The French Insurance Supervision Authority (Autorité de Contrôle Prudentiel et de Résolution – “ACPR“) recently published a Notice on the appointment and renewal of persons who effectively run insurance/ reinsurance undertakings or are responsible for other key functions (“Notice“). These persons must be notified to the ACPR to allow the latter to assess the fit and proper requirements of these managers and key function holders.
In this context, the ACPR has received more than 3,000 notification files and considered it to be appropriate to provide insight into the lessons learned after the implementation of provisions in relation to the appointment of managers and key function holders. The Notice does not intend to complete current provisions on the system of governance but aims at clarifying uncertainties in relation to the appointment of managers and key function holders.
The Notice describes (i) the conditions under which the ACPR processes notifications relating to the appointment of managers and key function holders’ (paragraph 1 below) and (ii) the key areas of focus in relation to the system of governance and the way the ACPR tackles these areas, particularly in the light of the principle of proportionality (paragraph 2 below).
Notification and opposition-power of the ACPR
The ACPR reminds that the appointment or renewal of persons who effectively run the undertaking or are responsible for key functions must comply with applicable provisions and the ACPR binding Instruction n° 2015-I-03 which provides (i) a sample application form that the undertaking should use and (ii) information, inter alia, on the identity of the managers and key function holders, the scope of their powers, other mandates of the relevant person and possible conflicts of interest. Furthermore, the ACPR emphasizes that the fit and proper requirements and the experience of these persons must be met at all times and shall be subject to continuous reassessment particularly upon occurrence of any changes.
The assessment of the proper requirements is the responsibility of the undertaking, which shall have adequate processes in place. The ACPR assessment is based on the notification file, therefore, undertakings must provide appropriate justifications evidencing that the relevant person meets the fit and proper requirements in relation to the functions held.
Persons who effectively run the undertaking are appointed on the basis of their competences and experiences but also on the basis of competences required having regard to the characteristics of the undertaking.
Persons holding key functions should have sufficient authority, organizational, communication and managerial skills. The ACPR recommends an experience of ten (10) years for persons holding key functions in a large-scale undertaking or an entity with a complex activity.
The ACPR also provides recommendations for each key function:
- the risk management function should be carried out by an individual having a global vision of the risks the undertaking is exposed to. Moreover, a background in company risk management or a professional experience as auditor or internal controller is highly recommended;
- the internal audit function should be carried out by an individual with a global vision of the undertaking’s activities, a background or a professional certificate in relation to internal audit is recommended;
- the actuarial function should be carried out by an individual with knowledge in statistics, actuarial and financial mathematics, commensurate with the nature, scale and complexity of the risks inherent in the undertaking;
- the compliance function should be carried out by an individual with legal knowledge in insurance and a professional experience as auditor or manager of an insurance/ reinsurance undertaking.
Key areas of focused relating to the system of governance
In assessing the notification of the persons who effectively run the undertaking or hold key functions, the ACPR identified grey areas in the system of governance. The Notice therefore aims at clarifying and providing guidelines on the ACPR’s approach.
Persons who effectively run the undertaking
A member of the board of the undertaking cannot be the person who effectively runs the undertaking, with the exception of the chairman of the board of an insurance undertaking under certain conditions. In this respect, particular attention will be paid to the compatibility of combining the functions held within the board and as the person effectively running the undertaking.
The CEO and Deputy CEO who are the persons who effectively run the undertaking can also be members of the board and cumulate these two (2) functions.
Nevertheless, the ACPR raises the point that combining several mandates or functions can affect the capacity of the person to effectively perform these activities.
Persons exercising key functions
It is fundamental to strictly separate the responsibility for a key function with other functions. Nevertheless, it nothing prevents cumulating a key function with another non-operational function in the absence of conflicts of interest and in case of sufficient availabilities. The ACPR assesses whether persons holding key function are in a hierarchical position that allow them to exercise their function in the undertaking with objectivity, impartiality and independence. The relevant undertaking must be in a position to evidence that key function holders must have a direct access to information, directly inform the board of major issues and be under the supervision of the CEO, management board or operational manager.
The principle of proportionality
The ACPR also takes into consideration the principle of proportionality and considers the size, the nature and complexity of activities of the insurance/ reinsurance undertaking or the group. The principle of proportionality may therefore allow a person to cumulate key functions.
As a general principle, it is prohibited to hold a key function and to effectively run the undertaking, though, the principle of proportionality may allow a person in a small undertaking to cumulate these functions. Appropriate processes must be put in place to avoid possible conflicts of interests.
The principle of proportionality can also temperate the general prohibition for a board member to hold key functions, depending on the specific circumstances of the undertaking.
In summary, the Notice provides useful guidance and clarification on to the ACPR approach when assessing notifications of appointments of persons who effectively run an undertaking or hold key functions, and in particular reaffirms the discretionary power of the ACPR to rule on a case by case basis having regard to the principle of proportionality.