk Management and Internal Controls for conflicts of interest provisions);
• proper channels of communications, including clear lines of reporting, as between the individuals performing the functions of the Senior Management and the Board, including provisions dealing with whistleblower protection, and their effective implementation; and
• effective communication strategies with supervisors and stakeholders that include the identification of matters that should be disclosed, and to whom such disclosure should be made.

Adequate procedures should be in place for assessing the effectiveness of Senior Management’s performance against the performance objectives set by the Board. For this purpose, annual assessments of their performance against set goals should be carried out at least annually, preferably by an independent party, a control function, or the Board itself. Any identified inadequacies or gaps should be addressed promptly and reported to the Board.

Senior Management should also promote strong risk management and internal controls through personal conduct and transparent policies. Senior Management should communicate throughout the insurer the responsibility of all employees in this respect. It should not interfere with the activities that control functions carry out in the rightful exercise of their responsibilities, including that of providing an independent view of governance, risk, compliance and control related matters.

The supervisor plays an important role by requiring the Board and Senior Management of the insurer to demonstrate that they are meeting the applicable corporate governance requirements, consistent with these standards, on an ongoing basis. The onus for demonstrating, to the satisfaction of the supervisor, that the corporate governance framework is effective and operates as intended rests with the insurer.

The Supervisor should assess through its supervisory review and reporting processes whether the insurer’s overall corporate governance framework is effectively implemented and remains adequate (see ICP 9 Supervisory Review and Reporting).

To help facilitate the supervisory review and reporting processes, the supervisor should establish effective channels of communication with the insurer, and have access to relevant information concerning the governance of the insurer. This may be obtained through periodic reports to the supervisor and any information obtained on an ad hoc basis (see also Standard 7.7). Communication may also be facilitated by the supervisor having regular interaction with the Board, Senior Management and Key Persons in Control Functions.

The supervisor should assess the governance effectiveness of the Board and Senior Management and determine the extent to which their actions and behaviours contribute to good governance. This includes the extent to which the Board and Senior Management contribute to setting and following the “tone at the top”; how the corporate culture of the insurer is communicated and put into practice; how information flows to and from the Board and Senior Management; and how potential material problems are identified and addressed throughout the insurer.  

• ongoing mandatory training that is commensurate with their respective duties, roles and responsibilities of the Board and Senior Management within the insurer;
• a review of the periodic self-evaluation undertaken by the Board as referred to in Guidance 7.3.3 and 7.11.1;
• meetings and/or interviews with the Board and Senior Management, both collectively and individually as appropriate, particularly to reinforce expectations relating to their performance and to get a sense of how informed and proactive they are; and
• attending and observing Board proceedings.

Where remuneration policies of an insurer contain more high risk elements, closer supervisory scrutiny of those policy and practices may also be warranted, including requests for additional information as appropriate to assess whether those practices are having an adverse impact on the ongoing viability of the insurer or commissioning an independent assessment of the insurer’s remuneration policy and practices.

The risk management system is designed and operated at all levels of the insurer to allow for the identification, assessment, monitoring, mitigation and reporting of all risks of the insurer in a timely manner. It takes into account the probability, potential impact and time horizon of risks.

• take into account the insurer’s overall business strategy and business activities (including any business activities which have been outsourced);
• provide that the insurer’s risk appetite, expressed in a risk appetite statement, be aligned with the insurer’s business strategy and embedded in its day-to-day activities;
• provide relevant objectives, key principles and proper allocation of responsibilities for dealing with risk across the business areas and business units of the insurer;
• provide explanations of the methodologies, key assumptions and limitations of risk management; for groups this would include the rationale as to the risk appetite for different individual insurance legal entities within the group;
• provide a documented process defining the Board approval required for any deviations from the risk management strategy or the risk appetite and for settling any major interpretation issues that may arise;
• define and categorise material risks (by type) to which the insurer is exposed, at both insurance legal entity and group level where applicable, and the levels of acceptable risk limits for each type of these risk;
• include documented policies that describe how categories of risks are managed and the specific obligations of employees and the insurer in dealing with risk, including risk escalation and risk mitigation tools;
• provide suitable processes and tools (including stress testing and, where appropriate, models) for identifying, assessing, monitoring and reporting on risks. Such processes should also cover contingency planning;
• provide for regular reviews of the risk management system (and its components) to help ensure that necessary modifications and improvements are identified and made in a timely manner; and
• appropriately address other matters related to risk management for solvency purposes set out in ICP

The risk management system should cover at least the following risks: underwriting and reserving, asset-liability management, investments, liquidity, concentration, operational and conduct, as well as reinsurance and other risk mitigation techniques.

