Corporate Governance & Insurance Industry.

CORPORATE GOVERNANCE & INSURANCE INDUSTRY.
CHAPTER 1
DIFINATION OF CORPORATE GOVERNANCE
The concept of corporate governance is poorly defined because it covers various
economics aspects. As a result of this different people have come up with
different definitions on corporate governance. It is hard to point on any one
definition as the ultimate definition on corporate governance. So the best way
to define the concept is to provide a list of the definitions given by some
noteworthy people.
Various definitions of corporate governance:
According to Sir Adrian Cadbury.
The system by which companies are directed and controlled
Corporate Governance is concerned with holding the balance between economic
and social goals and between individual and communal goals. The corporate
governance framework is there to encourage the efficient use of resources and
equally to require accountability for the stewardship of those resources. The aim
is to align as nearly as possible the interests of individuals, corporations and
society"
According to Mathiesen (2002)
Corporate Governance is a field in economics that investigates how to
secure/motivate efficient management of corporations by the use of incentive
mechanisms, such as contracts, organizational designs and legislation. This is
often limited to the question of improving financial performance, for example,
how the corporate owners can secure/motivate that the corporate managers will
deliver a competitive rate of return.
The definition given by Mathiesen means that corporate governance is a method
which tries to find out the different incentives which would motivate the
managers of a corporate to give a good return to the owners of the corporation.
According to the Journal of Finance written by Shleifer and Vishnv (1997),

Corporate governance deals with the way in which suppliers of finance to
corporate assure themselves of getting a return on their investment
The definition here means that corporate governance is basically a technique
where people who give money (lenders of the money) promise themselves or
comfort themselves about getting a return on their investment.
According to J. Wolfensohn, president of the World Bank, (in 1999)
Corporate governance is about promoting corporate fairness, transparency and
accountability
According to OECD (Organisation for Economic Co-operation and
Development)
Corporate governance is the system by which business corporations are
directed and controlled. The corporate governance structure specifies the
distribution of rights and responsibilities among different participants in the
corporation, such as, the board, managers, shareholders and other stakeholders,
and spells out the rules and procedures for making decisions on corporate
affairs. By doing this, it also provides the structure through which the company
objectives are set, and the means of attaining those objectives and monitoring
performance.
The definition given by OECD means that corporate governance is an
arrangement which manages the corporations. The configuration of corporate
governance defines the duties and obligations of all the members of the
corporation, gives the structure of setting the objectives and the method of
attaining the set
In short all the definitions stated above implies that corporate governance is a
mode by which the management is motivated to work for the betterment of the
real owners of the corporation i.e. the shareholders.
In other words corporate governance can be defined as the relationship of a
company to its shareholders or more broadly the relationship of the company to
the society.
Corporate governance thus refers to the manner in which a company is managed

and states the rules, laws and regulation that affect the management of the firm.
It also includes laws relating to the formation of the firm, establishment of the
firm and the structure of the firm. The most important concern of corporate
governance is to ensure that the managers and directors act in the interest of the
firm and for the shareholders.
CHAPTER 2
HISTORICAL PERSPECTIVE OF CORPORATE
GOVERNANCE
The seeds of modern corporate governance were probably sown by the
Watergate scandal in the United States. The global movement for better
corporate governance progressed in fits and starts from the mid-1980s up to
1997. There were the odd country-level initiatives such as the Cadbury
Committee Report in the United Kingdom (1992) or the recommendations of
the National Association of Corporate Directors of the US (1995). It would be
fair to say, however, that such initiatives were few and far between. And while
there were the occasional international conferences on the desirability of good
corporate governance, most companies both global and Indian knew little of
what the phrase meant, and cared even less for its implications. More recently,
the first major stimulus for corporate governance reforms came after the SouthEast and East Asian crisis of 1997-98. This was no classical Latin American
debt crisis. Here were fiscally responsible, healthy, rapidly growing, exportdriven economies going into crippling financial crises. Gradually, governments,
multilateral institutions, banks as well as companies began to understand that
the devil lay in the institutional, microeconomic details the nitty-gritty of
transactions between companies, banks, financial institutions and capital
markets; the design of corporate laws, bankruptcy procedures and practices; the
structure of ownership and crony capitalism; sharp stock market practices; poor
boards of directors showing scant regard to fiduciary responsibility; poor
disclosures and transparency; and inadequate accounting and auditing standards.
Suddenly, corporate governance came out of dusty academic closets and
moved centre stage. Barring Japan and possibly Indonesia, countries in Asia
recovered remarkably fast. By the year 2001, Thailand, Malaysia and Korea
were on the upswing and on course to regain their historical growth rates. With
such rapid recovery, corporate governance issues s were in the danger of being
relegated to the back stage once again. There were projects to be executed,
under-value assets to be bought, and profits to be made. International investors
were again showing bullishness. In such a milieu, there seemed no urgent need
to impose concepts like better accounting practices, greater disclosure, and
independent board oversight. Corporate governance once again settled into a
phase of extended inactivity.
Indias experience was somewhat different from this Asian scheme of things.
First, unlike South-East and East. Asia, the corporate governance movement did
not occur due to a national or region-wide macro economic and financial
collapse. Indeed, the Asian crisis barely touched India.
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Secondly, unlike other Asian countries, the initial drive for better corporate
governance and disclosure, perhaps as a result of the 1992 stock market scam,
and the onset of international competition consequent on the liberalization of
economy that began in 1990, came from all-India industry and business
associations, and in the Department of Company Affairs.
Thirdly, it is fair to say that, since April 2001, listed companies in India are
required to follow some of the most stringent guidelines for corporate
governance throughout Asia and which rank among some of the best in the
world.
Even so, there is scope for improvement. For one, while India may have
excellent rules and regulations, regulatory authorities are inadequately staffed
and lack sufficient number of skilled people. This has led to less than credible
enforcement. Delays in courts compound this problem. For another, India has
had its fair share of corporate scams and stock market scandals that has shaken
investor confidence. Much can be done to improve the situation.
Just as the global corporate governance movement was going into a bit of
hibernation, there came the Enron debacle of 2001, followed by other scandals
involving large US companies such as WorldCom, Qwest, Global Crossing and
the exposure of lack of auditing that eventually led to the collapse of Andersen.
After having shaken the foundations of the business world, that too in the
stronghold of capitalism, these scandals have triggered another more vigorous
phase of reforms in corporate governance, accounting practices and disclosures
this time more comprehensively than ever before.
As a US based expert recently put it, Enron and WorldCom have done more
to further the cause of corporate transparency and governance in less than one
year, than what activists could do in the last twenty.
This is truly so. In June 2002, less than a year from the date when Enron filed
for bankruptcy, the US Congress introduced in record time the Sarbanes-Oxley
Bill. This piece of legislation (popularly called SOX) brought with it
fundamental changes in virtually every area of corporate governance and
particularly in auditor independence, conflicts of interest, corporate
responsibility and enhanced financial disclosures. The SOX Act was signed
into law by the US President on 30 July 2002. While the US Securities and
Exchanges Commission (SEC) is yet to formalize most of the rules under
various provisions of the Act, and despite there being rumbles of protest in the
corporate world against some of the more draconian measures in the new law, it
is fair to predict that the SOX Act will do more to change the contours of board
structure, auditing, financial reporting and corporate disclosure than any other
previous law in US history.
Although India has been fortunate in not having to go through the pains of
massive corporate failures such as Enron and WorldCom, it has not been found
wanting in its desire to further improve corporate governance standards. On 21
August 2002, the Department of Company Affairs (DCA) under the Ministry of
Finance and Company Affairs appointed this Committee to examine various
corporate governance issues.
CHAPTER 3
CORPORATE GOVERNANCE IN INSURANCE
Good governance in a corporate entity should be a voluntary exercise and
managements should not reduce it to a function that is statutorily enforced.
While the bottom line undoubtedly is making a point, entities should realize that
they are in business to enhance the stockholders value. Thus they owe a
fiduciary responsibility to each of their shareholders. One can analyse corporate
governance as a delicate balance between the twin tasks of performance and
compliance. When profit making becomes the solitary objective, managements
tend to lose sight of their responsibilities and throw caution to winds. When the
auditors and other officials associated with surveillance join the black deeds, the
problem assumes humongous proportions. It is exactly in this background that
we had the occasion to witness several major corporate debacles; and suddenly
corporate governance hogs the limelight like never before. The series of fiascos
led to several important legislations being enacted in some of the most
developed economies and being
followed closely globally. We hear of
corporate governance in almost all sections of business, irrespective of their
size. Corporate governance has a different dimension as far as the insurance
business is concerned. On the one hand, insurers have to be prudent in
protecting the policyholders interests as regards reasonableness in charging
premiums; objectivity in settling the claims and so on. On the other, they also
have the responsibility of profitably investing the policyholders funds. This
demands that insurers additionally have to be sensitive to the management
styles of
the organizations where the funds are being lodged. To this extent, they have a
dual function to play.
STEPS TAKEN BY THE IRDA
The multi-disciplinary Working Group on Enhanced Disclosure, appointed by
the IRDA, while examining the need for improving the public disclosure
practices of financial intermediaries, put forward three broad recommendations:
(i)
(ii)
(iii)
a specific set of disclosures that should be provided by financial

