California Adopts NAIC Corporate Governance Annual Disclosure Requirements

On Monday, August 17, 2015, California Assembly Bill 553 was signed by Governor Jerry Brown, and became immediately effective. AB 553 adopts much of the NAIC’s Model Corporate Governance Annual Disclosure Model Act, along with a number of measures to bring California’s Insurance Holding Company Systems Act into conformity with NAIC holding company act model legislation pertaining to internationally active insurance groups.

The corporate governance provisions of AB 553 will require California domestic insurers to provide a detailed narrative describing governance practices to the California Department of Insurance by June 1st of each year, beginning on June 1, 2016. The narrative will be protected by strict confidentiality measures, to encourage insurers to be open and transparent in describing their governance practices. Insurers are be allowed some discretion in determining the level within the organization to report their corporate governance practices at, depending upon their structure and organization.

Key items required to be described within the corporate governance annual disclosure include:

• The insurer’s corporate governance framework and structure including duties and structure of the board of directors and its committees;
• The 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 processes, the actuarial function, and investment, reinsurance and business strategy decision-making processes.

In addition to the corporate governance provisions described above, AB 553 also adopts as part of California’s insurance holding company systems law the NAIC provisions on internationally active insurance groups, and clarifies the roles of a group-wide supervisor between the states and the international insurance community.