Current through Register Vol. 50, No. 9, March 1, 2024
RELATES TO:
KRS
304.3-235
NECESSITY, FUNCTION, AND CONFORMITY:
KRS
304.2-110 authorizes the commissioner of the
Department of Insurance to make reasonable rules and administrative regulations
necessary for or as an aid to the effectuation of any provision of the Kentucky
Insurance Code, as defined in
KRS
304.1-010.
KRS
304.3-235 requires insurers and insurance
groups to file a corporate governance annual disclosure form. This
administrative regulation provides specific details on the contents of the
required disclosure and incorporates a form to be utilized by reporting
entities to permit efficiency in the review and submission.
Section 1. Definitions.
(1) "Corporate Governance Annual Disclosure"
or "CGAD" is defined by
KRS
304.3-235(1)(c).
(2) "Insurance group" is defined by KRS
301.3-235(1)(a).
(3) "Insurer" is
defined by
KRS
304.37-010(7).
(4) "Senior Management" means any corporate
officer responsible for reporting information to the board of directors at
regular intervals or providing this information to shareholders or regulators,
such as the Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO"),
Chief Operations Officer ("COO"), Chief Procurement Officer ("CPO"), Chief
Legal Officer ("CLO"), Chief Information Officer ("CIO"), Chief Technology
Officer ("CTO"), Chief Revenue Officer ("CRO"), Chief Visionary Officer
("CVO"), or any other "C" level executive.
Section 2. Filing Procedures.
(1) The Corporate Governance Annual
Disclosure form or CGAD form shall be filed by June 1 of each calendar year in
accordance with the provisions of
KRS
304.3-235(3) through
(6).
(2) If the CGAD is completed at the insurance
group level, then it shall be filed with the lead state of the group as
determined by the procedures outlined in the most recent Financial Analysis
Handbook adopted by the NAIC, which is available at
www.naic.org. In these instances, a
copy of the CGAD shall also be provided to the chief regulatory official of any
state in which the insurance group has a domestic insurer, upon
request.
Section 3.
Contents of Corporate Governance Annual Disclosure.
(1) The CGAD description of the governance
framework and structure required by
KRS
304.3-235(5) shall include
the following considerations:
(a)
(a) The board and various committees thereof
ultimately responsible for overseeing the insurer or insurance group and the
level at which that oversight occurs. The insurer or insurance group shall
describe and discuss the rationale for the current board size and structure;
and
(b) The duties of the board and
each of its significant committees and how they are governed, as well as how
the board's leadership is structured, including a discussion of the roles of
chief executive officer and chairman of the board within the
organization.
(2) In
accordance with
KRS
304.3-235(5)(a) 4., the
description of the policies and practices of the most senior governing entity
and significant committees shall include a discussion of the following factors:
(a) How the qualifications, expertise and
experience of each board member meet the needs of the insurer or insurance
group.
(b) How an appropriate
amount of independence is maintained on the board and its significant
committees.
(c) The number of
meetings held by the board and its significant committees over the past year as
well as information on director attendance.
(d) How the insurer or insurance group
identifies, nominates, and elects members to the board and its committees. The
discussion should include, for example:
1.
Whether a nomination committee is in place to identify and select individuals
for consideration;
2. Whether term
limits are placed on directors;
3.
How the election and re-election processes function; and
4. Whether a board diversity policy is in
place and if so, how it functions.
(e) The processes in place for the board to
evaluate its performance and the performance of its committees, as well as any
recent measures taken to improve performance,including any board or committee
training programs that have been put in place.
(3) The insurer or insurance group shall
describe the policies and practices for directing senior management, including
a description of the following factors:
(a)
Any processes or practices (i.e., suitability standards) to determine whether
officers and key persons in control functions have the appropriate background,
experience and integrity to fulfill their prospective roles, including:
1. Identification of the specific positions
for which suitability standards have been developed and a description of the
standards employed; and
2. Any
changes in an officer's or key person's suitability as outlined by the
insurer's or insurance group's standards and procedures to monitor and evaluate
these changes.
(b) The
insurer's or insurance group's code of business conduct and ethics, the
discussion of which considers, for example:
1. Compliance with laws, rules, and
administrative regulations; and
2.
Proactive reporting of any illegal or unethical behavior.
(c) The insurer's or insurance group's
processes for performance evaluation, compensation, and corrective action to
ensure effective senior management throughout the organization, including a
description of the general objectives of significant compensation programs and
what the programs are designed to reward. The description shall include
sufficient detail to allow the commissioner to understand how the organization
ensures that compensation programs do not encourage or reward excessive risk
taking. Elements to be discussed may include, for example:
1. The board's role in overseeing management
compensation programs and practices;
2. The various elements of compensation
awarded in the insurer's or insurance group's compensation programs and how the
insurer or insurance group determines and calculates the amount of each element
of compensation paid;
3. How
compensation programs are related to both company and individual performance
over time;
4. Whether compensation
programs include risk adjustments and how those adjustments are incorporated
into the programs for employees at different levels;
5. Any clawback provisions built into the
programs to recover awards or payments if the performance measures upon which
they are based are restated or otherwise adjusted; and
6. Any other factors relevant in
understanding how the insurer or insurance group monitors its compensation
policies to determine whether its risk management objectives are met by
incentivizing its employees.
(d) The insurer's or insurance group's plans
for CEO and senior management succession.
(4) The description of processes required by
KRS
304.3-235(5)(a) 4.c. shall
include a discussion of:
(a) How oversight
and management responsibilities are delegated between the board, its
committees, and senior management;
(b) How the board is kept informed of the
insurer's strategic plans, the associated risks, and steps that Senior
Management is taking to monitor and manage those risks;
(c) How reporting responsibilities are
organized for each critical risk area. The description should allow the
commissioner to understand the frequency at which information on each critical
risk area is reported to and reviewed by senior management and the board. This
description may include, for example, the following critical risk areas of the
insurer:
1. Risk management processes, for
example, an ORSA Summary Report filer may refer to its ORSA Summary Report
pursuant to the Risk Management and Own Risk and Solvency Assessment Model Act,
NAIC model law III-505;
2.
Actuarial function;
3. Investment
decision-making processes;
4.
Reinsurance decision-making processes;
5. Business strategy or finance
decision-making processes;
6.
Compliance function;
7. Financial
reporting or internal auditing; and
8. Market conduct decision-making
processes.
Section 4. Incorporation by Reference.
(1) "Corporate Governance Annual Disclosure",
07/19, is incorporated by reference.
(2) This material may be inspected, copied,
or obtained, subject to applicable copyright law, at the Kentucky Department of
Insurance, 215 West Main Street, Frankfort, Kentucky 40601, Monday through
Friday, 8 a.m. to 4:30 p.m.
STATUTORY AUTHORITY:
KRS
304.2-110