intermediaries that incur a material level of the relevant risks through
periodic reports to their shareholders, creditors and counterparties;
identification of other disclosures which could be informative but
with respect to which further investigation is necessary of their costs
and benefits or precisely how they should be made; and
Identification of certain areas where quantitative information will fill
the gap in disclosures.
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OBJECTIVES OF DISCLOSURE
The working Group while giving its recommendations reiterated the need for
extensive disclosures, stating that these can increase market discipline and may
increase the stability of the financial system and lead to an improved allocation
of capital and other resources. Greater transparency can allow participants in
the financial system to make more informed judgment about risks and returns
and to place new information in proper context. More generally, with greater
transparency there may be fewer tendencies for markets to place emphasis on
positive or negative news and in this way; volatility in the financial markets and
an important source of fragility can be reduced. The Working Groups
conclusions had three general themes: first, a healthy balance is necessary
between quantitative and qualitative disclosures; second, intermediaries
disclosure should be consistent with how they assess and manage their risks;
and third, intra-period information is necessary for a more complete view of an
institutions exposure to risks. The IAIS Task Force on Enhanced Disclosure
approved the Guidance Note on Public Disclosures by Insurers in January,
2002. Public disclosure of reliable and timely information facilitates the
understanding by prospective and existing policyholders and other market
participants of the financial position of insurers and the risks to which they are
exposed. Supervisors are concerned with maintaining efficient, safe, fair and
stable insurance markets for the benefit and protection of policyholders. Risk
disclosure is critical in the operation of a sound market. When provided with
appropriate information that allows them to assess an insurers activities and the
risks inherent in those activities, markets can respond efficiently, rewarding
those companies which manage risk effectively and penalizing those that do not.
This is often referred to as Market Discipline, and it acts as an adjunct to
supervision.
Corporate Governance (CG) encompasses the processes,
structures, information and relationships used for directing and overseeing the
management of the institution in the best interest of the institution and the key
stakeholders that have a significant interest in the on-going viability of the
company. CG is a complex interweaving of legislation, regulation business
practices, institution, cultures and social values. Good governance is the means
of ensuring that there is adequate control over objectives, strategies, controls
and operations within the company. In addition, factors such as business ethics
and corporate awareness of the environmental and societal interests of the
communities in which a company operates can also have an impact on its
reputation and on its long term success. Two elements of CG which make it an
important part of effective insurance supervision are:
(i)
effective CG can improve the confidence that investors have in

a company and therefore strengthen the access that a company
enjoys to capital, and other forms of financing, as and when it
might be required; and
(ii)
Effective CG strengthens the controls within a company to

ensure that the strategies adopted and decisions made by the
Board, acting on behalf of the stakeholders, are effectively
implemented.
Effective CG allows the supervisor to rely on the work performed by the Board
of directors and senior management and in doing so allows the supervisory
process to operate more efficiently and effectively than it would in the absence
of such a relationship. This reliance relationship, however, needs a review from
time to time to ensure that it is well founded. Both the capital market regulators
and the insurance supervisors are interested that companies adopt CG practices.
In case of the capital market regulators it is to ensure that the interests of the
investors are protected. In respect of insurance supervisors, the interest in good
CG practices stems not just from the need to protect the rights and interests of
the shareholders. It is the money that the investors have tied up in a company
that forms at least a part of its capital base that the supervisors are relying on to
protect the rights of the policyholders in the event that the company fails.
Insurance supervisors are interested in having insurance enterprises that are well
managed, that treat their customers fairly, that are in compliance with the
legislation and other requirements, and are well managed by competent ethical
individuals. In many insurance companies, there is more policyholders money
than the shareholders money the size of the policy and claims liabilities (and
provisions or reserves) exceed the amount of assets held in respect of shares and
other capital instruments that the company has issued. The investor while
making a decision to invest in the insurance company is aware of the risks.
Policyholders, on the other hand, are unaware of the risks rather they seek the
services of the insurance company to relieve their unwanted risk exposure.
While, both the shareholders and the policyholders have a common interest in
the company being run in a prudential, profitable and sound manner, board
decisions which may benefit the shareholders may not necessarily benefit the
policyholders, and vice-versa.
This is where the role of the supervisor in implementing CG acquires greater

complexity. CG forms one of the corner stones of the IAIS (international
Association of Insurance Supervisors) core principles (ICPs). While ICP 9
focuses on Corporate Governance, the other ICPs which cover various aspects
relating to CG are:
1.
2.
3.
4.
5.
6.
Suitability of Persons (ICP-7);

Changes in Controls & Portfolio Transfers (ICP-8)
Internal Controls (ICP-10)
On site Inspections (ICP-13);
Risk Assessment & Risk Management (ICP-18); and
Information, disclosure and transparency towards the market (ICP-26).
The principle of CG is linked to the Core Principle on Suitability of Persons

(ICP-7). The ICP provides, The significant owners, board members, senior
management, auditors and actuaries of an insurer are fit and proper to fulfill
their roles.
This requires that they possess the appropriate integrity,
competency, experience and qualifications. ICP-9 defines the CG framework
as one which recognizes and protects the rights of all interested parties. The
supervisory authority requires compliance with all applicable corporate
governance standards. The core principle of CG rests on another premise,
which is set out in ICP-10, viz., internal Controls. Internal controls represent a
very important tool that boards have to ensure that their decisions are
implemented. Once in place, internal controls become a very powerful tool for
the supervisor. The ICP-18 embodies the principle of Risk Assessment and
Management. A critical component of CG is the ability of insurers to recognize
the range of risks that they face, and to assess and manage those risks
effectively. Effective and prudent risk management systems appropriate to the
complexity, size and nature of the insurers business must exist, and the insurer
should establish appropriate tolerance levels to risk. The fundamental of CG is
dissemination of information to all the stakeholders, and this finds a cornerstone
in ICP-26 pertaining to Information, Disclosure and Transparency towards the
market, and ICP-12 on Reporting to Supervisors and Off-site Monitoring. For
information to be useful, it must be timely, accurate, complete and relevant.
Insurers must disclose relevant information on timely basis in order to give the
stakeholders a clear view of their business activities and financial position and
to facilitate understanding of the risks to which they are exposed.
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THE FOUNDATION OF GOOD CORPORATE GOVERNANCE RELIES

