2005 Sutherland Asbill & Brennan LLP

Corporate Governance Best Practices

For Insurance Companies:
The Current Perspective
Thomas F. English
New York Life Insurance Company
Donald R. Stading
Ameritas Life Insurance Corp.
Stephen E. Roth
Sutherland Asbill & Brennan LLP
Cynthia M. Krus
Sutherland Asbill & Brennan LLP
2005 Sutherland Asbill & Brennan LLP
Introduction
Despite the fact that there is no legal requirement to do so, there has
been some recent movement within the non-public company sector
of the insurance industry to adopt certain corporate governance best
practices as set forth in the Sarbanes-Oxley Act of 2002 (SOX) and
the various securities exchanges.
The insurance industry is confronted with certain unique problems in
applying governance principles.
Any governance principles adopted by the insurance industry should
be flexible enough to take into account the variety of insurers within
its purview
2005 Sutherland Asbill & Brennan LLP
Introduction
Insurance companies should anticipate that the certain governance
and disclosure reforms will become increasingly expected of them,
especially in light of the NAICs proposed revisions to the Model
Audit Rule incorporating certain aspects of SOX.
Our outline discusses best practices for officers and directors of
insurance companies to consider given the enhanced scrutiny
inherent in todays environment.
Obviously, one size does not fit all and the board of each company
should tailor procedures to its own circumstances.
2005 Sutherland Asbill & Brennan LLP
Tone at the Top
Having the right tone at the top is one of the most important factors
in ensuring that the board meets all its duties.
The right tone at the top will establish the ethical culture of the
corporation and permeate the corporations relationships with
employees, the business community and regulators.
The board of directors should participate in creating the right tone at
the top and oversee how it is being communicated to all employees
and constituents of the corporation.
2005 Sutherland Asbill & Brennan LLP
Director Independence
Companies will increasingly be expected to have a board of directors
with at least a significant number, if not a majority, of independent
directors.
In general, independent directors are individuals who have no
employment or other material business relationship with the
company.
Several corporate governance guidelines suggest that directors
should be independent in both fact and appearance.
Director independence is believed to enhance the objective exercise
of independent business judgment by boards for the benefit of the
companys shareholders and other constituencies.
The determination of what constitutes independence should take into
account the industry and regulatory structure that a company
operates within.
2005 Sutherland Asbill & Brennan LLP
Board Committees
It is best practice for a board to have the following committees:
an audit committee,
a compensation committee, and
a nominating/corporate governance committee.
Each committee may formally establish a charter that specifies its
responsibilities and the manner and frequency of meeting and
reporting to the board of directors.
There is no one size fits all template for board structures. When
appropriate, smaller boards may opt to always meet as the full board
with break-out sessions for independent directors to perform
committee-type functions.
2005 Sutherland Asbill & Brennan LLP
Self Assessments
Boards and board committees of companies are increasingly
expected to complete annual self assessments.
The self evaluation is intended to serve as a useful tool for the board
to assess its strengths and weaknesses.
The Business Roundtable recommends that the independent
directors periodically review the performance of the CEO and,
together with the CEO, the performance of the remaining upper
management.
2005 Sutherland Asbill & Brennan LLP
Executive Sessions
Companies will increasingly be expected to require non-management
members of their board of directors to meet in executive sessions.
These executive sessions should be viewed primarily as a safety
valve to deal with problems and not as a forum for revisiting matters
already considered by the full board.
2005 Sutherland Asbill & Brennan LLP
Corporate Governance Guidelines
Companies will increasingly be expected to adopt a set of basic
board of directors governance policies to guide how their boards
should govern themselves.
Corporate governance guidelines typically describe the board of
directors position on the following corporate governance guidelines:
Director qualification standards;
Director responsibilities;
Director access to management and, as necessary and appropriate,
independent advisors;
Director compensation;
Director orientation and continuing education;
Management succession; and
Annual performance evaluation of the board.
2005 Sutherland Asbill & Brennan LLP
Code of Ethics
Adoption and implementation of a code of ethics is one of the most
common practices in corporate governance.
It is increasingly expected that all companies will have a code of
ethics in place to ensure that employees conduct themselves in a fair
and ethical manner.