The risk management system should be aligned with the insurer’s risk culture and embedded into the various business areas and units with the aim of having the appropriate risk management practices and procedures embedded in the key operations and structures.

The risk management system should take into account all reasonably foreseeable and relevant material risks to which the insurer is exposed, both at the insurer and the individual business unit levels. This includes current and emerging risks.

Insurers should assess material risks both qualitatively and, where appropriate, quantitatively. Appropriate consideration should be given to a sufficiently wide range of outcomes, as well as to the appropriate tools and techniques to be used. The interdependencies of risks should also be analysed and taken into account in the assessments.

The insurer’s risk assessment should be documented including detailed descriptions and explanations of the risks covered, the approaches used, and the key judgements and assumptions made.

Insurers should have in place adequate processes, controls and systems to assess the risks of new products and carry out a risk assessment before entering into new business lines and products. Significant new or changed activities and products that may increase an existing risk or create a new type of exposure should be approved by Senior Management and/or by the Board.

The risk management system should include processes and tools for monitoring risk, such as early warnings or triggers that allow timely consideration of, and adequate response to, material risks.

The risk management system should include strategies and tools to mitigate against material risks. In most cases an insurer will control or reduce the risk to an acceptable level. Another response to risk is to transfer the risk to a third party. If risks are not acceptable within the risk appetite and it is not possible to control, limit or transfer the risk, the insurer should cease or change the activity which creates the risk.

Risks, the overall assessment of risks and the related action plans should be reported to the Board and/or to Senior Management, as appropriate, using qualitative and quantitative indicators and effective action plans. The insurer’s documented risk escalation process should allow for reporting on risk issues within established reporting cycles and outside of them for matters of particular urgency.

The Board should have appropriate ways to carry out its responsibilities for risk oversight. The risk management policy should therefore cover the content, form and frequency of reporting that it expects on risk from Senior Management and each of the control functions. Any proposed activity that would go beyond the Board-approved risk appetite should be subject to appropriate review and require Board approval.

The insurer’s risk management policy should be written in a way to help employees understand their responsibilities regarding risk management. It should also reflect how the risk management system relates to the insurer’s overall corporate governance framework and its corporate culture. Regular internal communications and training within the insurer on the risk management policy and risk appetite may help in this regard.

For insurance groups, a risk management policy addresses the way in which the group manages risks that are material at the insurance group level, including risks that arise from the insurance group being part of a wider group. For an insurance legal entity that is part of a group, the risk management policy of that entity should address management of risks material at the entity level as well as additional risk it faces as a result of its membership in a group, which can encompass the widest group of which the insurance legal entity is a member and not only the entity’s insurance group. Within an insurance group, the head of the group and the legal entities should ensure appropriate coordination and consistency between the head of the group and the legal entities when setting the risk management policy.

Both the Board and Senior Management should be attentive to the need to modify the risk management system in light of changes in the insurer’s risk profile as well as other new internal or external events and/or circumstances. The risk management system should include mechanisms to incorporate new risks and new information related to risk already identified on a regular basis. The risk management system should also be responsive to the changing interests and reasonable expectations of policyholders and other stakeholders.

The internal controls system should ensure effective and efficient operations, adequate control of risks, prudent conduct of business, reliability of financial and non-financial information reported (both internally and externally), and compliance with laws, regulations, supervisory requirements and the insurer's internal rules and decisions. It should be designed and operated to assist the Board and Senior Management in the fulfilment of their respective responsibilities for oversight and management of the insurer. Some insurers have a designated person or function to support the advancement, coordination and/or management of the overall internal controls system on a more regular basis.