ON:
1. Transparency on financial reporting and the details of disclosures.
2. Independence of auditors.
3. Independence and expertise of the independent directors
4. Regulatory enforcement and its oversight.
5. Legal systems to resolve disputes early and with a sense of fairness.
Role of the Board;
The Board of Directors is the link between the people who provide capital
(shareholders) and those (managers) that use the capital to create value. Its
primary role is to monitor management on behalf of the shareholders. There
have to b structures and mechanisms to keep managements accountable to the
Board. Similarly there have to be structures and mechanisms to keep the Board
accountable to the shareholders. There has to be a balance of two distinct
powers.
Duties of Directors:
The Directors have two duties: duty of care and duty of loyalty; the rest is
business judgment.
Duty of loyalty means unyielding loyalty to the
shareholders. Duty of care would mean that a director must exercise due
diligence in making decisions. He must discover as much information as
possible on the question at issue and be able to show that, in reaching a
decision, he has considered all reasonable alternatives. In the case of Walt
Disney vs. its shareholders, it has been held that when a director has
demonstration that he has acted with all due loyalty and exercised all possible
care, the courts will not second-guess his decision. In other words, the court
will defer to his business judgment. Unless a decision made by the directors
is clearly self dealing or negligent, the court will not challenge it, whether or not
it was a good decision in the light of subsequent developments.
A distinction has been made by US courts between a director making a wrong
decision with ordinary negligence but not acting in bad faith
and doing wrong with ill considered and reckless negligence.
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The Board has responsibilities for the following:

1. Supervise the performance of the CEO
2. Review and approve financial objective, major strategies and plans
3. Whether the resources are being managed within the law, within
ethical considerations, and for enhancing shareholder value.
4. Review the adequacy of systems of internal control to mitigate risk
exposures,
5. Provide advice and counsel to the management.
The Board is expected to ensure that the performance of the corporation is
efficient but not to run its day-to-day administration, It is responsible for the
overall picture, not the daily business decisions, Its job is all to do with creating
momentum, movement, improvement and direction. It has to create tomorrows
corporation out of today. But who is responsible for the company? The Board
or the Management? It is the Board that bears responsibility; but in practice it is
the management that has the infrastructure, expertise, time, control and
information. Given this management domination how can a Board exercise its
responsibility? Who actually wears the crown? The paradox is how to allow
both to have dynamic control without diminishing initiative and motivation of
either. The tension between them is to enhance creative and productivity.
What information should the Board have for that purpose?
1.
2.
3.
4.
5.
6.
Financial statements, and plans and reviews.

Market intelligence about competitors
Newspaper reports; and regulatory circulars and issues.
Management Committee meetings minutes.
Consumer issues.
Employee attitudes.
Boards are found to be usually reactive and not proactive. They may exercise
negative virtues of compliance. Making sure that things are running in order
may be good enough. But its main job is to oversee management is effective
and satisfy itself that the management is solving company problems and is risktaking enough to build improved performance.
Role of CEO:
What one wants from a CEO is that he is able by virtue of ability, expertise,
resources, motivation and authority, to keep the company not only just ready for
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change but ready to benefit from changes, and ideally to lead them. The CEO
must be powerful enough to do the job, but accountable enough to do the job
correctly. The decisions he makes should be in the long-term interests of the
shareholders. Who is the best position to make a decision about the direction of
the corporation, and does that person or group have the necessary authority?
That is determined by two factors: conflicts of interest and information.
Decisions must be made with the fewest of conflicts and most information.
Accountability must come from within; and that requires a corporate
governance system that is itself accountable. It must be continually reevaluated
so that the structure itself can adapt to changing times and needs.
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CHAPTER 4
GOVERNANCE CODE FOR THE INDIAN
INSURANCE INDUSTRY
In the area of corporate governance in India, the approaches would require to
be refined. However, the task of the regulatory bodies would be considerably
eased once proper governance
standards are in place, observes R. Krishna Murthy (MD, Watson Wyatt
Insurance Consulting and former MD & CEO of SBI Life Insurance Co. Ltd.).
Corporate governance simply put is just being honest about in every way an
enterprise is run governing relationship with every stakeholder in the company.
While honesty is the best policy everywhere and at all times, it needs to be
practiced particularly in the case of insurance industry which bears a fiduciary
relationship with clients, and where the industry is judged by its long term
performance. At a time when financial institutions are increasingly under public
scanner; and some of the icons in the insurance industry in mature markets are
under attack for breaking laws and their key management personnel charged for
personal aggrandizement; the issue of corporate governance acquires new
dimension.
Urgency in India
There are four major factors why drawing up a set of governance standards for
the Indian insurance industry, covering life as well as general insurance
companies, public and private sector, is important at this stage.
Firstly, in life insurance, a well drafted governance code and their adherence
would help to shore up the level of public confidence in the new generation
insurance companies, which seem to suffer in comparison to LIC due to the
absence of a level playing field, with the insurance policies issued by the latter
carrying the stamp of sovereign guarantee. While there is reportedly a move by
the government to level this field by removing the privilege enjoyed by LIC, it
is perhaps quite a long way off. Meanwhile, as an industry which engages with
clients on long term contract, the new generation life insurance companies
should be keen to have a set of standards against which they could benchmark
their own governance to strengthen the public image that the new players can be
considered as trustworthy and dependable as their public sector counterparts.
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Secondly, the Indian Insurance industry is set to witness a major phase of

change, and possibly explosive growth, with the lifting of the foreign equity cap
and dilution of domestic promoters stake in the foreseeable future, as well as
removal of tariff regulations in the non-life sector. There are plans to pave way
for the entry of large number of players to open business in specialized
insurance fields such as health insurance by relaxing the capital and solvency
rules. We would possibly witness more foreign firms entering the country, and
key management personnel with limited industry experience representing
domestic and foreign partners running the companies. There are plans to pave
way for the entry of large number of players to open business in specialized
insurance fields such as health insurance by relaxing the capital and solvency
rules. At the same time, the existing companies in the life insurance sector,
along with facing competition from new players, will probably grapple with
greater operating challenges, such as increasing number of maturity, death and
other claims on the cumulative business built by them over the last few years.
We need good governance standards against which the companies conduct and
performance would get measured in this backdrop. On the general insurance
side, with the industry moving away from the tariff regime, there are going to be
plenty of issues concerning fair play, transparency and policyholder servicing.
Thirdly, the need for proper governance standards in the insurance industry
assumes importance in the context of the Indian corporate sector getting ready
to accept and live up to a set of corporate governance rules, thanks to the
initiatives taken by the securities market watchdog during the last two years.
Companies that are listed in the stock exchange, and having paid up capital of
Rs,3crore or net worth of Rs.25crore or more would now need to abide by the
new code. SEBI has boldly introduced a system of disincentive-cum-penalty
for defaulting companies: they run the risk of being de-listed from bourses, or
the promoters being fined up to Rs.25crore (the highest in the corporate law
book) or face imprisonment up to 10 years. Since insurance companies are not
likely to get listed in bourses in the near future and would remain closely held
companies, they need to conform to a set of governance rules of reassures takeholders about their standards of performance and conduct.
Fourthly, there is increasing evidence of public sector financial institutions
evincing interest to enter insurance business in partnership with foreign
insurance firms, and in some cases as three-way partnerships with private
corporate enterprises. While a few such ventures have recently been licensed,
several more are set to take off in the life and non-life sectors. There is
ambivalence whether such public-private partnerships are subject to the rules
normally applicable to PSU enterprises.
15
PSU managements in general have no uniform views in regard to the

