CORPORATE GOVERNANCE & MARKET CONDUCT

G-force

GFIA comments on significant IAIS papers that focus on the “G” of ESG

By David Snyder, chair of the GFIA corporate governance working group and market conduct working group

Environmental, social and governance (ESG) issues have become a paramount concern for supervisors, (re)insurers and other insurance stakeholders, especially in the past year as the pandemic issues have started to wane somewhat.

The “E” aspect of ESG — environmental and climate risk issues — has risen to the top of the international supervisory agenda in the run up to November 2021’s COP26 UN Climate Conference. “S” issues, specifically the social issues of diversity, equity and inclusion, have seen increased interest in some but not all jurisdictions. Meanwhile, the “G” governance issues, while less visible to the general public, have been the subject of important international regulatory developments. Indeed, for the insurance industry, the “G” issues are every bit as important as the “E” and “S” ones.

Over the last year, GFIA’s corporate governance and market conduct working groups have provided comments on two important papers by the International Association of Insurance Supervisors (IAIS) and participated in an IAIS webinar at which the papers were discussed.

Effective control

The corporate governance group provided comments to the IAIS on its draft Application Paper on the Supervision of Control Functions, which seeks to ensure that effective control functions have the necessary independence, stature and resources to help insurers identify and manage their risks. In its comments, GFIA recommended that the provisions on outsourcing be limited to large-scale or material outsourcing.

GFIA also commented on several provisions that seemed to proscribe a particular internal company structure, since these provisions would not be workable for smaller companies, specifically those that need to combine several functions in the same employee position due to limited resources. GFIA was pleased to see the subsequent clarification by the IAIS that the finalised Application Paper it published in June 2021 should be read in the context of the principle of proportionality.

“For the insurance industry, the “G” issues of ESG are every bit as important as the “E” and “S” ones.”

Cultural exchange

Both the corporate governance and market conduct working groups provided extensive comments on the IAIS draft Issues Paper on Insurer Culture, in part because the IAIS defined culture as the bridge between prudential management and market conduct. The IAIS argues that understanding the elements that make up insurers’ culture, and which inform decisions, behaviour and practices across their business, can be critical in helping supervisors identify and address prudential and conduct issues.

While GFIA recognises the importance of good culture, in its comments it expressed concern over the possibility that culture could become an additional layer of supervision, due to its inherent subjectivity. GFIA also voiced concern over the danger that intervening in culture would intertwine supervisors too closely in the internal management of companies, rather than remaining objective external parties.

Furthermore, GFIA commented on the undefined term “fair treatment” of consumers, carried over from earlier IAIS papers. As previously stated, GFIA has a preference for defining the term based on legally established standards, rather than supervisory judgment that could exceed applicable regulatory standards.

The next letter

At the end of its insurer culture paper, the IAIS stated that it will likely consider the “S” issues of diversity and inclusion in future work. To prepare to engage in dialogue on that topic, GFIA will be consulting its members on developments and responses in their jurisdictions.

David Snyder

American Property Casualty Insurance Association