The internal controls system should cover all units and activities of the insurer and should be an integral part of the daily activities of an insurer. The controls should form a coherent system, which should be regularly assessed and improved as necessary. Each individual control[1] of an insurer, as well as all its controls cumulatively, should be designed for effectiveness and operate effectively.

[1] Individual controls may be preventive (applied to prevent undesirable outcomes) or detective (to uncover undesirable activity). Individual controls may be manual (human), automated, or a combination and may be either general or process or application specific.

An effective internal control system requires an appropriate control structure with control activities defined at every business unit level. Depending on the organisational structure of the insurer, business or other units should own, manage and report on risks and should be primarily accountable for establishing and maintaining effective internal control policies and procedures. Control functions should determine and assess the appropriateness of the controls used by the business or other units.  The internal audit function should provide independent assurance on the quality and effectiveness of the internal controls system.[2]

[2] This division of responsibilities between business, risk management and compliance and internal audit is typically referred to as the three lines of defense. The business is considered as the first line of defence, the control functions (other than internal audit) as the second line of defence, and internal audit as the third line of defence. The business is deemed to “own” the controls, and the other lines of defence are there to help ensure their application and viability. Whatever approach is used, it is important that responsibilities be clearly allocated to promote checks and balances and avoid conflicts of interest.

• appropriate segregation of duties and controls to ensure such segregation is observed. This includes, amongst others, having sufficient distance between those accountable for a process or policy and those who check if for such a process or policy an appropriate control exists and is being applied. It also includes appropriate distance between those who design a control or operate a control and those who check if such a control is effective in design and operation;
• up-to-date policies regarding who can sign for or commit the insurer, and for what amounts, with corresponding controls, such as practice that key decisions should be taken at least by two persons and the practice of double or multiple signatures. Such policies and controls should be designed, among other things, to prevent any major transaction being entered into without appropriate governance review or by anyone lacking the necessary authority and to ensure that borrowing, trading, risk and other such limits are strictly observed. Such policies should foresee a role for control functions, for example by requiring for major matters the review and sign-off by Risk Management or Compliance, and/or approval by a Board level committee;

• appropriate controls for all key business processes and policies, including for major business decisions and transactions (including intra-group transactions), critical IT functionalities, access to critical IT infrastructure by employees and related third parties, and important legal and regulatory obligations;
• policies on training in respect of controls, particularly for employees in positions of high trust or responsibility or involved in high risk activities;
• a centralised documented inventory of insurer-wide key processes and policies and of the controls in place in respect of such processes and policies, that also may introduce a hierarchy among the policies;

• appropriate controls to provide reasonable assurance over the accuracy and completeness of the insurer’s books, records, and accounts and over financial consolidation and reporting, including the reporting made to the insurer’s supervisors;
• adequate and comprehensive internal financial, operational and compliance data, as well as external market information about events and conditions that are relevant to decision making. Information should be reliable, timely, accessible, and provided in a consistent format;
• information processes that cover all significant activities of the insurer, including contingency arrangements;
• effective channels of communication to ensure that all staff fully understand and adhere to the internal controls and their duties and responsibilities and that other relevant information is reaching the appropriate personnel;
• policies regarding escalation procedures;

• processes for regularly checking that the totality of all controls forms a coherent system and that this system works as intended; fits properly within the overall corporate governance framework of the insurer; and provides an element of risk control to complement the risk identification, risk assessment, and risk management activities of the insurer. As part of such review, individual controls are monitored and analysed periodically to determine gaps and improvement opportunities with Senior Management taking such measures as are necessary to address these; and
• periodic testing and assessments (carried out by objective parties such as an internal or external auditor) to determine the adequacy, completeness and effectiveness of the internal controls system and its utility to the Board and Senior Management for controlling the operations of the insurer.

The Board should have an overall understanding of the control environment across the various entities and businesses, and require Senior Management to ensure that for each key business process and policy, and related risks and obligations, there is an appropriate control.

In addition, the Board should ensure there is clear allocation of responsibilities within the insurer, with appropriate segregation, including in respect of the design, documentation, operation, monitoring and testing of internal controls. Responsibilities should be properly documented, such as in charters, authority tables, governance manuals or other similar governance documents.