applicability of corporate governance standards to them. It is important that
insurance ventures promoted by PSUs are governed by clear governance
principles to send the right signals that they are viable and dependable stand
alone entities in their own right. On a wider context, this would reinforce the
grounds on which the financial sector convergence is taking place in the Indian
market.
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CHAPTER 5
CORPORATE GOVERNANCE AND INSURANCE
INDUSTRY
We dont have to accept that the world has become a less ethical place and
learn to live with it. Even if it has, we can change it say Dr. K.C,
Mishra(Director National Insurance Academy, Pune) & Dr. Geetanjali
Panda(Mgmt Faculty, Finance & Economics, IMIS, Bhubaneswar).
Modern society can place individuals in situations where they find themselves
at odds with principles of personal ethics and character. Our desire for
independence and freedom has left us less community-oriented. Our pursuit of
happiness in the form of wealth has made a disturbing degree of socially
acceptable greed and selfishness. Our ability to demonstrate integrity is
challenged by conflicting values and social imperatives .
Seven accepted principles of personal ethics and character encompass:
1. Willing compliance with the law
2. Refusal to take unfair advantage
3. Concern and respect for others
4. Prevention of harm
5. Trustworthiness
6. Benevolence
7. Fairness
Individuals in a monetized society constitute the community of corporate
citizens. Corporate Governance is about promoting corporate fairness,
transparency and accountability. Functionally, Corporate Governance means
doing everything better, to improve relations between companies and their
shareholders; to improve the quality of Directors; to encourage people to think
long-term, to ensure that information needs to all stakeholders are met and to
ensure that executive management is monitored properly in the interest of
shareholders. Corporate Governance becomes an organic system when
companies are directed and controlled by the management in the best interest of
the stakeholders and others ensuring greater transparency and better and timely
financial reporting.
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Key Principles in the Indian context:

The OECD has defined corporate governance as a set of relationships between a
companys management, its board, its shareholders and other stakeholders.
Corporate governance provides the structure through which the objectives of the
company are set, and the means of attaining those objectives and monitoring
performance are determined. Corporate governance is of course an ongoing
process. While the set standards may undergo revision based on experienced
and developments in the market, the core principles would remain unchanged.
From an insurance company perspective, corporate governance involves the
manner in which the business of the company is governed by its board and the
senior management relating to four key elements:
i.
How the company set its corporate objectives, including the

expected rate of return on the shareholders funds. IRDA requires
insurance license applications to describe from the first stage (R-1),
the objectives of the company and its vision and mission, as well as
details of the financial returns anticipated by promoters from
insurance operations. The financial accounting rules in the Indian
insurance industry require companies to segregate policyholders
funds and shareholders funds at any given time, and conduct the
transactions pertaining to shareholders funds in a manner that is
fair to the policyholders.
ii.
How the day to day affairs of the insurance company are proposed
to be run in every functional area in the company, and what kind of
internal controls are sought to be established and enforced.
iii.
How the company proposes to align the activities and the

behaviour with the expectation that the company would operate in
a safe and sound manner and in accordance with the applicable
rules and regulations.
iv.
How the company would protect the interest of policyholders.
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CHAPTER 6
BOARD & IT`S RESPONSIBILITIES
While the IRDA licensing norms. The most important aspect of governance
code is to ensure that the collective expertise is available on the board to meet
the competitive challenges of the market place while maintaining soundness of
the company, require that the company is run by persons who are fit and
proper for the respective positions, the regulator has largely left issues
concerning the constitution of board and defining its responsibilities to the
wisdom of the promoters. The most important aspect of governance code is to
ensure that the collective expertise is available on the board to meet the
competitive challenges of the market place with maintaining soundness of the
company. It is important to ensure that board members, especially those
appointed to represent the policyholder interests, are qualified for the position,
and they have a clear understanding of their role and are able to exercise sound,
independent judgment duty of loyalty as well as duty of care.
There are five key aspects of governance expected of boards in insurance
companies:
Setting and enforcing clear lines of responsibility and accounting
throughout the organization. In insurance companies where the risk
experience emerges over several years, demarcating areas of
responsibility, and ensuring that there is an appropriate oversight by the
senior management in every functional area are crucial.
Periodically assess the effectiveness of the companys own
governance practices with due understanding of the regulatory
environment, identify areas of weakness and make changes where
necessary.
Regularly assess that the risk management systems and policies in
the company are sound; and they are rigorously adhered to.
Identify, disclose and resolve conflicts between the personal
interests of promoters; as well as senior managers and the
company. The conflict resolution issue is particularly important
where the insurance operations are part of a large business group of
a financial conglomerate.
Overseas that every type of communication to clients and potential
clients is clear, fair and not misleading.
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It is important that the board consists of persons who have the expertise, as well
as ability to commit sufficient time and energies to fulfill their responsibilities.
The Board members should regularly meet with the senior management, as well
as the internal audit team, to monitor progress towards the corporate objectives.
They should however never participate as members of the board with the day to
day management of the company. The board as well as the senior management
would need to ensure that the corporate objectives and the corporate values are
clearly set, and they are clearly communicated throughout the organization. As
they say, the tone is always set at the top.
20
ORGANIZATIONAL STRUCTURE AND

FUNCTIONING;
The board should exercise oversight in regard to all policy formulations
governing the operations of an insurance company, such as investment policy;
underwriting policy; product development and risk management policy; and
take responsibility for overseeing the managements actions to ensure their
consistency with the policies approved. Senior managers contribute to an
insurance companys sound corporate governance by exercising proper
oversight over line managers in specific business areas in a manner consistent
with the policies laid down by the board. The senior management is responsible
for proper delegation to the staff, while at the same time being cognizant of the
responsibility on their part and accountability to the board to oversee the proper
exercise of the delegated responsibility. It is therefore important that senior
management ensures an effective system of internal and external auditors in
enforcing proper governance is well known. The board and the senior
management can enhance the effectiveness of the audit function in insurance
companies by recognizing its importance and the internal control processes; and
effectively communicating the same throughout the organization. In our current
stage of market development where several issues concerning premium
accounting and reconciliation are emerging; as the insurance buying is
spreading to far flung areas and covering various strata of population, timely
audit is an important function. It is an equally important corporate governance
principle that the findings of the auditors are utilized in a timely and effective
manner to correct the problem areas. Corporate governance standards should
address corruption, self-dealing and other illegal or unethical practices in
insurance companies. There should The senior management is responsible for
proper delegation to the staff, while at the same time being cognizant of the
responsibility on their part and accountability to the board to oversee the proper
exercise of the delegated responsibility be a policy to encourage whistle
blowers, as well as support employees to freely express and point out violations
to board or senior management without fear of reprisal, either openly or
anonymously.
21
Compensation policies and ethics:

There are already issues surfacing in the Indian market concerning the
appropriateness of compensation policies in insurance companies. Failure to
link compensation and incentives to senior management to the long term
business goals can result in actions that can run counter to the policyholder
interests. In general, the compensation policies should be consistent with the
culture of the insurance company, its long term objectives and strategy.
Transparency as the core of governance:
The important of transparency as the core principle in corporate governance is
well known. Weak transparency and inadequate disclosures tend to fuel market
skepticism, and in a newly deregulated and long term oriented industry, this
could affect the interests of all stakeholders. It is well known that complex
ownership structures contribute to opacity. While listed companies are
generally more transparent, closely held firms suffer on this account by
comparison. The Indian insurance regulations emphasize the importance of
transparency in every aspect of company operations. At the current stage, there
is quite a way to go for companies to achieve the desired levels of disclosure.
Accurate and timely disclosure of information in insurance companies should be
in place in every area of operation.
Such disclosure are desirable by way of annual reports released by companies,
as well as through their websites, covering various areas, more particularly the
following:
Board structure and senior management structure
The companys self-determined code of conduct, if any, and the process
by which it is implemented, including a self assessment by the board of
its performance relative to the code
The special obligations of the insurance company under the regulations,
such as the rural and social sector obligations; and the level of their
fulfillment
Nature and extent of inter-party transactions within the promoter groups;
and matters on which the directors and senior managers have material
interests on behalf of third parties.
22
Important aspects of performance that have a bearing on the safety and

solvency, such as claim ratios Weak transparency and inadequate
disclosures tend to fuel market skepticism, and in a newly de-regulated
and long term oriented industry, this could affect the interests of all
stakeholders. Better than industry averages of internally projected levels,
unexpected depletion in the value of assets; and actions or warnings
issued by regulators.
Information on the number of cases of policyholder complaints or
disputes; and directives against the company issued by Ombudsman or
other consumer protection bodies. While financial statements may be
posted on the website, every policyholder should be entitled to ask for a
full set of account statements including notes and the supporting
schedules.
Existence of sound corporate governance standards lowers the moral risk hazard
from the regulatory viewpoint. IRDA should view corporate governance as an
important element of policyholder protection. Corporate governance codes and
the earnestness of insurance companies to adhere to them would encourage
regulation to place more reliance on the internal processes in insurance
companies; and thereby becoming less strict or more pragmatic in operational
areas, as for example, relaxing the rigours of File and Use process for product
approval. The level of self-policing by the players is indeed a barometer of
maturity of the market, since sound corporate governance serves as bedrock to
build public trust and confidence.
23
CHAPTER 7
CORPORATE GOVERNANCE
- In A Risk Based Rating Environment
In a de-tariffed regime, governance for the insurers would be a different ball
game and various issues would come up in the areas of fair rating, equitable
policy conditions etc. feels Mr. P.C. James(Executive Director, Non-Life,
IRDA).
Insurance and Corporate Governance
Corporate Governance is a subject of significance for the insurance industry.
Insurers manage the funds of the public, i.e. the premium of their customers, as
well as capital and other resources on behalf of the shareholders. Companies
also have other stakeholders such as employees, partners, intermediaries, the
government and the society. There is a growing concern that a companys
accountability and transparency requirements need to be aligned with the
expectations of stakeholders concerned. Insurance Core Principles No.9
brought out by the IAIS (International Association of Insurance Supervisors),
says that the corporate governance framework recognizes and projects the rights
of all interested parties. Corporate governance is thus required as a voluntarist
agenda for the Board and the top management on how to oversee the success
and sustainability of the organization in the wider context of satisfaction of all
the stakeholders concerned. Business organizations work in an environment of
increasing risks. Risk is anything that can impede on the negative side or
accelerate on the positive side, the achievement of business objectives.
Responding to risks involves instituting the necessary tools to discover, analyse
and make transparent the potential risks. It also means that while taking steps to
minimize or eliminate the downside of risks, the upside that can be generated by
managing risks successfully needs to be fully exploited. This linkage between
business objectives, risk, controls and their alignment to business outcomes is
important for enhancing shareholder and stakeholder value. All successful
companies excel because they have the necessary risk management capability,
internal control systems and procedures to sustain them. This naturally involves
Board level interventions in deciding strategies and policies which can ensure
that the entire company becomes risk aware; and has one uniform risk
language in the organization.
24
Risks and Insurers

The core of insurance business is the bearing of risks transferred to the insurer
by customer either through intermediaries or directly. Based on acceptance of
the risks and the premium thereof insurers are subject to various organizational
risks which are known as technical risks, investment risks and other operational
risks. Technical or underwriting risks include premium deficiency risk,
concentration risk, catastrophe risks, frequency/severity risks and so on.
Investment risks include credit risk, market risk including interest rate risks,
liquidity risks etc. Various types of operational risks also face insurers, just as
they do other business organizations. Such risks include global risks; general,
economics and political risks; industry risks; and company specific risks. The
Board is expected to have a grasp of the strategic issues involved, and set the
necessary policies and procedures regarding risk taking and the desirable risk
management techniques.
This enables the organizations many layers and operational lines to translate the
need for risk management into real and verifiable activities including the
following:
The approach to risk taking.
Internal controls including management information systems.
Worldwide, companies are being encouraged to go beyond legislative and
regulatory compulsions to where good governance norms are self
generated arising from the basic fiduciary role of the Board and the top
management. As the insurance sector grows, there will be a reduction of
supervisory resources and its place will need to be replaced by self
regulation and betterment through various self-governing mechanisms.
This will ensure that the company is operated in accordance with the best
standards of business and financial practice. From the point of view of
the regulator and others, corporate governance is necessary to promote
transparent and efficient markets. It helps to lay a strong and sustainable
foundation to the business model the Board wishes to set up so as to
exploit market opportunities. Business risks that need to be tackled
include demand risks where customers or intended customers do not buy;
competitive risks, whereby the initiatives taken by competitors can upset
strategies drawn up; and capability risks, where the companys value
proposition does or does not match the requirements of the market. A
companys readiness to be aware and act in these areas to understand,
report and be accountable for such risks, make companies face a
heightened probability of not meeting the expectations of stakeholders.
25
Risk Governance
When insurers are se to move from a rule based tariff regime to a risk based
pricing environment, risks for such insurers generate both opportunities as
well as vulnerabilities. Risk exposures heighten because the deeply held
mental models of yesterday which were versed in interpretation of given
rules need to move onto divination of an ever changing risk landscape in the
many businesses that the company may wish to offer protection. The Board
needs to put in place new mental models and systems thinking that can
create and nurture the necessary skills of seeing the insurable world in the
hard reality of risks and realistic pricing of such risks without the comfort of
tariffs. Similarly it is to be ensured that the independence of the risk
assuming function is clearly maintained and not subordinated to the
compulsions of those departments not familiar with the discipline of
insurance risk and pricing characteristics. Guidelines will need to be given
for the disciplined application of underwriting powers, with clear reporting
lines and accountabilities. The underwriting department must be endowed
with stature, experience and authority to carry out it expected functioning.
There must be the planned churning and rotation of personnel to garner everricher experience and bring in new learnings, experience and perspectives.
New skills and knowledge will have to be built up and must flow through the
organization to ensure constant up gradation and benchmarking against the
best in the market. Risk specialists need to be encouraged to probe and
question till satisfactory answers and solutions are obtained, and there should
an openness that is not afraid to challenge the experts.
26
CHAPTER 8
REGULATORY REQUIREMENTS AND
CORPORATE GOVERNANCE
Sensitivity to regulatory requirements is an important part of corporate
governance.
Companies need to guard against possible clash between the interests of the
policyholders and the owners of companies. It is well accepted that having
satisfied and happy consumers is good business, and the Board needs to
continuously strengthen the alignment of interests between the company and
its consumers through better governance standards.
Compliance
management is the beginning of corporate wisdom and is an expression of
the wiliness to develop the continuum towards developing self-accepted
norms of governance based on an inclusive agenda that looks to the
betterment of all interests in a holistic manner. A
disdain for regulatory accountability as manifest in non-compliance of laws,
regulations, guidelines is indicative of a mindset that may block
internalization of the best practice codes that can help to enhance business
success. Insurance also
involves issues of public good; and the legislative and judicial intent
wherever spelt out and point to the development of the business in the best
interest of the community, need to be kept in mind while dealing with
business practices. This means that insurers are prevented by the intent of
law and judicial precedents from acting in a manner that is arbitrary, unfair,
untenable or adverse to the interest of the consumer. Thus there cannot be
arbitrary freedom for private contracts. Corporate governance would have to
internalize the nature of insurance business in the context of the law of the
land and should keep in mind the moral and social responsibilities involved
while fashioning the templates of corporate success. Various issues thus
come up in the areas of fair rating, equitable policy conditions, proper
disclosures, acceptable methods of solicitation, terms of renewal,
cancellation of policies, loading of premium, denial of insurance, repudiation
of claims and so on. These will need to be addressed and homogenized
across the company to prevent regulatory or judicial strictures that can have
a bearing on the reputation or legitimacy of the insurer. Failing to meet
societys expectations can pose risks to organizations and at the same time a
proper understanding and effective management of generally recognized
social duties can help to build shareholder value, corporate recognized social
duties can help to build shareholder value. Corporate social responsibility is
also an area which, if neglected, can pose risks for insurers.
27
Managing community perceptions backed by beneficial action in the area of

