UK: Insurance Market Update - The Deloitte View For Life Insurers, December 2009

Last Updated: 13 January 2010
Article by Deloitte Financial Services Group

Most Read Contributor in UK, August 2017

Welcome to this December edition of the Insurance Market Update, in which we focus on issues in the life insurance industry.

This month's edition tackles the publication, on 26 November, of Sir David Walker's final review of corporate governance in UK banks and other financial institutions.

The aim of the Walker Review (the "Review") recommendations is to create a culture of risk awareness and rigorous challenge, in support of financial stability. Several of the key recommendations for FTSE 100-listed banks have also been applied to listed life insurers. Although they will not all be mandatory for life insurers, it is advisable to undertake a gap analysis against the Review, especially given the endorsement it receives from the FSA.

In their article, Natasha De Soysa and Mark FitzPatrick analyse different aspects of the final recommendations and look at how the insurance industry should prepare for implementing them.

We hope you find this edition informative and, as always, your comments and suggestions for future themes or topics are welcome. I take this opportunity to wish you a happy festive season and a successful 2010!

Marylène Lanari-Boisclair


The financial crisis was the result of a "massive failure in governance at every level" according to Sir Christopher Hogg, head of the Financial Reporting Council (FRC). The "Review of corporate governance in UK banks and other financial industry entities" led by Sir David Walker (the "Walker Review" or "Review") has set out to tackle this issue. The final recommendations were published on 26 November 2009.

Shortly after, on 1 December, the FRC published its review of the Combined Code, soon to be renamed the UK Corporate Governance Code, and those Walker recommendations that are applicable to all listed companies will be proposed for inclusion in the new Code.

The aim of the Walker Review recommendations is to create a culture of risk awareness and rigorous challenge, through changing behaviours and outcomes, in support of financial stability. Organisations that attempt to "tick the box" on Walker may be missing the point.

Several of the key recommendations for FTSE 100-listed banks have also been applied to listed life assurers, acknowledging the major role that they play in the capital markets and wider financial system. Although not all recommendations will be mandatory for life assurers, Walker has formed the governance benchmark which will be used by the FSA. Undertaking a gap analysis against the Review is advisable. Many of the key concepts, particularly in connection with risk governance and risk-related remuneration, are core to Solvency II and insurers should leverage existing work to address the Walker recommendations in the most efficient way.

Governance Of Risk

The Walker Review suggests that the governance failures during the financial crisis had less to do with deficiencies in conventional compliance and audit processes than with a lack of effective challenge. This itself had arisen from defective information flows, inadequate risk analysis and interpretation which was not sufficiently informed by a deep understanding of the impact of potential market events on the business model. Creating sufficient focus on a sustainable business model is critical, alongside alignment of risk appetite with business strategy. Robust board challenge informed by high quality stress and scenario analysis is also of high importance. The proposals for risk committees and CROs are structural enablers to these ends.

The Review recommends that FTSE 100-listed life assurers should establish a board risk committee responsible for oversight of risk exposure and mitigation. It has been left to the FSA to consider potential application of this recommendation to other financial institutions.

Walker's analysis suggests that more board risk committee time should be devoted to emerging risks and resilience in the face of the unexpected, and calls for sufficient focus on the "fundamental prudential risks" by the board risk committee, including the strategy for capital and liquidity management. One of the practical implementation challenges for insurers will be determining how to most effectively and efficiently conduct operational and financial risk oversight, something that insurers are already grappling with as part of Solvency II preparations. At the heart of Solvency II is the need for more closely integrated risk and capital management, and insurers should be reviewing committee structures to consider whether the right discussions are taking place in the right fora. The existence of a board audit committee, board risk committee and executive risk committee creates potential for overlap, and indeed underlap, and care will need to be taken when determining their respective mandates.

Walker emphasises that a critical role for the risk committee is the provision of advice to the board on risk appetite. Insurers should ensure rigorous full-board focus in reviewing and deciding risk appetite and tolerance. Monitoring the implementation of the approved strategy and the ongoing compliance of the business with the approved risk appetite will require improved quality, coverage and timeliness of information flows.

Walker places oversight of embedding and maintenance of a supportive culture in relation to the management of risk firmly within the purview of the board risk committee. Although this recommendation is aimed at listed life assurers, the Review makes it clear that a cultural shift is one of the most fundamental developments in governance needed and that process-led risk management frameworks have not always proved effective. All insurers should appraise the extent of their processes for assessment and oversight of risk culture.

