Insurer Culture: A Key Piece for Regulatory Corporate Governance

Corporate culture and insurance regulation are traditionally not considered in tandem. However, after the Global Financial Crisis (GFC), it has been concluded that the responsibility and ethical standards have been eroded in the context of a “[t]one from the top … [and that] [n]o one said ‘no’.” In Europe, this led to a significant regulatory proliferation. In this vein, European Parliament’s recital 29 Solvency II Directive acknowledges that an effective system of governance is essential for the adequate management of insurance companies. In the broader context of corporate governance, corporate culture is vital.

At present, corporate culture is gaining attention in the context of corporate finance but has yet to achieve such attention in insurance regulation. Some define corporate culture as “[a] prevalent attitude or atmosphere created by a company’s rules, policies, practices […], and communications from management, such as those touching on compliance or noncompliance with legal requirements.” Contrastingly, scholars emphasize that defining corporate culture is challenging, if not impossible and that culture is just “a mental construct.” Amidst its subjective and initially imperceptible character, one has to look at its elements, such as a company’s values, norms, conventions, customs, traditions or knowledge.  In essence, corporate culture affects a company’s risk-taking and ethics, and is essentially important for the decision-making process on various levels. Is paying more attention to corporate culture also important in the insurance regulatory context?

A major take-away from the GFC was that corporations suffered from lapsing ethics and insufficient leadership. For insurance companies, this is particularly concerning due to the pivotal role they play in our societies. The focus on their culture, consequently, cannot be overstated. A supervisory focus on insurer culture can enhance the regulated entities’ ability to effectively pursue the regulatory goals. For instance, under European law, insurance companies are subject to rigorous remuneration requirements to avoid short-term compensation, which incentivizes board members in taking too high of risks.  Sound culture can lead to less risky and more sustainable remuneration practices, and thus, enhance prudential insurance business. In sum, proper values and proper business conducts exemplify the intersection of both corporate culture and regulatory corporate governance.

The importance of insurer culture is also emphasized by the Draft Issues Paper on Insurer Culture of the International Association of Insurance Supervisors (IAIS) from June 2021. Accordingly, culture is “the set of norms, values, attitudes and behaviours of an insurer that characterizes the way in which the insurer conducts its activities.” The paper further states that “[e]ffective insurer cultures are pivotal to strengthening and maintaining public trust and confidence in the sector as a whole.”  Therefore, understanding an insurer’s culture will lead to better and more effective supervision from a prudential angle.

Even in the US, regulators are beginning to focus on insurer culture. On the occasion of the National Association of Insurance Commissioners (NAIC) annual fall meeting in 2021, a commissioner noted that “culture is a cornerstone to an insurer’s … risk management framework”. In Europe apparently, the European Insurance and Occupational Pensions Authority (EIOPA) has not deliberately looked at insurer culture yet, rather focusing on a common supervisory culture among EIOPA and National Competent Authorities.

After all, paying more attention to corporate culture is important in the insurance regulatory context. Both the US and Europe need to work on embedding insurer culture in their regulatory and supervisory scheme. Especially, since technology and digitalization are disrupting the insurance business. The cultural ideals that technology firms embrace are likely to be quite different from the ones of traditional insurance companies. Without regulatory and supervisory consideration of insurer culture, the industry could become more risky and less sustainable as these technological ideals spread within the market. For regulators, it could be helpful to recur on the Insurance Core Principles (ICPs). For instance, these principles require insurance companies to set and oversee the implementation of an insurer’s corporate culture (ICP 7.2) or include the promotion and sustainment of a sound risk culture in an effective risk management function (ICP 19.2). At the same time, supervisors will face the major hurdle to actually getting a hand on the culture of an insurance company. Because this is typically like an iceberg, largely hidden and imperceptible supervisors and supervised will have to work closely together not only to allow greater supervisory compliance, but also, to achieve sound culture and, ultimately, better insurance business.