social good can help to reduce downside risks and also open up opportunities
for profitable business as those excluded from the benefits of developmental
insurance are far too many. Involvement with social concerns including lack
of protection to the vast majority who are excluded owing to poverty or
ignorance helps to build up long-lasting intangible assets for the company. It
helps not only to capitalize on community resources and reduces regulatory
intervention but also helps to obtain competitive advantage from a longlasting fund of public goodwill. Boards Concerns for smoothening the
Rollover Detariffing involves serious transitional issues especially for the
older insurers. Active involvement of the Board and the top management is
required along with massive investment of time and money in establishing
proper systems through necessary hardware and software, as also in training
of underwriters and in creating the necessary data infrastructure and its
learning context.
In particular, the following areas would be important in the context of
corporate governance.
1. Detariffing must not degenerate into mindless rate cutting and so
called
cash-flow underwriting. Equitable rating and solvency issues are
paramount in disciplined underwriting. Hence clear guidelines from
the level of Board must be given, drawing up the methodologies of
ratemaking and also wherever possible guide tariffs, so that individual
discretion at non-responsible levels is reduced to the minimum.
2. Underwriting must be supported by a strong technical base. Rating
factors need to be identified for every sub-class, and every type of
risk. The required data needs to be captured in respect of every risk
underwritten and every claim lodged. Collection, compilation and
analysis of data will form the bedrock of developing underwriting
expertise.
Similarly pre-acceptance risk inspections and data
generated by claim surveys and inspections will also form important
part of the knowledge bank for underwriter.
28
3. Delegation of authority will be based on the knowledge of the person

concerned based on experience as well as qualifications. There must
be proven ability to evaluate all risk factors. The financial
implications of underwriting decisions on factors such as adequacy of
pricing, the concentration of risks written, the frequency/severity
aspects, etc. will need to be understood by persons who are vested
with discretionary authority. Responsibility needs to be fixed so that
delegated powers are used only as desired.
4. Determining the basis of rating. Rating can be on the basis of class for
which internal tariffs can be developed. Rating can also be on
community basis for risks such as group health or PA, where there is
an incentive for communities/groups to reduce risks and obtain
favourable terms. Finally rates can be fixed on individual basis
depending on the uniqueness of the risk and the financial magnitude
justifying individual rating. In all these cases a base rate has to be set;
and loadings and discounts should apply based on risk perceptions,
backed by factual risk features.
5. Ready availability of insurance should be ensured at fair terms for all
customers. In the restructuring that may take place on account of
detariffing it will be unfortunate if the normal insurance enjoyed by
the public prior to detariffing are not available readily under internal
tariffs and at fair terms.
6. Underwriting audit programmes must be instituted to check the
adequacy of pricing and other disciplines of underwriting and
compliance to internal tariffs.
Justification of rates, whether
individual or class, needs to be examined by the audit department; and
necessary correctives need to be suggested for implementation.
7. Training of underwriters and setting up or R&D for developing
underwriting practices is to be institutionalized. New product
development based on sound market research and innovation in areas
that can capture value for the organization in containing risks for the
consumer would be a core task to meet competitive challenges.
Detariffing will see the emergence of many new competencies and
differentiations which will help market development.
8. In moving from tariff policy wording to more innovatively packaged
products, insurers would need to ensure that that there are even more
disclosures to avoid consumer confusions, through transparent and
logical presentation of covers and benefits.
29
9. Finally customer service and grievance handling need to become a

thrust area in the detariffing era for the Board, as there are bound to be
dissatisfactions that could arise from the asymmetries perceived in the
changeover. Alleviating the difficulties of the average consumer in
times of possible uncertainties will help to win goodwill of the public
and the regulator as well as the consumer bodies.
Customers an insurer look to the company to meet promises made to
protect as per its licensed mandate. Insurance is a complex business built
around the promise to cover and pay on the occurrence of the specified event
i.e. loss occurring. The customer is not the expert on insurance and hence relies
on the integrity and skill of the insurer to meet the obligations as promised.
Insurers thus need to consider meeting their obligations not only in the end by
paying claims when covered losses occur, but also upfront in their readiness to
cover fairly and equitably so as to enable consumers to take on economic risks
that are necessary to create dynamism and momentum in the economy.
30
CHAPTER 9
CORPORATE BEST PRACTICES
-RECOMMENDATIONS FOR DIRECTORS
For ensuring good corporate governance, the importance of overseeing the
various aspects of the corporate functioning needs to be properly understood,
appreciated and implemented avers Vepa Kamesam (Former Deputy Governor
of RBI, Former MD of SBI and presently MD, institute of Insurance and Risk
Management, Hyderabad).
Historically attention was paid to the subject following the collapse of Savings
and Loan companies in USA in the mid 1980s and the SEC of USA taking a
tough stand on the same. It is ironical that once again it was the US which
brought in Sarbanes Oxley Act and along with it very stringent measures of
Corporate Governance. In passing, we may add that there is no corresponding
legislation in India. Later, Adrian Cadbury report was an important milestone,
which spelt out 19 best practices called the Code of Best Practices, which the
companies listed on the London Stock Exchange, began to comply with. Some
of those guidelines applicable to the Directors, Non-executive Directors,
Executive Directors, an d others responsible for reporting and control are as
follows:Relating to the Directors the recommendations are:
- The Board should meet regularly, retain full and effective control over the
company and monitor the executive management.
- There should be a clearly accepted division of responsibilities at the head
of a company, which will ensure balance of power and authority, such
that no individual has unfettered powers of decision. In companies where
the Chairman is also the Chief Executive, it is essential that there should
be a strong and independent element of the Board, with a recognized
senior member.
- The Board should include nonexecutive Directors of sufficient caliber
and number for their views to carry significant weight in the Boards
decisions.
- The Board should have a formal schedule of matters specifically reserved
to it for decisions to ensure that the direction and control of the company
is firmly in its hands.
- There should be an agreed procedure for Directors in the furtherance of
their duties to take independent professional advice if necessary, at the
companys expense.
31
- All Directors should have access to the advice and services of the
Company Secretary, who is responsible to the Board for ensuring that
Board procedures are followed and that applicable rules and regulations
are complied with. Any question of the removal of Company Secretary
should be a matter for the Board as a whole.
Relating to the Non-executive Directors the recommendations are:
- Non-executive Directors should bring an independent judgement to
bear on issues of strategy, performance, resources, including key
appointments, and standards of conduct.
- The majority should be independent of the management and free from
any business or other relationship, which could materially interfere
with the exercise of their independent judgement, apart from their fees
and shareholding. Their fees should reflect the time, which they
commit to the company.
- Non-executive Directors should be appointed for specified terms and
reappointment should not be automatic.
- Non-executive Directors should be selected through a formal process
and both, this process and their appointment, should be a matter for
the Board as a whole.
For the Executive Directors the recommendations in the Cadbury
Code of Best Practices are:
- Directors service contracts should not exceed three years without
shareholders approval.
- There should be full and clear disclosure of their total emoluments
and those of the Chairman and the highest-paid Directors,
including pension contributions and stock options. Separate
figures should be given for salary and performance-related
elements and the basis on which performance is measured should
be explained.
- Executive Directors\ pay should be subject to the recommendations
of a Remuneration Committee made up wholly or mainly of NonExecutive Directors.
32
And on Reporting and Controls the Cadbury Code of Best Practices