The Board should determine which function or functions report to it or to any Board Committees in respect of the internal controls system.

• the strategy in respect of internal controls (such as responsibilities, target levels of compliance to achieve, validations and implementation of remediation plans);
• the stage of development of the internal controls system, including its scope, testing activity, and the performance against annual or periodic internal controls system goals being pursued;
• an assessment of how the various business units are performing against internal control standards and goals;
• control deficiencies, weaknesses and failures that have arisen or that have been identified (including any identified by the internal or external auditors or the supervisor) and the responses thereto (in each case to the extent not already covered in other reporting made to the Board); and
• controls at the appropriate levels so as to be effective, including at the process or transactional level.

As part of the effective systems of risk management and internal controls, insurers have control functions, including for risk management, compliance, actuarial matters and internal audit. Control functions add to the governance checks and balances of the insurer and provide the necessary assurance to the Board in the fulfilment of its oversight duties.

The existence of control functions does not relieve the Board or Senior Management of their respective governance and related responsibilities.

The control functions should be subject to periodic review either by the internal audit function (for control functions other than internal audit) or an objective external reviewer.

The appointment, performance assessment, remuneration, discipline and dismissal of the head of control functions should be done with the approval of, or after consultation with, the Board or the relevant Board committee. For the head of the internal audit function, the appointment, performance assessment, remuneration, discipline and dismissal should be done by the Board, its Chair or the Audit Committee.

The insurer should notify the supervisor of the reasons for dismissals of heads of control functions.

The Board should approve the authority and responsibilities of each control function to allow each control function to have the authority and independence necessary to be effective.

The authority and responsibilities of each control function should be set out in writing and made part of, or referred to in, the governance documentation of the insurer. The head of each control function should periodically review such document and submit suggestions for any changes to Senior Management and the Board for approval, where appropriate.

A control function should be led by a person of appropriate level of authority. The head of the control function should not have operational business line responsibilities.

Insurers should organise each control function and its associated reporting lines into the insurer’s organisational structure in a manner that enables such function to operate and carry out their roles effectively. This includes direct access to the Board or the relevant Board committee.

• serve as a component of the insurer’s checks and balances;
• provide an objective perspective on strategies, issues, and potential violations related to their areas of responsibility; and
• implement or oversee the implementation of corrective measures where necessary.

Each control function should avoid conflicts of interest. Where any conflicts remain and cannot be resolved with Senior Management, these should be brought to the attention of the Board for resolution.

Each control function should have the authority to communicate on its own initiative with any employee and to have unrestricted access to information in any business unit that it needs to carry out its responsibilities. The control functions should have the right to conduct investigations of possible breaches and to request assistance from specialists within the insurer, eg legal and internal audit, or engage external specialists to perform the task. The control functions should be free to report to Senior Management or the Board on any irregularities or possible breaches disclosed by its investigations, without fear of retaliation or disfavour from management.

Each control function should have the resources necessary to fulfil its responsibilities and achieve the specific goals in its areas of responsibility. This includes qualified staff and appropriate IT/management information processes. The function should be organised in an appropriate manner to achieve its goals.

The head of each control function should review regularly the adequacy of the function's resources and request adjustments from Senior Management as necessary. Where the head of a control function has a major difference of opinion with Senior Management on the resources needed, the head of the control function should bring the issue to the Board or relevant Board Committee for resolution.

Persons who perform control functions should be suitable for their role and meet any applicable professional qualifications and standards. Higher expectations apply to the head of each control function. Persons who perform control functions should receive regular training relevant to their role to remain up to date on the developments and techniques related to their areas of responsibility.

• information as to the function’s strategy and longer term goals and the progress in achieving these;
• annual or other periodic operational plans describing shorter term goals and the progress in achieving these; and
• resources (such as personnel, budget, etc.), including an analysis on the adequacy of these resources.

In addition to periodic reporting, the head of each control function should have the opportunity to communicate directly and to meet periodically (without the presence of management) with the Chair of any relevant Board committee (eg Audit or Risk Committee) and/or with the Chair of the full Board. The Board should periodically assess the performance of each control function. This may be done by the full Board, by the Chair of the Board, by the relevant Board committee or by the Chair of the relevant Board committee.

