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FINANCIAL SERVICES

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. All governance is not alike. Banks play an important role in Germany.

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FINANCIAL SERVICES

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  1. 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

  2. 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

  3. 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 Conclusions on CG issues • FSTB Corporate Action Plan • SCCLR CG proposals (phase 2) • HKEx Consultation on CG issues • SCCLR CG proposals (phase 1) • Code of best practices • Disclosure in Annual Reports • Guidelines onINEDs • Requirements on • directors Source: Hong Kong Exchanges and Clearing Governance in HK listed companies is an example.

  4. 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?

  5. 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

  6. 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 don’t have the free lunch like you had …….” Source: Business Week – The Boss on the sidelines – April 2005 NEDs are under increased pressure

  7. 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.

  8. 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.

  9. 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.

  10. Insurance NEDs have it tough • Business model • Global structures • Jargon “It takes years to get up to speed ………” – Public Co NED, May 2005

  11. 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

  12. A plethora of audit committees? Parent Sub Sub Sub Sub Sub Sub Sub Different committees with different requirements and knowledge

  13. Is it that simple at subsidiary level? Parent Global Product Global HR Global IT Sub Sub Sub Legal structure ≠ Management structure?

  14. A serious shortage of suitable talent ……. SITUATION VACANT NED …….. Insurance Industry … made worse through trepidation and the need to refresh the Board

  15. Advice for NEDs • Line of sight transparency over drivers of value and associated risks

  16. Analysis of key assumptions underlying the financials and whether they are appropriate Example of Audit Committee Input Helping NEDs understand the risks and judgements

  17. Example of Audit Committee Input

  18. 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

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