stipulate that:
- It is the Boards duty to present a balanced and understandable
assessment of the companys position.
- The Board should establish an Audit Committee of at least three NonExecutive Directors with written terms of reference, which deal
clearly with its authority and duties.
- The Directors should explain their responsibility for preparing the
accounts next to a statement by the Auditors about their reporting
responsibilities.
- The Directors should report on the effectiveness of the companys
system of internal control.
- The Directors should report that the business is a going concern, with
supporting assumptions or qualifications as necessary.
The report created mixed feelings and with some more frauds emerging in
UK, Governance came to mean the extension of Directors responsibility to
all relevant control objectives including business risk assessment and
minimizing the risk of fraud. The shareholders are surely entitled to ask, if
all the significant risks had been reviewed and appropriate actions taken to
mitigate them and why a wealth destroying event could not be anticipated
and acted upon.
The one common denominator behind the corporate failures and frauds was
the lack of effective risk management and the role of the Board of Directors.
When it became clear that merely reviewing the internal processes of control
were not enough and, therefore, risk management had to be embodied
throughout the organization, an easy solution was found by passing on this
responsibility to the internal audit.
In India, the CII came out with its own views, but SEBI, as the custodian of
millions of investors came out with its guidelines and Kumar Mangalam
Committee recommendations became mandatory and, therefore, all the listed
companies were obliged to comply in accordance with the listing agreement
with these Stock Exchanges. The clean up of most companies has begun in a
big way and the Section 49 of the SEBI Act has now almost become the
hallmark of compliance in this country.
33
The mandatory recommendations of the Kumar Mangalam Committee

include the constitution of Audit Committee and Remuneration Committee
in all listed companies; appointment of one or more independent Directors;
recognition of the leadership role of the Chairman of a company;
enforcement of accounting standards; the obligation to make more
disclosures in annual financial reports; effective use of the power and
influence of institutional shareholders; and so on.
The Committee also recommended a few provisions, which are nonmandatory. Some of the mandatory recommendations are:
- The Board of a company should have an optimum combination of
executive and non-executive Directors with not less than 50% of the
Board comprising the nonexecutive Directors.
- The Board of a company should set up a qualified and an independent
Audit Committee. The Audit Committee should have minimum three
members, all being nonexecutive Directors, with the majority being
independent, and with at least one Director having financial and
accounting knowledge. The Chairman of the Audit Committee should
be an independent Director. They are responsible for balance sheet
compilation and clarificatory notes appearing thereto; and to ensure
that sensitive information is not tucked away in small print.
The Chairman of the Audit Committee should be present at Annual
General Meeting to answer shareholder-queries.
The Company Secretary should act as the secretary to the Audit
Committee.
The Audit Committee should meet at least thrice a year. The quorum
should be either two members or one-third of the members of the Audit
Committee.
The Audit Committee should have powers to investigate any activity
within its terms of reference, to seek information from any employee; to
obtain outside legal or professional advice, and to secure attendance of
outsiders if necessary.
34
The Audit Committee should discharge various roles such as, reviewing
any change in accounting policies and practices; compliance with
accounting standards; compliance with Stock Exchange and legal
requirements concerning financial statements; the adequacy of internal
control systems; the companys financial and risk management policies
etc.
The Board of Directors should decide the remuneration of the nonexecutive Directors.
Full disclosure should be made to the shareholders regarding the
remuneration package of all the Directors.
The Board meetings should be held at least four times a year.
A Director should not be a member in more than ten committees or act as
the Chairman of more than five committees across all companies in
which he is a Director. This is done to ensure that the members of the
Board give due importance and commitment of the meetings of the Board
and its committees.
The management must make disclosure to the Board relating to all
material, financial and commercial transactions, where they have personal
interest.
In case of the appointment of a new Director or re-appointment of a
Director, the shareholders must be provided with a brief resume of the
Director, his expertise and the names of companies in which the person
also hold Directorship and the membership of committees of the Board.
A Board committee should be formed to look into the redressal of
shareholders complaints like transfer of shares, non-receipt of balance
sheet, dividend etc.
There should be a separate section on Corporate Governance in the
annual reports of the companies with a detailed compliance report.
Apart from these, the Kumar Mangalam Committee also made some
recommendations that are nonmandatory in nature. Some of are:
The Board should set up a Remuneration Committee to determine the
companys policy on specific remuneration packages for Executive
Directors.
Half-yearly declaration of financial performance including summary
of the significant events in the last six months should be sent to each
shareholder.
Non-executive chairman should be entitled to maintain a chairmans
office at the companys expense. This will enable him to discharge the
responsibilities effectively.
35
It will be interesting to note that Kumar Mangalam Committee while