A robust risk management function that is well positioned, resourced and properly authorised and staffed is an essential element of an effective risk management system. Within some insurers, and particularly at larger or more complex ones, the risk management function is typically led by a Chief Risk Officer.

• an assessment of risk positions and risk exposures and steps being taken to manage them;
• an assessment of changes in the insurer’s risk profile relative to risk appetite;
• where appropriate, an assessment of pre-defined risk limits;
•  where appropriate, risk management issues resulting from strategic affairs such as corporate strategy, mergers and acquisitions and major projects and investments;
• an assessment of risk events and the identification of appropriate remedial actions.

The head of the risk management function should have the authority and obligation to inform the Board promptly of any circumstance that may have a material effect on the risk management system of the insurer.

• assist the Board and Senior Management in carrying out their respective responsibilities, including by providing specialist analyses and performing risk reviews;
• identify the individual and aggregated risks (actual, emerging and potential) the insurer faces;
• assess, aggregate, monitor and help manage and otherwise address identified risks effectively; this includes assessing the insurer’s capacity to absorb risk with due regard to the nature, probability, duration, correlation and potential severity of risks;
• gain and maintain an aggregated view of the risk profile of the insurer both at a legal entity and/or group-wide level;
• establish a forward-looking assessment of the risk profile;
• evaluate the internal and external risk environment on an ongoing basis in order to identify and assess potential risks as early as possible. This may include looking at risks from different perspectives, such as by territory or by line of business;
• consider risks arising from remuneration arrangements and incentive structures;
• conduct regular stress testing and scenario analyses as defined in ICP 16 (Enterprise Risk Management for Solvency Purposes);
• regularly provide written reports to Senior Management, Key Persons in Control Functions and the Board on the insurer's risk profile and details on the risk exposures facing the insurer and related mitigation actions as appropriate;
• document and report material changes affecting the insurer’s risk management system to the Board to help ensure that the system is maintained and improved; and
• conduct regular self-assessments and implement or monitor the implementation of any needed improvements.

The compliance function has a broader role than merely monitoring compliance with laws, regulations and supervisory requirements; monitoring compliance with internal policies and promoting and sustaining a compliance culture within the insurer are equally important aspects of this control function.

Compliance starts at the top. The Board is ultimately responsible for establishing standards for honesty and integrity throughout the insurer and for creating an effective corporate culture that emphasises them. This should include a code of conduct or other appropriate mechanism as evidence of the insurer’s commitment to comply with all applicable laws, regulations, supervisory requirements and internal policies, and conduct its business ethically and responsibly.

As part of this commitment, the insurer has in place a robust and well positioned, resourced and properly authorised and staffed compliance function. Within some insurers, particularly larger or more complex ones, such a function is typically led by a Chief Compliance Officer.

• an assessment of the key compliance risks the insurer faces and the steps being taken to address them;
• an assessment of how the various parts of the insurer (eg divisions, major business units, product areas) are performing against compliance standards and goals;
• any compliance issues involving management or persons in positions of major responsibility within the insurer, and the status of any associated investigations or other actions being taken;
• material compliance violations or concerns involving any other person or unit of the insurer and the status of any associated investigations or other actions being taken; and
• material fines or other disciplinary actions taken by any regulator or supervisor in respect of the insurer or any employee.

The head of the compliance function should have the authority and obligation to inform promptly the Chair of the Board directly in the event of any major non-compliance by a member of management or a material non-compliance by the insurer with an external obligation if in either case he or she believes that Senior Management or other persons in authority at the insurer are not taking the necessary corrective actions and a delay would be detrimental to the insurer or its policyholders.