The status and authority of the chief risk officer (CRO) in all insurers is expected to be at the highest level, with power of veto over product launch and pricing decisions. The remit of the CRO, as recommended by Walker, should cover all risks in the organisation; insurers may need to re-examine the roles and responsibilities of both the CRO and the actuarial function holder, as well as more broadly review the interaction between the risk and actuarial functions. The need for full independence of both the CRO and risk function from individual business units, while at the same time being sufficiently engaged in order to provide robust and value-adding challenge, will be a delicate path to negotiate.

Composition And Functioning Of The Board

In Sir David Walker's view, "the fundamental change needed is to make the boardroom a more challenging environment than it has often been in the past". Achieving the desired cultural behaviours both in the boardroom and through the business is likely to prove considerably harder to do than changing structures and processes.

Walker underlines the importance of the role to be played by the Chairman in achieving an atmosphere of rigorous and constructive challenge as well as having the right balance of independence, skills and experience on the board. Alongside financial, commercial and industry expertise, commonsense challenge by Non- Executive Directors (NEDs) is needed to hold the executive to account and to counteract the risk of "groupthink".

NEDs on the board of a FTSE 100-listed life assurance are expected to devote more time to their role than in the past but the original proposal of a 30 to 36 day minimum commitment now only applies to some NEDs on the board of a major bank.

The importance of board induction and training is emphasised, and insurers should be developing personalised development programmes not only for NEDs but also for executives in fields outside their specialism. Insurers should also embrace Walker's recommendation for a wide-ranging, candid board and committee evaluation, using the results as a catalyst for enhancing effectiveness.


The proposals for remuneration policy, oversight and disclosures are intended to drive a longer term and more risk aware focus both for the executive, the board and the investing institutions. Since the July Consultation Paper which set out the draft Walker recommendations, many of the remuneration points have been restricted to FTSE 100-listed banks and entities in the scope of the FSA Remuneration Code (large banks, building societies and broker dealers), including the requirement to disclose the number of employees with total expected remuneration in bands.

The remit of remuneration committees for insurers as well as other financial industry entities should be expanded to include responsibility for setting the overarching principles and parameters of remuneration policy on a firm-wide basis as well as oversight of remuneration policy and outcomes for "high-end" employees. The definition of "high-end" employees comprises those "who perform a significant influence function for the entity" or "could have a material impact on the risk profile of the entity".

The link to risk management is one of the most important aspects of the Walker remuneration recommendations. Insurers should not lose sight of the underlying benefits that can be gained from behavioural as well as procedural change – for example, changing bonus arrangements to be structurally compliant with Walker in terms of deferrals may arguably have less impact on culture than is likely to be achieved by more effectively risk weighting the basis of calculating bonus awards.

The Role Of Institutional Shareholders

The Walker Review calls for the agency gap between owner and manager of financial institutions to be reduced through increased communication and engagement between fund managers and other major shareholders and the companies that they invest in.

  • Boards are encouraged to be receptive and proactively seek involvement from major shareholders.
  • The Stewardship Code prepared by the Institutional Shareholders' Committee (ISC) will be ratified and sponsored by the FRC.
  • Adherence to the Stewardship Code should be on a "comply or explain" basis.
  • Fund managers and other institutions authorised by the FSA to undertake investment business should signify on their websites whether they commit to the Stewardship Code.

Life assurance companies and pension funds account for a significant proportion of holdings of UK equities and clearly will have a role to play in embedding the Walker recommendations, both as investee and investor. Disclosure of the business model in the annual report as proposed by the FRC is just the first step in improving communication with investors.

Implementing The Recommendations

The Walker recommendations will be implemented predominantly by the FRC through revision of the Combined Code and by the FSA though supervisory processes or amendment of Handbook provisions. As part of this process, clarification will be required from the FSA over how widely the proposals will apply to insurers outside the FTSE 100. The FSA intends to publish a further consultation paper on governance early in 2010 but has already announced the appointment of five new senior advisors to assist the FSA in its work on governance, including the panel interview process for prospective board members in the largest life assurance companies.

Those firms that look beyond the structural recommendations to the desired outcomes that the Walker Review seeks to achieve are likely to gain the most value. Rather than waiting for the details of the recommendations to be finalised before acting, insurers should start to prepare for the behavioural changes required to promote greater challenge and to refresh the focus that the Board gives to their review of the business model, and of the related risk appetite and financial strategy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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