3 Common Governance Pitfalls + How to Remedy Before Your Next Examination

When it comes to insurance industry regulations, corporate governance can play a significant role in determining a company’s success. With heightened public scrutiny due to social media and the risk of expedited spread of information, as well as the greater use of complex technology, much of the risk landscape is shifting. Now more than ever, it’s important to make sure your insurance company has a strong corporate governance structure and is prepared for a risk-focused examination. We share below a summary of common regulatory examination pitfalls — and how to avoid them. 

Pitfall #1: Lack of Documentation

Inaccurate or incomplete documentation can result in a major headache for companies. Without proper evidence to document the implementation of policies and procedures and necessary control discussions, exam teams are often forced to apply alternative procedures, resulting in a lengthier examination process. The same documentation expectations apply to the board of directors: any key decisions or communication (ie., discussions with external auditors or actuaries, discussions of investment activities and approvals, etc.) need to be thoroughly documented.  

With more reliance than ever on digital tools, all documentation procedures should be assessed routinely. If there’s already a system of recording information in place, be sure and check that there’s a backup system in place or alternative control should that one fail for any reason. 

Pitfall #2: Failure to Comply with Statutes, Regulations, and Bylaws

Given the fluid nature of risk management, it’s important to make sure the company is up-to-date on all statutes, regulations, and in compliance with company articles and bylaws. Many statutes and regulations vary based on jurisdiction and can change over time.  

The same level of attention should apply to those charged with governance. With heightened public attention and changing expectations, stakeholders are looking for diversity in boards. The board should be structured in accordance with company bylaws, as well as reflective of the company itself and its stakeholders.

Pitfall #3: Inadequate Discussion

Like the risk-management landscape, discussion surrounding corporate governance should never be static. That’s why it’s important to have a firm understanding of every facet of the company management process. This applies especially to the board and senior-level employees, as regulators expect that management and those charged with governance are able to speak articulately about risk areas, mitigation strategies, strengths and weaknesses, and demonstrate that meaningful discussion is taking place in areas of high risk. 

Straightforward Strategies to Prepare for an Examination

Though it can seem daunting to prepare for a regulatory examination, there are a few key things an insurance company can do to ensure that the process goes as smoothly as possible.

Step #1: Formalize Documentation for Policies and Procedures

After an organization has developed and established formal policies and procedures, it’s important to formalize documentation.  In doing this, organizations are able to create company-wide standards that can be referred to as needed. When regulatory examinations are scheduled, the organization will be able to easily point to and provide any policies or procedures in place. 

Step #2: Retain Documentation of Key Controls and Information

As mentioned earlier, thorough documentation is paramount when it comes to meeting regulatory standards. By developing and retaining formal documentation of key processes and controls, the board and senior management will be able to answer any questions easily. Additionally, audit and accounting information and support should be kept for the amount of time specified in the appropriate document retention guidelines. 

Step #3: Review Internal Control Processes Periodically

Without an effective set of control processes, it can be difficult to track an organization’s success. By establishing and maintaining thorough internal control processes, it’s easier to understand how a company is performing, as well as to identify any areas of concern. Control processes also make it easier to articulate strengths and weaknesses, as well as answer any questions, during the regulatory examination. 

Final Notes

In conclusion, corporate governance plays a crucial role in navigating the complex and ever-changing regulatory landscape in the insurance industry. By avoiding common pitfalls such as lack of documentation, failure to comply with regulations, and inadequate consideration of key risks, companies can prepare themselves for successful regulatory examinations. By following the steps of formalizing and documenting policies and procedures, retaining information and documentation, and reviewing internal control processes periodically, organizations can establish a solid foundation for risk management and ensure they are in compliance with relevant laws and expectations of regulations. Ultimately, effective corporate governance not only helps companies meet regulatory standards but also strengthens their overall risk management practices, leading to greater success in the long run.

How Can Johnson Lambert Help?

Looking to learn more about corporate governance’s role in the insurance industry? Have questions about the regulatory environment? Reach out to our business advisory team through our contact form.