• promote and sustain an ethical corporate culture that values responsible conduct and compliance with internal and external obligations; this includes communicating and holding training on an appropriate code of conduct or similar that incorporates the corporate values of the insurer, aims to promote a high level of professional conduct and sets out the key conduct expectations of employees;
• identify, assess, report on and address key legal and regulatory obligations, including obligations to the insurer’s supervisor, and the risks associated therewith; such analyses should use risk and other appropriate methodologies;
• ensure the insurer monitors and has appropriate policies, processes and controls in respect of key areas of legal, regulatory and ethical obligation;
• hold regular training on key legal and regulatory obligations particularly for employees in positions of high responsibility or who are involved in high risk activities;
• facilitate the confidential reporting by employees of concerns, shortcomings or potential or actual violations in respect of insurer internal policies, legal or regulatory obligations, or ethical considerations; this includes ensuring there are appropriate means for such reporting;
• address compliance shortcomings and violations, including ensuring that adequate disciplinary actions are taken and any necessary reporting to the supervisor or other authorities is made; and
• conduct regular self-assessments of the compliance function and the compliance processes and implement or monitor needed improvements. 

A robust actuarial function that is well positioned, resourced and properly authorised and staffed is essential for the proper operation of the insurer. It plays a key role as part of the insurer’s overall systems of risk management and internal controls.

• any circumstance that may have a material effect on the insurer from an actuarial perspective;
• the adequacy of the technical provisions and other liabilities;
• distribution of profits to participating policyholders;
• stress testing and capital adequacy assessment with regard to the prospective solvency position of the insurer; and
• any other matters as determined by the Board.

Written reports on actuarial evaluations should be made to the Board, Senior Management, or other Key Persons in Control Functions or the supervisor as necessary or appropriate or as required by legislation.

• the insurer’s insurance liabilities, including policy provisions and aggregate claim liabilities, as well as determination of reserves for financial risks;
• asset liability management with regard to the adequacy and the sufficiency of assets and future revenues to cover the insurer’s obligations to policyholders and capital requirements, as well as other obligations or activities;
• the insurer’s investment policies and the valuation of assets;
• an insurer’s solvency position, including a calculation of minimum capital required for regulatory purposes and liability and loss provisions;
• an insurer’s prospective solvency position by conducting capital adequacy assessments and stress tests under various scenarios, and measuring their relative impact on assets, liabilities, and actual and future capital levels;
• risk assessment and management policies and controls relevant to actuarial matters or the financial condition of the insurer;
• the fair treatment of policyholders with regard to distribution of profits awarded to participating policyholders;
• the adequacy and soundness of underwriting policies;
• the development, pricing and assessment of the adequacy of reinsurance arrangements;
• product development and design, including the terms and conditions of insurance contracts and pricing, along with estimation of the capital required to underwrite the product;
• the sufficiency, accuracy and quality of data, the methods and the assumptions used in the calculation of technical provisions;
• the research, development, validation and use of internal models for internal actuarial or financial projections, or for solvency purposes as in the ORSA; and
• any other actuarial or financial matters determined by the Board.

Where required, the actuarial function may also provide to the supervisor certifications on the adequacy, reasonableness and/or fairness of premiums (or the methodology to determine the same) and certifications or statements of actuarial opinion.

The supervisor should clearly define when such certifications or statements of actuarial opinion need to be submitted to the supervisor. When these are required to be submitted, the supervisor should also clearly define both the qualifications of those permitted to certify or sign such statements and the minimum contents of such an opinion or certification.

Some jurisdictions may require an “appointed actuary”, “statutory actuary”, or “responsible actuary” (referred to here as an “Appointed Actuary”) to perform certain functions, such as determining or providing advice on an insurer’s compliance with regulatory requirements for certifications or statements of actuarial opinion. The tasks and responsibilities of the Appointed Actuary should be clearly defined and should not limit or restrict the tasks and responsibilities of other individuals performing actuarial functions.

The insurer should be required to report the Appointed Actuary’s appointment to the supervisor.

The Appointed Actuary should not hold positions within or outside of the insurer that may create conflicts of interest or compromise his or her independence. If the Appointed Actuary is not an employee of the insurer, the Board should determine whether the external actuary has any potential conflicts of interest, such as if his or her firm also provides auditing or other services to the insurer. If any such conflicts exist, the Board should subject them to appropriate controls or choose another Appointed Actuary.