drafting its recommendations was faced with the dilemma of statutory v/s
voluntary compliance. One may also be aware that the desirable code of
Corporate Governance, which was drafted by CII was voluntary in nature
and did not produce the expected improvement in Corporate Governance.
It is in this context that the Kumar Mangalam Committee felt that under
the Indian conditions a statutory rather than a voluntary code would be far
more purposive and meaningful.
This led the Committee to decide between mandatory and non-mandatory
provisions. The Committee felt that some of the recommendations are
absolutely essential for the framework of Corporate Governance and
virtually from its code, while others could be considered as desirable.
Besides, some of the recommendations needed change of statute, such as
the Companies Act for their enforcement. Faced with this difficulty, the
Committee settled for two classes of recommendations.
SEBI
has given effect to the Kumar Managlam Committees
recommendations by a direction to all the Stock Exchanges to amend
their listing agreement with various companies in accordance with the
mandatory\ part of the recommendations.
For ensuring good corporate governance in a banking organization the
importance of overseeing the various aspects of the corporate functioning
needs to be properly understood, appreciated and implemented. There are
four important forms of oversight that should be included in the
organizational structure of any bank in order to ensure the appropriate
checks and balances:
1) oversight by the board of directors or supervisory board;
2) oversight by individuals not involved in the day-today running of the
various business areas;
3) direct line supervision of different business areas; and
4) independent risk management and audit functions. In addition to these, it
is important that the key personnel are fit and proper for their jobs (this
criterion also extends to selection of Directors).
36
CHAPTER 10
RECENT DEVELOVMENTS
The Department of Company Affairs, in May 2000, invited a group of leading
industrialists, professionals and academics to study and recommend measures to
enhance corporate excellence in India. The Study Group in turn set up a Task
Force, which examined the subject of Corporate Excellence through sound
corporate governance and submitted its report in Nov. 2000. The task force in
its recommendations identified two classifications namely essential and
desirable with the former to be introduced immediately by legislation and the
latter to be left to the discretion of companies and their shareholders. Some of
the recommendations of the task force include:
Greater role and influence for nonexecutive independent directors
Stringent punishment for executive directors for failing to comply with
listing and other requirements
Limitation on the nature and number of directorship of managing and
whole-time directors
Proper disclosure to the shareholders and investing community
Interested shareholders to abstain from voting on specified matters
More meaningful and transparent accounting and reporting
Tougher listing and compliance regimen through a centralized national
listing authority
Highest and toughest standards of Corporate Governance for listed
companies
A code of public behaviour for public sector units
Setting up of a centre for Corporate Excellence
37
Recently, the Government has announced the proposal for setting up the Centre
for Corporate Excellence under the aegis of the Department of Company Affairs
as an independent and autonomous body as recommended by the study group.
The centre would undertake research on Corporate Governance; provide a
scheme by which companies could rate themselves in terms of their corporate
governance performance; promote corporate governance through certifying
companies who practice acceptable standards of corporate governance and by
instituting annual award
for outstanding performance in this area.
Governments initiative in promoting corporate excellence in the country by
setting up such a center is indeed a very important step in the right direction. It
is likely to spread greater awareness among the corporate sector regarding
matters relating to good corporate governance motivating them to seek
accreditation from this body. Cumulative effect of the companies achieving
levels of corporate excellence would undoubtedly be visible in the form of
much enhanced competitive strength of our country in the global market for
goods and services.
A large number of public sector companies both in the banking industry and
financial sector have on their Boards representative of the Government /
Reserve Bank of India. It is for debate whether functionaries of the
Government should sit on their boards.
While there is no easy or
straightforward answer to this question, at some distant future it is hoped, all the
Directors would be truly independent. The subject is no doubt complex and can
be looked upon from various angles. Frauds in the banking system are also
increasing but computer Management Information Systems should be able to
detect them early and the Board must have the will to deal with such mischief
makers in an exemplary manner. Zero tolerance should be the goal for frauds in
the banking system. It is the leader at the helm of affairs who makes a
difference. A close coordination exists through High Level Co-ordination
Committee (HLCC) between RBI, SEBI, IRDA and the Secretary Finance,
Government of India who has a formal structure for reviewing the affairs which
impact the whole financial system. Although the US and UK models are
different, this model has served us well and we seem to be comfortable to
continue with the same for some more time to come.
It would be appropriate to dwell upon the Corporate Governance standards
as applicable to the insurance industry. Capital markets, banks, insurers and
other financial institutions are all closely linked and international benchmarks
have been established and adopted by the regulators under the aegis of IAIS at
Basle. The basic principles are no doubt adopted from the OECD model.
Unlike active regulation and supervision in the banking sector, insurance
regulations are still under evolution as fundamentally the contract of insurance
is basically a promise to pay at some time in the future.
38
Events like Enron, Sumitomo, 9/11 or even natural calamities like the Tsunami
or Katrina can all change the risk comprehension and call for superior
underwriting and actuarial skills. The problem of opacity arises due to the
underlying contracts whose risk-return profiles keep changing. Therefore, the
asset liability management in insurance companies must be very dynamic and
strategies need to be fine tuned on a continuous and daily basis depending upon
the markets in which these companies operate and the risks get covered.
Insurance industry is also confronted with intensified agency problems from
informational asymmetries and complex structures of the principal agent
relationship and often times, conflicts of interest arise amongst the insurance
companies and with other players in the financial markets. Therefore, there is a
clear need for maintaining excellent Corporate Governance standards in this
industry. The IAIS principle ICP 9 is the anchor principle which gives the
entire criteria of the responsibilities of the Board of Directors and the senior
management, and the oversight responsibilities. Simultaneously it also covers
the relationship between the responsible actuary and the board of the insurance
company. All the other insurance core principles are cohesively connected to
ICP 9 and it is worth referring to ICP 7, 8, 10, 13, 18 and lastly to 26, which
deal on the suitability of persons; controls measures and portfolio changes;
internal controls; inspections; risk management and assessment; and lastly
information and disclosure requirements.
There is no escape from the governance structure and the guideline functions;
and responsibilities of the board covers inter-alia, Reviewing and guiding the
strategy of the insurance entity, including reinsurance strategies; major plans of
action, risk policy related to the main insurance risks and annual budgets;
approving the pricing strategy; setting performance objectives; overseeing
auditing and actuarial function/other oversight structures; and monitoring the
administration of the insurance entity in order to ensure that the objectives set
out in the by-laws, statues or contracts, or in documents associated with any of
these, are attained (e.g. diversified asset allocation, cost effectiveness of
administration, etc.) The guideline further state Board Members are
accountable to the entitys shareholders and / or policy holders, or participating
policy holders and / or to the competent authorities. The above guidelines got
modified in April 2005 by OECD relating to the actuaries and boundaries
between life and non-life insurers and the responsibility of the external and
internal auditor. Thus, although the process of evolution is still taking place in
view of the peculiar situations faced, there is a much greater need, so that the
highest ethics and corporate governance are followed in the insurance industry,
so that men at the helm of these Boards set exemplary standards.
39
Finally, the four aspects of oversight that should be included in the

organizational structure of any financial institution to ensure appropriate check
and balances are:
(i)
(ii)
(iii)
(iv)
Oversight by the board of directors or supervisory board;

Oversight by individuals not involved in the day-to-day
running of the various business areas;
Direct line supervision of different business areas; and
Independent risk management and audit functions.
There is an entire subject called whistle blowing and there is enormous

literature on this subject when to blow the whistle, who should blow the
whistle and where the whistle should be heard. These are the questions for
which one needs to find the answers between spate of anonymous letters to
which any one working in public sector is used to and honest officials are
harassed sometimes on one side and the damaging investigative audit reports
and doctored balance sheets on the other side. Somewhere in between lies the
governance and ethics; and standards expected to be set up by the virtuous men
appointed for heading these institutions. In such organizations the shareholders
and the other stakeholders derive full value. It is myopic, bordering on
foolishness, to look for astronomical return by the shareholders, who would
allow the boards to indulge in unethical practices like market rigging, insider
trading, speculation and host of other irregular practices for the sole purpose of
making huge profits. One cannot argue that the shareholders value is enhanced
by higher profits and dividends are distributed by the board acting merely as an
agent of the shareholder who becomes the principal. Here lies the test of
governance of the board of directors walking the well defined, honest and
straight path in conducting the affairs in the required atmosphere of
transparency seen and perceived by all the stakeholders, the markets and the
regulators. Then only one can confidently state that corporate governance has
taken firm roots in this country.
40
CHAPTER 11
CONCLUSION
41
CHAPTER 12
REFERENCE
42

Corporate Governance & Insurance Industry.

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What are some definitions of corporate governance provided?

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What are the key aspects of corporate governance according to the text?

CORPORATE GOVERNANCE & INSURANCE INDUSTRY.