Topics commonly addressed in a code of ethics are as follows:
Conflict of interest;
Corporate opportunities;
Confidentiality;
Fair dealing;
Protection and proper use of company assets;
Compliance with laws, rules and regulations; and
Encouraging the reporting of any illegal or unethical behavior
2005 Sutherland Asbill & Brennan LLP
Whistleblower Procedures
Whistleblower procedures ensure that employees are able to report
wrongdoing without the threat of retaliation.
Section 301 of SOX requires audit committees of public companies
to establish procedures for:
The receipt, retention, and treatment of complaints received by the
company regarding accounting, internal accounting controls, or auditing
matters; and
The confidential, anonymous submission by employees of the company
of concerns regarding questionable accounting or auditing matters.
Section 806 of SOX provides substantial protection to employee
whistleblowers who report certain company misconduct.
2005 Sutherland Asbill & Brennan LLP
The Model Audit Rule
The NAICs proposed revisions to the Model Audit Rule would
subject insurance companies to corporate governance rules similar
to those mandated by SOX.
The proposed revisions include:
Creation of an independent audit committee;
Designation of an audit committee financial expert;
Prohibition of non-audit services;
Pre-approval of audit and non-audit services;
Rotation of lead audit partner; and
Managements report on internal control over financial reporting.
2005 Sutherland Asbill & Brennan LLP
The Model Audit Rule Audit
Committee Independence
Under the proposed revisions, each member of the audit committee would
be required to be a member of the board of directors and independent of the
insurer.
In order to be considered independent under the proposed revisions, an
audit committee member may not:
Accept any consulting, advisory or other compensatory fee from the insurer other
than in his/her capacity as a member of the audit committee, the board or any
other board committee; or
Be an affiliated person of the insurer or any subsidiary thereof.
The number of independent audit committee members is based on direct
and assumed premium volume:
$0 - $25 million = no minimum, but encouraged
$25 - $100 million = 50% or more
>$100 million = 75% or more
NOTE:
The proposed revisions allow for an exception where domiciliary law requires
participation by an otherwise non-independent member.
The proposed revisions would permit the audit committee of the holding company
to act on behalf of the subsidiaries.
2005 Sutherland Asbill & Brennan LLP
The Model Audit Rule Audit
Committee Financial Expert
Pursuant to the proposed revisions, all members of the audit committee
should be financially literate and at least one individual should qualify as an
audit committee financial expert.
An audit committee financial expert should have the following attributes:
An understanding of generally accepted accounting principles or statutory
accounting principles;
The ability to assess the general application of such principles in connection with
the accounting for estimates, accruals and reserves;
Experience preparing, auditing, analyzing or evaluating financial statements that
present a breadth and level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues that can reasonably be
expected to be raised by the companys financial statements, or experience
actively supervising one or more persons engaged in such activities;
An understanding of internal controls and procedures for financial reporting; and
An understanding of audit committee functions.
2005 Sutherland Asbill & Brennan LLP
The Model Audit Rule Audit
Committee Financial Expert
An audit committee financial expert should have acquired such
attributes through:
Education and experience as a principal financial officer, principal
accounting officer, controller, public accountant or auditor or experience
in one or more positions that involve the performance of similar
functions;
Experience actively supervising a principal financial officer, principal
accounting officer, controller, public accountant, auditor or person
performing similar functions;
Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing or evaluation
of financial statements; or
Other relevant experience.
2005 Sutherland Asbill & Brennan LLP
The Model Audit Rule Internal
Control Over Financial Reporting
The proposed revisions to the Model Audit Rule would incorporate
the substantive requirements of the Section 404 of SOX.
Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles or statutory accounting principles.
Under the proposed revisions, an insurer would be required to file a
report prepared by management regarding managements
assessment of the insurers internal control over financial reporting.
2005 Sutherland Asbill & Brennan LLP
The Model Audit Rule Internal
Control Over Financial Reporting
Managements report on internal control over financial reporting
would contain:
A statement of managements responsibility for establishing and
maintaining adequate internal control over financial reporting;
A statement identifying the framework used by management to evaluate
the effectiveness of internal control over financial reporting;
Managements assessment of the effectiveness of internal control over
financial reporting;
A statement indicating that the independent certified public accountant
that audited financial statements has issued an attestation report on
managements assessment of internal control over financial reporting;
Disclosure of any material change in internal control over financial
reporting that occurred in the fourth quarter; and
Disclosure of any material weaknesses.