If an Appointed Actuary is replaced, the insurer should notify the supervisor and give the reasons for the replacement. In some jurisdictions, such a notification includes statements from both the insurer and the former Appointed Actuary as to whether there were any disagreements with the former Appointed Actuary over the content of the actuary’s opinion on matters of risk management, required disclosures, scopes, procedures, or data quality, and whether or not any such disagreements were resolved to the former Appointed Actuary’s satisfaction.

In some jurisdictions, the Appointed Actuary also has the obligation to notify the supervisor if he or she resigns for reasons connected with his or her duties as an Appointed Actuary or with the conduct of the insurer’s business and give the reasons for resigning. The Appointed Actuary should also notify the supervisor and provide an explanation if his or her appointment is revoked by the insurer.

The supervisor should have the authority to require an insurer to replace an Appointed Actuary when such person fails to adequately perform required functions or duties, is subject to conflicts of interest or no longer meets the jurisdiction’s eligibility requirements.

One of the oversight roles of the Board is to ensure that the information provided by the internal audit function allows the Board to effectively validate the effectiveness of the internal control system.

• the overall means by which the insurer preserves its assets and those of policyholders, and seeks to prevent fraud, misappropriation or misapplication of such assets;
• the reliability, integrity and completeness of the accounting, financial and risk reporting information, as well as the capacity and adaptability of IT architecture to provide that information in a timely manner to the Board and Senior Management;
• the design and operational effectiveness of the insurer’s individual controls in respect of the above matters, as well as of the totality of such controls (the internal controls system);
• other matters as may be requested by the Board, Senior Management, the supervisor or the external auditor; and
• other matters which the internal audit function determines should be reviewed to fulfil its mission, in accordance with its charter, terms of reference or other documents setting out its authority and responsibilities.

To help ensure objectivity, the internal audit function is independent from management and other control functions and is not involved operationally in the business. The internal audit function’s ultimate responsibility is to the Board, not management. To help ensure independence and objectivity, the internal audit function should be free from conditions that threaten its ability to carry out its responsibilities in an unbiased manner. In carrying out its tasks, the internal audit function forms its judgments independently. If necessary, the internal audit function should consider the need to supplement its own assessment with third party expertise in order to make objective and independent decisions.

• access and review any records or information of the insurer which the internal audit function deems necessary to carry out an audit or other review;
• undertake on the internal audit function’s initiative a review of any area or any function consistent with its mission;
• require an appropriate management response to an internal audit report, including the development of a suitable remediation, mitigation or other follow-up plan as needed; and
• decline doing an audit or review, or taking on any other responsibilities requested by management, if the internal audit function believes this is inconsistent with its mission or with the strategy and audit plan approved by the Board. In any such case, the internal audit function should inform the Board or the Audit Committee and seek their guidance.

• the function’s annual or other periodic audit plan, detailing the proposed areas of audit focus, and any significant modifications to the audit plan;
• any factors that may be adversely affecting the internal audit function’s independence, objectivity or effectiveness;
• material findings from audits or reviews conducted; and
• the extent of management's compliance with agreed upon corrective or risk mitigating measures in response to identified control deficiencies, weaknesses or failures, compliance violations or other lapses.

In addition to periodic reporting, the head of internal audit should be authorised to communicate directly, and meet periodically, with the head of the Audit Committee or the Chair of the Board without management present.

• establishing, implementing and maintaining a risk-based audit plan to examine and evaluate alignment of the insurer's processes with their risk culture;
• monitoring and evaluating the adequacy and effectiveness of the insurer’s policies and processes and the documentation and controls in respect of these, on a legal entity and group-wide basis and on an individual subsidiary, business unit, business area, department or other organisational unit basis;
• reviewing levels of compliance by employees, organisational units and third parties with laws, regulations and supervisory requirements, established policies, processes and controls, including those involving reporting;
• evaluating the reliability, integrity and effectiveness of management information processes and the means used to identify, measure, classify and report such information;
• monitoring that identified risks are effectively addressed by the internal control system;
• evaluating the means of safeguarding insurer and policyholder assets and, as appropriate, verifying the existence of such assets and the required level of segregation in respect of insurer and policyholder assets;
• monitoring and evaluating the effectiveness of the insurer's control functions, particularly the risk management and compliance function; and
• coordinating with the external auditors and, to the extent requested by the Board and consistent with applicable law, evaluating the quality of performance of the external auditors.

