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Brace for New NAIC Corporate Governance Disclosures in June

Publisher: Day Pitney Advisory
March 7, 2016

The Corporate Governance Annual Disclosure Model Act and Model Regulation have been adopted by the National Association of Insurance Commissioners (NAIC) and have been passed into law by California, Indiana, Iowa, Louisiana and Vermont. Other states are expected to follow suit in the near future. 

The Model Act provides for extensive disclosure about corporate governance procedures, usually to the lead state regulator for an insurance group, about

  • corporate governance framework and structure;
  • policies and practices of its board of directors and significant committees;
  • board policies and practices directing senior management; and
  • processes by which the board of directors, its committees and senior management ensure an appropriate level of oversight to the critical risk areas impacting the insurer's business activities.

The specific disclosures within those areas will, most likely, be determined by regulation. The NAIC-proposed Model Regulation includes some surprisingly invasive items, such as

  • how the qualifications, expertise and experience of each board member meet the needs of the insurer or insurance group;
  • processes in place for the board to evaluate its performance and the performance of its committees;
  • processes for performance evaluation, compensation and corrective action to ensure effective senior management throughout the organization; and
  • clawback provisions built into the programs to recover awards or payments if the performance measures on which they are based are restated or otherwise adjusted.

The first reports by those insurance groups that have insurance companies domiciled in states that have adopted the Model Act are generally due June 1, but other dates will apply in individual states and will evolve as the law rolls out across state legislatures. 

In addition to the Model Act's adoption by California, Indiana, Iowa, Louisiana and Vermont, other states are rapidly moving ahead. For example, measures have been introduced in Rhode Island, where the bill was passed by the House and recommended for passage by a Senate committee, and in Florida, where legislation is pending in both chambers of the legislature to impose reporting by 2018. Pennsylvania's regulator has given passage a high priority. 

The NAIC Financial Regulation Standards and Accreditation Committee has recommended a one-year comment period, which began on January 1, as to whether large parts of the Model Act would be required for individual states to be accredited. This move would result in almost all states adopting these provisions and requiring reports from insurers. 

The exact content of the reports is expected to continue to evolve as we move toward June 1, but insurers should be preparing to share an unprecedented level of detail on corporate governance procedures with insurance regulators annually once the statutes are adopted.