PAMIC Corporate Governance Workshop Presented by: Joel C. Hopkins, Esq. Saul Ewing Arnstein & Lehr 1

What is Corporate Governance? “The structures, policies and processes through which an organization or entity is managed and controlled.” 2

Why the Focus on Corporate Governance? Financial crisis Regulators’ new prospective outlook Regulatory interest in enterprise risk “Top-down” philosophy 3

How is Corporate Governance Monitored? ORSA reporting ERM reporting (Form F) Holding Company Registration Statement (Form B) Corporate Governance Annual Disclosure Statement 4

Goals of Corporate Governance Effective, efficient and prudent management and oversight of business operations Security and long-term value for stakeholders (members / policyholders) Accountability of Board and Management Compliance with laws and regulations 5

What’s the Impact? Boards are expected (required) to play a prominent role in risk assessment, governance and financial oversight Management will have greater responsibilities to its Board and the Company 6

CORPORATE GOVERNANCE ANNUAL DISCLOSURE MODEL LAW 7

Corporate Governance Annual Disclosure Why? “Lessons Learned” Financial Crisis Inquiry Commission: “An essential cause of the financial and economic crisis was appallingly bad risk management by the leaders of some of the largest financial institutions in the United States and Europe. Each failed firm that the Commission examined failed in part because its leaders poorly managed risk.” AIG: Testimony of Sarah Dahlgren (NY Fed. Reserve Bank official) in Starr International Co., Inc. v. U.S.) as reported by Law 360: “This need [to monitor how AIG used its loan] was reinforced in the team’s initial meetings with the company, which left her with the impression that the company’s management was “shell-shocked” and indicated to Fed staffers that the decentralized nature of AIG’s control over its various units meant it was unable to answer even some basic questions about its operations . . . “ 8

Corporate Governance Annual Disclosure What It Is Model Law & Regulation adopted by the NAIC at its Fall 2014 Meeting; effective 1/1/16 Cited as one of the top insurance regulatory trends Provides regulators a tool for assessing a company’s corporate governance on an annual basis Likelihood of adoption in PA: High A proposed NAIC accreditation standard Presently before House Insurance Committee – PID to address industry concerns 9

Corporate Governance Annual Disclosure What It Is A filing that includes detailed narrative and documentation to respond to “inquiries” under 4 key areas: Governance framework & structure Policies & practices of the Board & Board committees Policies & practices for directing senior management Oversight of critical risk areas 10

Corporate Governance Annual Disclosure What It Is No specified form/format: Not a “check the box” filing or a “questionnaire/survey” No specific form/format like exists for, e.g., Forms B & D Insurers have “discretion regarding the appropriate format [and are] permitted to customize the CGAD to provide the most relevant information necessary” to permit the regulator to gain an understanding of your governance structure, policies & practices 11

Corporate Governance Annual Disclosure Its Purpose Stated Purpose: To provide to insurance regulators a summary of the corporate governance structure, policies and practices to permit the regulator to gain and maintain an understanding of the governance framework of an insurer / insurer group The CGAD must go beyond the governance documents to provide information on actual practices and, in some cases, rationale for and suitability of those practices Signed by the CEO or Secretary, affirming that the insurer has implemented the practices described and a copy has been provided to the Board or its designated committee 12

Governance Framework & Structure Corporate Governance Annual Disclosure What Must Be Included – A Few Examples Governance Framework & Structure Rationale for Board size & structure Duties of the Board & each committee – and how each is governed (e.g. bylaws, charters, informal mandates, etc.) How the Board’s leadership is structured (including a discussion of the roles of the CEO & Board chair) 13

Policies & Practices of Most Senior Governing Entity & Committees Corporate Governance Annual Disclosure What Must Be Included – A Few Examples Policies & Practices of Most Senior Governing Entity & Committees How the qualifications, expertise & experience of each Board member meets the needs of the insurer / insurer group Number of meetings of the Board & its committees and information on director attendance How the insurer/insurer group identifies, nominates & elects members to the Board & its committees (including a discussion on any term limits & how the election & re-election process works) Processes for Board to evaluate the performance of the Board & its committees; measures taken to improve performance – including training programs 14

Policies & Practices for Directing Senior Management Corporate Governance Annual Disclosure What Must Be Included – A Few Examples Policies & Practices for Directing Senior Management Processes/practices (suitability standards) for determining whether officers & key persons in control functions have appropriate background, experience & integrity to fulfill roles Plans for CEO and senior management succession Processes for performance evaluation, compensation and corrective action (must include sufficient information for an understanding how the organization ensures that compensation programs do not encourage and/or reward excessive risk taking) 15

Oversight of Critical Risk Areas Corporate Governance Annual Disclosure What Must Be Included – A Few Examples Oversight of Critical Risk Areas Processes by which the Board, its committees and senior management ensure an appropriate amount of oversight of critical risk areas (i.e. risk management, actuarial, investments, reinsurance, business strategy/finance, compliance, financial reporting/internal auditing, and market conduct), including: How oversight and responsibilities are delegated between the Board, its committees and management How the Board is kept informed of strategic plans, associated risks, and monitoring and management of risks Frequency at which information on each critical risk areas is reported to and reviewed by management and the Board 16

Corporate Governance Annual Disclosure What You Should Be Doing NOW Know what you must report on in the CGAD Could you provide now rational, logical and meaningful information on all of the CGAD inquiries? Is your governance structure appropriate for your needs and objectives? Do your governance documents accurately say what you want them to say? Are your actual practices/policies/procedures in accordance with your governance documents? Are your governance structure, documents, policies and practices effective? 17

Corporate Governance Annual Disclosure What You Should Be Doing NOW Change takes time . . . If you have not recently analyzed the appropriateness & effectiveness of your corporate governance structure, documents, policies and practices for your operations, the time to do so is now and not when the filing is imminent. 18

Corporate Governance Annual Disclosure What You Should Be Doing NOW Thinking about corporate governance CGAD is more than a regulatory reporting & monitoring tool It should be used as a springboard for asking the right questions; evaluating the company’s performance; and taking proactive steps towards best practices 19

Corporate Governance Annual Disclosure What You Should Be Doing NOW Recognize the importance of corporate governance to regulators Even if your state hasn’t (yet) adopted CGAD, financial examiners are already looking into many of the same things! Financial Conditions Examiners Handbook (NAIC) identifies certain component of effective corporate governance programs 20

Financial Condition Examiners Handbook Competency of board members Independent and adequate involvement by the board Communication between the board, management and auditors Code of conduct for senior management Establishing sound strategic and financial objectives 21

Financial Condition Examiners Handbook Relevant business planning and proactive resource allocation Reliable risk-management processes Adherence to sound principals of conduct and segregation of authority Assessment and verification of sound programs 22

Financial Condition Examiners Handbook Objective and independent reporting to the board Adoption of auditor independence and whistle-blower provisions Board oversight and approval of executive compensation and performance evaluations 23

Contact Information Joel C. Hopkins, Esquire Saul Ewing Arnstein & Lehr, LLP Penn National Insurance Tower 2 North Second Street, 7th Floor Harrisburg, PA 17101 Phone: 717.257.7525 Fax: 717.257.7590 Email: jhopkins@saul.com 24

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