• market, underwriting, credit, liquidity, operational, conduct of business, as well as reputational issues derived from exposure to those risks;
• accounting and financial policies and whether the associated records are complete and accurate;
• extent of compliance by the insurer with applicable laws, regulations and supervisory requirements from all relevant jurisdictions;
• intra-group transactions, including intra-group risk transfer and internal pricing;
• adherence by the insurer to the insurer’s remuneration policy;
• the reliability and timeliness of escalation and reporting processes, including whether there are confidential means for employees to report concerns or violations and whether these are properly communicated, offer the reporting employee protection from retaliation, and result in appropriate follow up; and
• the extent to which any non-compliance with internal policies or external legal or regulatory obligations is documented and appropriate corrective or disciplinary measures are taken including in respect of individual employees involved.

Subject to applicable laws on record retention, the internal audit function should keep records of all areas and issues reviewed so as to provide evidence of these activities over time.

Outsourcing should not materially increase risk to the insurer or materially adversely affect the insurer’s ability to manage its risks and meet its legal and regulatory obligations.

The Board and Senior Management remain responsible in respect of functions or activities that are outsourced.

The supervisor should require the Board to have review and approval processes for outsourcing of any material activity or function and to verify, before approving, that there was an appropriate assessment of the risks, as well as an assessment of the ability of the insurer’s risk management and internal controls to manage them effectively in respect of business continuity. The assessment should take into account to what extent the insurer’s risk profile and business continuity could be affected by the outsourcing arrangement.

The supervisor should require insurers which outsource any material activity or function to have in place an appropriate policy for this purpose, setting out the internal review and approvals required and providing guidance on the contractual and other risk issues to consider. This includes considering limits on the overall level of outsourced activities at the insurer and on the number of activities that can be outsourced to the same service provider. Because of the particularly important role that control activities and control functions play in an insurer’s corporate governance framework, the supervisor should consider issuing additional requirements for their outsourcing or dedicating more supervisory attention to any such outsourcing.

• how the insurer’s risk profile and business continuity will be affected by the outsourcing;
• the service provider’s governance, risk management and internal controls and its ability to comply with applicable laws and regulations;
• the service providers’ service capability and financial viability; and
• succession issues to ensure a smooth transition when ending or varying an outsourcing arrangement.

In choosing an outsourcing provider, the Board or Senior Management should be required to satisfy themselves as to the expertise, knowledge and skills of such provider.

Outsourcing arrangements should be subject to periodic reviews. Periodic reports should be made to management and the Board.

While the framework should encompass all insurers within a jurisdiction, it should be sufficiently flexible with varying supervisory review and reporting requirements that allow for taking a risk-based approach. For example, the supervisory processes and activities which are appropriate for a complex, internationally active insurer may be different than those for a small, local insurer.

The supervisor should have documented procedures and/or guidelines for consistent and regular supervisory review and reporting at an appropriate level of depth.

The supervisor should be able to process data in a timely and effective way and have processes and procedures to collect and store reported data securely in an electronic format. The framework should have the necessary protections for confidential information in the possession of the supervisor and for the sharing of information (see ICP 2 Supervisor and ICP 3 Information Sharing and Confidentiality Requirements).

The framework should enable the supervisor to coordinate on-site inspection and off-site monitoring activities. The supervisor should document the results of these activities in such a way that they are accessible and comprehensible to all involved staff.

• current and prospective solvency, including assets and liabilities and off-balance sheet commitments;
• capital resources management;
• technical operations (eg actuarial methods, underwriting policy, reinsurance policy);
• treatment of customers and whether any activities being engaged in are not fair, lawful or proper;
• corporate culture, business objectives and strategies and business models;
• the systems of risk management and internal controls;
• organisational structure; and
• compliance with supervisory requirements.

A supervisory plan is a tool for supervisors to determine the frequency, scope and depth of supervisory review activities. It could be generic (eg addressing categories or groups of insurers) or specific (addressing individual insurers).