Ensuring Good Governance: Meeting ESG Standards in the Insurance Industry
Fit and Proper is a vital cornerstone of governance. The framework aims to ensure individuals holding key positions possess the necessary qualifications, competence, and integrity to effectively fulfill their responsibilities. Due to the nature of its business, professional judgement and interpretation amongst the leadership play an even greater role within the insurance industry in relation to other financial service companies. With the rise of Environmental, Social, and Governance (ESG) considerations, the quality of Fit and Proper leadership becomes ever more pertinent.
Insights from the EIOPA – Norway and Sweden
Recognizing the need for robust oversight, EIOPA published the Peer Review on Propriety of Administrative, Management or Supervisory Body Members and Qualifying Shareholders in 2019. The report centered around national authorities’ control of the “proper” component of the Fit and Proper requirements. This means the assurance that board members, key position holders and qualifying shareholders are of good character, with no criminal convictions, ongoing prosecutions, or involvement in financial crime. Additionally, they should embody financial soundness, integrity, and transparency.
Last year EIOPA published a follow-up report evaluating the implementation of recommended actions in each member state. The review revealed that Norway, along with five other countries, had implemented less than 50% of the actions. However, Sweden stood out as worst in class. Citing a lack of resources, Sweden has so far failed to fulfil any part of its assigned actions. The ongoing evaluation of both executive and non-executive board members and qualifying shareholders was shown to be a key area of concern for both Norway and Sweden. It is imperative for entities in these countries to ensure propriety assessments are made continuously and not only upon entry. Whilst the report primarily evaluated the role of national authorities in overseeing the industry, it is crucial to note that these authorities will face increased scrutiny from EIOPA in this area. Consequently, it is expected that the authorities themselves will prioritize these areas when supervising the entities operating under their national oversight.
So, what should insurance companies in Sweden and Norway do next?
The message is clear, it is high time for insurance companies to take a long and hard look at their Fit and Proper practices to review any gaps, proactively implement best practices and mine this compliance area for optimizing opportunities that align with their overall strategic ambitions.
In practice, insurance companies commonly adopt a unified approach to manage Fit and Proper assessments, where the Board of Directors typically undergoes collective evaluations. Besides conducting regular checks to verify the propriety of leaders and major shareholders, companies must also ensure that their key individuals are fit for purpose. This is accomplished through pre-appointment assessments and adherence to qualification requirements. To ensure requirements are continuously met, it is essential for companies to establish and implement an ongoing, and continuous, training and development plan for both the board of directors and key employees.
Fit and Proper and ESG
In addition to meeting regulatory requirements, it is worth noting that insurance companies have further compelling reasons to strengthen their Fit and Proper management. The growing significance of ESG has not passed anyone by, and Fit and Proper is central to all three letters of the ESG acronym – Environmental, Social and Governance.
Climate change underscores the critical need for insurance companies’ leadership to possess sufficient expertise related to environmental concerns in two distinctive ways. Solvency II has already added requirements to include risk-based scenarios in the ORSA process. From a compliance perspective, insurance companies are already gearing up for a tsunami of new and incoming ESG regulations, such as the Taxonomy Regulations, Sustainable Finance Disclosure Regulations (SFDR), Corporate Sustainability Reporting Directive (CSRD), and the Norwegian Transparency Act. From the commercial standpoint, companies will need to rely on the leadership’s collective knowledge to effectively navigate the complex challenges and opportunities presented by climate change. Inadequate knowledge regarding environmental impacts runs a serious greenwashing and reputational risk.
Due to changes in the environment, insurance companies will need to manage transition risks, reassess physical risks and underwriting models. This may lead to premium adjustments which could lead to affordability concerns, affecting the financing of the company. On the other hand, new challenges always come with new opportunities. For insurance companies this means developing innovative products and services, such as cover for climate-related risks and sustainable energy infrastructure.
In the social realm, fit and proper requirements play a pivotal role both internally and externally. The emergence of new reporting standards demands that insurance companies understand the intricate social impacts of their investments and operations. Information security and data privacy is a pressing regulatory area that stands high on the social agenda. Moreover, fostering a commitment to diversity of experience among the leadership and empowering leaders to act with an independence of mind, contributes to the company’s bottom line, as much as it aims to rebalance social injustices.
Governance factors have always been integral to fit and proper assessments, however seen through the ESG lens, Fit and Proper requirements ensure that individuals within leadership exhibit integrity and high ethical standards, by properly managing conflicts of interest controls, and embodying transparency. This means that companies must ensure that their leadership and shareholders remain “proper”.
Ongoing internal controls on propriety should ensure that the shareholding always aligns with internal and external regulations.
At Advisense, our recommendation is for insurance companies to thoroughly review their fit and proper risk management practices to proactively integrate best practices into their governance systems and ensure continuous assessments. This includes implementing a well-considered development plan for the Board of Directors and key personnel to continuously ensure qualification and competence in key areas, such as conflict of interest, whistleblowing, and ESG. Ambitious and forward-looking companies will do well to consider going beyond alignment with regulatory expectations and use this opportunity to strengthen their Fit and Proper criteria to reflect and pursue their established ESG goals, thereby effectively and efficiently achieving multiple momentous objectives within a single compliance review.
Here at Advisense, we are unique in our field by having a specialized insurance law team, along with an innovative insurance ESG team.
Together we are committed to providing tailored support to insurance companies reviewing their fit and proper practices in the following ways:
- Gap Analysis, Compliance Review and Risk Assessments
- Process and governance review for ongoing internal Fit and Proper evaluations
- Training and Development plan for the Board of Directors and company executives
- Freestanding training modules in related fields such as Conflict of Interest, Whistleblowing
- Comprehensive ESG offerings tailored to insurance companies, captives, and pension funds including set-up or enhancement of process for fit and proper governance.
- Ongoing guidance, advice, and support.
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