‘Senior Management’ of Insurance Undertakings
(1)
Johannes Gutenberg University, Mainz, Germany
Abstract
This chapter treats the subject of senior management in insurance undertakings. This subject comes into view because this category appears in the nomenclature of the Solvency II Level 3 draft rules. This then leads to the question whether there is a fit-and-proper-review above and beyond the limits drawn in art. 42 of the Solvency II Directive, a question ultimately answered in the negative.
First published as “Das ‘senior management’ der Versicherungsunternehmen und das künftige Versicherungsaufsichtsrecht” [in English: The ‘Senior Management’ of Insurance Undertakings and the Future Insurance Supervisory Regime], VersR (2013), 35 ff.
9.1 Introduction
The new insurance supervisory regime under the Solvency II Directive,1 the planned DVO2 and the RegE-VAG,3 are directed mainly, as with current supervisory law, at the management of insurance undertakings,4 which generally means the managing board members,5 and at key function holders.6 Supervisory board members are included in the Solvency II Directive only for undertakings that are part of a group and for insurance holding companies. More specifically, supervisory board members are not among the persons who “hold other key functions” within the meaning of art. 42 of the Solvency II Directive.7 Nor does the DVO add anything further in this area. General monitoring of the fit-and-proper standard for supervisory board members is conducted only in a broad sense under company law, as provided for currently and in the future at the national level, for the supervisory board members of financial services institutions.8
However, sec. 25, para. 2, sent. 1 of the RegE-VAG does not limit fit-and-proper supervision to managing board members, persons equivalent to them such as de facto members of management, supervisory board members, and key function holders. It goes further, and provides that all persons “authorized to make significant decisions for the undertaking” are subject to supervision. This leads to an important practical question for insurance undertakings: Is “senior management” of the insurance undertaking also subject to fit-and-proper supervision and all of the legal implications that ensue?
9.1.1 The Normative Rules
The starting point for answering this question is art. 42, para. 1 of the Solvency II Directive, which applies to “all persons who effectively run the undertaking or have other key tasks”.9 Neither the Solvency II Directive nor the DVO refers to “senior management” in connection with this. Aside from the subordinate staff members in key functions, staff members of insurance undertakings below the managing board10 are addressed only in art. 249 SG1, paras. 1 e and f of the DVO. This rule mandates, as a requirement for proper governance and thus a duty of the managing board, that the undertaking employs only persons who are suited to the tasks assigned to them. There is no reference to “senior management” in the provision, yet key function holders are unambiguously designated as addressees in the regulation. Therefore, “senior management” would have to fall under persons who “effectively run the undertaking”, at best.
The draft of the CEIOPS Consultation Paper “Draft Proposal for Level 3 Guidelines on the System of Governance” of December 2010 describes this group of persons in ref. 1.9 as follows:
Persons effectively running the undertaking cover the administrative, management or supervisory body as well as senior management. The latter includes persons employed by the undertaking who are responsible for high level decision making and implementing strategies devised and the policies approved by the management body.11
The text of sec. 25, para. 2, sent. 1 of the RegE-VAG12 currently accords with this, as does the subsequent Statement of Reasons for sec. 25 of the RegE-VAG, which states the following:
Persons who effectively run the undertaking are those who, in addition to the management, have substantial effect on the decisions of the undertaking below the level of management. Whether such lower levels of management are present in an undertaking and which persons are classified under positions are matters subject to evaluation of the individual case.13
9.2 ‘Senior Management’ in the Solvency II System
Ultimately, senior management and holders of “key functions”, among which are counted only subordinate staff members to the managing board, are placed on obligatory equal footing only under the future VAG [German Insurance Supervision Act]. Indicators of the distinction between senior management and other staff members include being given responsibility for particularly important decisions and implementing the strategies and requirements of the managing board. This would mean that all staff members in the various areas of the undertaking who have any sort of distinctive responsibility would be encompassed by the Solvency II Directive and the DVO simply based on the legal qualifier, “persons who effectively run the undertaking”.
This proposition, which is found only at Level 3 and in the RegE-VAG, contains a significant inconsistency with respect to the treatment of key function holders, regardless of whether the Solvency II Directive and the DVO intended to include senior management in fit-and-proper supervision and despite the lack of evidence for this. The inconsistency is seen in the detailed rules concerning key function holders, which would not at all be necessary if senior management were an addressee of the rule on the basis of “effectively running the business”. This is because key function holders are always part of the senior management of an undertaking and as such would be addressees of the rule in any case, even without the detailed rules. Conversely, if this singled-out senior management were in fact included in fit-and-proper supervision because it meets the condition necessary of “effectively running the undertaking”, then an open term “key function”, such as found only at Level 3 and in the RegE-VAG would miss the mark.14 It would mean that the same group of individuals would now be named twice as addressees of the law, additionally through the condition of “other key functions”. From the apparent alignment of the RegE-VAG both in its regulations and statement of reasons to the Governance Guidelines it can be assumed that in formulating the VAG [German Insurance Supervision Act] government draft, not only was the non-binding nature of CEIOPS (now EIOPA)15 guidelines overlooked, but also, and most significantly, the date of submission of the Governance Guidelines. The draft of these guidelines specifically dates from the time before dissemination of the DVO draft. Since the concept of “senior management” is not taken up at Level 1 and the DVO made no changes to this with respect to the fit-and-proper requirements, such action is also excluded at Level 3 in the future. The VAG [German Insurance Supervision Act] draft would have needed to take this into account and ought not to have been based on the non-binding regulatory wishes of CEIOPS, which are superseded by binding regulations, now published in draft form.
The individual regulations of the Solvency II system also demonstrate that a vertical extension of the fit-and-proper requirements to staff members subordinate to the managing board of the undertaking applies only to the key function holders and not to all of senior management. Art. 249 SG1, para. 1 e and f of the DVO requires—as discussed earlier—that the insurance undertaking employ suitable personnel. Under supervision law, the Level 1 and 2 rules encompass those staff members subordinate to the managing board only in their capacity as key function holders. And it is only in this same capacity that the fit-and-proper requirements for them are regulated in detail. There is nothing in any way equivalent to this for senior management. But most importantly, the DVO itself distinguishes between “holders of key functions and other categories of staff whose professional activities have a material impact on the undertaking’s risk profile”.16 It expressly mandates where it intends to encompass the latter, that being senior management and in particular the risk-takers or, in the words of the RegE-VAG, “persons who have substantial influence on the decisions of the undertaking”.17 A separate subjugation of senior management under national insurance supervision law is not provided for in the Solvency II system. This is especially true in the context of the (chief) underwriters or risk-takers being considered as distinct staff members subordinate to the managing board with significant relevance to risk. As the previous quoted language from the DVO shows, these persons are addressees of the Solvency II rules in specific circumstances and entirely separate from key function holders. This is seen, for example, both under art. 265 SG13, para. 1 c, para. 2 of the DVO in the juxtaposition of the two different groups of persons and under art. 265 SG13, para. 1 d of DVO for the specific inclusion of risk-takers.