Insurancedigest Sharing insights on key industry issues* Americas edition • July 2005 The Americas Insurance digest is published three times a year, to address the key issues driving the insurance industry. If you would like to discuss any of the issues raised in more detail, please contact the individual authors or the Editor-in-chief, whose details are listed at the end of each article. We would also welcome your feedback and comments on Insurance digest, and as such, we enclose a Feedback Fax Reply form. Your feedback will help us to ensure that our publications are addressing the issues that you feel most strongly about. Contents Americas edition • July 2005 Editor’s Comment 2 John S. Scheid The evolving definition of ‘compliance’ 4 Stephen Koslow There are several significant drivers behind the increased attention being paid to the governance of compliance operations. This article examines new perspectives on compliance functions and structure and their impact on the governance of a company’s compliance operation. European regulatory change – Threats or opportunities? 10 Tim Harris The regulatory and reporting environment for insurers in Europe has begun a process of radical change, and there is little sign of the pace of change relenting. This presents threats but also opportunities to insurers and reinsurers doing business with Europe. Record retention compliance in a changing regulatory environment 14 Jin J. Lee, James Santangelo and Rosalind Conway Record retention compliance in a changing regulatory environment examines the regulatory impact on the insurance industry, the approach to mitigating the risk of non-compliance and the approach to an effective records management program. The CFO Forum’s European Embedded Value – A superior financial reporting framework for life insurers 20 Sheryl A. Battit and David C. Scheinerman As European Embedded Value support among analysts in the European market increases, the concept is likely to spill over into the U.S. insurance market. U.S. adoption of EEV principles could provide an opportunity for improved communication to stakeholders and present an opportunity for U.S. insurers to enhance their internal performance measurement. China and India – Opportunities too big to ignore? 26 Robert Fok and Khushroo Panthaky Our authors examine the current state of affairs and future trends in these two markets, and discuss the life insurance market entry considerations from the perspective of an overseas insurer. Editor’s Comment JOHN S. SCHEID: CHAIRMAN, AMERICAS INSURANCE GROUP As this edition The first article looks at some of the more Welcome to the is released, significant conditions leading to increased companies are attention being paid to governance and July 2005 edition completing their compliance by many within the industry. second quarter Effective compliance functions aligned with of Americas or half-year company business goals and board/CEO results, the strategies are increasingly challenging Insurance digest. financial markets organizations and their chief compliance are heading officers. Where is this evolution headed? into the slower This will be examined carefully. days of summer and yet the Insurance industry remains increasingly challenged While most regulatory discussions over the by its regulators. past two years have centered on Sarbanes- Oxley requirements in the US, European Generally, the content of Insurance digest insurers have been focusing on increasing is based upon reader feedback and input regulations and changing reporting standards. from our clients about the issues that are Our second article provides a look at changes of most importance to them. Consequently, that will redefine the reporting and regulatory it is no surprise that given the ongoing landscape for European insurance companies. developments affecting companies and the concerns expressed by many insurance As a result of all the increasing regulation, executives, regulation and compliance are there are numerous tactical challenges that two subjects weighing heavily on your all businesses are facing. One of these agendas. As a result we have a few articles challenges is records retention. Our third addressing these subjects. article presents some thoughts on effective records management, together with mitigating compliance risk. 2 Insurance digest • PricewaterhouseCoopers A perennial topic of interest is capital think tank to the industry and the MOF I hope you find this range of articles of management. Today, regulators are increasingly (Ministry of Finance) and also as a bridge interest. Please do continue to provide us interested in solvency and capital adequacy. between the Government and the Industry. with feedback on the topics you would like to Embedded Value (EV) is an important tool China and India also made up the agenda at see addressed in future issues. Online copies in life insurer evaluations and in certain PricewaterhouseCoopers’ first Asia Insurance of both this publication and the sister European markets EV is increasingly utilized Forum, held in October 2004, aimed at European and Asia Pacific editions are in insurer financial reporting. The launch, providing an informal discussion forum for available from our website, therefore, of the European Embedded Value senior executives. The insights from these www.pwc.com/insurance. guidelines by the European Insurance programs regarding the dynamic markets CFO Forum is a major step forward for in China and India are well worth your read. transparency and comparability in insurance company disclosure. The development is a Finally, PricewaterhouseCoopers just rare example of industry-sponsored reporting completed a white paper focusing on the guidelines and should enable companies to future of the financial services industry over achieve a degree of consistency of reporting the next three years. Piecing the Jigsaw throughout a period of considerable change considers the drivers, risks and opportunities, John S. Scheid brought about by the move to IFRS. Like as well as the impact and responses for Editor-in-chief IFRS, these new principles are likely to have existing and potential players in the industry. an impact in North America, as well as in Asia The study identifies five principal drivers that Tel: 1-646-772-3061 and Europe. will affect all financial institutions: Politics, [email protected] Demographics, The Economic Cycle, Our last article on China and India grew out Regulation and Reporting, and Technology. of a seminar organized and sponsored by the Insurance Institute of the Republic of China Soft copies of this and all of our other FS (IIROC), which plays a very important and and sector surveys and reports are available, active role in the insurance industry in Taiwan. free of charge from our web site, The IIROC has traditionally served as the www.pwc.com/financialservices. Insurance digest • PricewaterhouseCoopers 3 The evolving definition of ‘compliance’ AUTHOR: STEPHEN KOSLOW 4 Insurance digest • PricewaterhouseCoopers New perspectives on compliance functions and structure and their impact on the governance of a company’s compliance operation. THE EVOLVING DEFINITION OF ‘COMPLIANCE’ Chief compliance officers are Exchange Commission (SEC) and Ultimately, through this structure often asked to identify the current the National Association of of relationships and connections, issues occupying a significant Securities Dealers (NASD) have the company is able to maintain amount of their time and energy. enacted rules requiring the governance framework for Over the years, responses to this compliance-related certifications meaningful oversight. question have closely tracked by senior management.2 matters being played out in the In addition, the highly publicized Compliance functions – core, media and boardrooms across the investigations and enforcement supporting and monitoring country. In the early to mid-90s, actions by New York Attorney- In a broad sense, virtually compliance officers of life General Eliot Spitzer, and the all functions occurring in insurance companies questioned related inquiries by state the business environment relate There are several whether their company had departments of insurance into to compliance. Essentially, all significant drivers adequate controls over sales and the world of brokers and employees are directed to perform advertising materials to meet contingent commissions, activities in compliance with behind the new standards of fairness and has focused attention on the company policies, procedures disclosure. Just a few years ago, governance and oversight of and objectives. Unfortunately, increased attention compliance officers worried about compliance operations at both such a broad definition becomes being paid to the how well their compliance property and casualty, as well meaningless for purposes of program compared to that of as life insurance companies. analysis and discussion. governance of peer companies and industry standards. Today, facing stiff Effective governance of a Today’s environment requires compliance compliance operation occurs inquiry by boards of directors that the word ‘compliance’ operations. and senior management teams, when a company establishes an be expanded into a term which compliance officers are intensely appropriate structure to facilitate more clearly articulates the focused on whether there is meaningful oversight over the contextual meaning of the sufficient governance and myriad compliance functions concept being conveyed. At the oversight over