A recently enacted Connecticut statute intended to compel insurance companies to improve their corporate governance will impose significant new obligations on Connecticut domestic insurers, and their holding companies. Pursuant to Connecticut Public Act No. 16-206, by June 1, 2017, and annually thereafter, each domestic insurer or the insurance group of which that insurer is a member must submit to the Insurance Commissioner a confidential Corporate Governance Annual Disclosure (CGAD). If an insurer is a member of an insurance group, the insurer must submit the CGAD to the lead state commissioner, as determined by the procedures in the NAIC’s applicable financial analysis handbook. Although the new statute is essentially a disclosure obligation, it will focus directors and senior management on analyzing and improving their corporate governance practices. Enactment of P.A. 16-206 follows the approval of the Corporate Governance Annual Disclosure Model Act and supporting Model Regulation by the NAIC. Similar CGAD statutes have already been enacted in several other states, including California, Florida, Vermont and Nebraska.
Under the new Act, the CGAD must contain the following information:
(1) Description of Governance Framework: The CGAD must describe the insurer's or insurance group's corporate governance framework and structure, including consideration of the following:
a. Board of Director Oversight: The Board of Directors (Board) and committees thereof ultimately responsible for overseeing the insurer or insurance group and the level or levels at which that oversight occurs. The insurer or insurance group must describe and discuss the rationale for the size and structure of the current board of directors.
b. Board Duties: The duties of the Board and each of its significant committees and how they are governed, which may include bylaws, charters, or informal mandates as well as how the Board’s leadership is structured and a discussion of the roles of the CEO and chairperson of the Board within the organization.
(2) Description of Policies and Procedures: The insurer or insurance group must describe the policies and practices of the Board and significant committees thereof, including a discussion of:
a. How each Board member’s qualifications, expertise and experience meet the needs of the insurer or insurance group.
b. How appropriate Board and significant committee independence is maintained.
c. The number of Board and significant committee meetings over the past year (including information on director attendance).
d. How the insurer or insurance group identifies, nominates and elects Board and committee members.
e. The processes in place for the Board to evaluate its and its committees’ performance, as well as any recent performance improvement measures (including any Board or committee training programs).
(3) Senior Management Policies: The insurer or insurance group must describe the policies and practices for directing senior management, including a description of the following:
a. Any processes or practices (such as suitability standards) to determine whether officers and key persons in control functions have the appropriate background, experience and integrity to fulfill their prospective roles.
b. The insurer's code of business conduct and ethics.
c. The plans for CEO and senior management succession.
d. The insurer's or insurance group's processes for performance evaluation, compensation and corrective action to ensure effective senior management, including a description of the general objectives of significant compensation programs. The description must include sufficient detail regarding how the organization ensures that compensation programs do not encourage or reward excessive risk taking.
(4) Oversight: The insurer or insurance group must describe the processes by which the Board, its committees and senior management ensure an appropriate amount of oversight to the critical risk areas impacting the insurer's or insurance group's business activities, including a discussion of:
a. How oversight and management responsibilities are delegated among the Board, its committees and senior management.
b. How the Board is kept informed of the insurer's or insurance group's strategic plans, the associated risks, and steps senior management is taking to manage those risks.
c. How reporting responsibilities are organized for each critical risk area.
(5) Reporting Level: For purposes of completing the CGAD, the insurer/holding company system may choose to provide information on governance activities that occur at the ultimate controlling parent level, an intermediate holding company level or the individual legal entity level, depending upon how the insurer or insurance group has structured its system of corporate governance. The CGAD may be completed at (i) the level at which the insurer's/holding company’s risk appetite is determined, (ii) the level at which the earnings, capital, liquidity, operations, and reputation of the insurer are overseen collectively and at which the supervision of those factors are coordinated and exercised, or (iii) the level at which legal liability for failure of general corporate governance duties would be placed. If the insurer or insurance group determines the level of reporting based on these criteria, it must indicate which one of the three criteria was used to determine the level of reporting and explain any subsequent changes in the level of reporting.
(6) Reference to ORSA, Form B, Form F, SEC Proxy: An insurer or insurance group may reference other existing documents including an own risk and solvency assessment (“ORSA”) summary report, Form B, Form F, SEC proxy statements or foreign regulatory reporting requirements if those documents provide information that is comparable to the information required by Public Act 16-206. The insurer must attach such other documents to the CGAD if such documents are not already filed with or available to the commissioner, and clearly reference the applicable information within the CGAD.
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