SUPERVISORY DIRECTORS OF A CURACAO INSURANCE COMPANY
The Central Bank has issued guidance notes
According to the Curacao Ordinance on the Supervision of the Insurance Business, a Board of Supervisory Directors of an insurance company shall have the task of supervising the policy of the Management Board of such company and the general course of events of the insurance company and the business associated with it. It shall advice the Management Board. In carrying out its duties the Board of Supervisory Directors shall take into account the interests of the insurance company and the business associated with it (Article 16 par 4 Ordinance).
‘The actions and records of the persons who determine or help determine the policy of the insurance company, shall not give the Central Bank reason for the belief that the interests of those involved, now or in the future, as policyholders, insured persons or persons entitled to benefits, in insurance contracts concluded or yet to be concluded with the insurance company, might be jeopardized’ (Article 17 par 2 Ordinance).
The Central Bank has issued ´Guidance notes for the supervisory board of supervised financial institutions´ (the “Notes”), i.e. for institutions like banks and insurance companies.
According to the Notes, the members of the Board of Supervisory Directors must exercise reasonable care and sound judgment in governing the affairs of the institution. The institution should select individuals who are likely to exercise independent judgment and will participate actively in decision making. The Notes continue:
´The members of the Supervisory Board of financial institutions face special challenges, because these institutions differ from other corporations in that most of the funds they put at risk belong to others. Customers’ deposits of banks and other depository institutions and policyholders’ premiums of insurance companies are loaned out or invested to provide a reasonable return to shareholders and other beneficiaries of these institutions. This activity, generating return to the shareholders with mainly third party funding, creates limits on the risks that a supervised institution can prudently undertake. Proper managing of risks to serve these competing interests – profitability versus the safe use of third party funding – is one of the most important challenges the Supervisory Board and Management of the institution face. (…) In general, the Bank requires that these institutions avoid unsafe and unsound practices. The Bank therefore monitors the performance of the institutions in various critical areas to determine compliance with laws, rules and regulations and to encourage safe and sound practices to preserve the financial soundness of the institution in particular and a sound development of the financial sector in general.´
In the Notes it is mentioned that, in general, the quality of earnings should be of equal importance as the level of these earnings. Quality earnings result from sound fundamentals, such as good quality assets, stable funding sources, well controlled expenses, sound funds-management systems and knowledge of the markets in which the institution operates. The members of the Board of Supervisory Directors need to ensure, for instance, that earnings levels are not inflated by such factors as delayed charge-offs or inadequate provision for losses on assets.
The Notes further mention the individual responsibilities of the members of the Board of Supervisory Directors. For instance, notwithstanding the fact that members of the Board of Supervisory Directors may feel pressure from management or the shareholders, each member must ask the questions and know the facts necessary to satisfy himself that management’s or shareholders’ recommendations are feasible and in the institution’s best interest.
The members of the Board of Supervisory Directors must ensure that their own business and personal relationships do not interfere with decisions of the Board of Supervisory Directors. The members must also ensure that neither they nor others take advantage of their position to benefit personally from the institution. They should structure their business with and personal ties to the institution in such a manner to avoid even the appearance of a conflict of interest.
According to the Notes, no financial institution operates in a vacuum and an affiliate’s unsafe and unsound activities could adversely affect the soundness or the public perception of the institution.
‘Therefore, the Board of Supervisory Directors should also remain aware of the possibility that certain transactions with an affiliate may adversely affect the institution. An institution’s Board of Supervisory Directors’ primary duty is to protect the institution which it serves. Therefore, if the holding company is engaging in practices which the members of the Board of Supervisory Directors fear may harm the institution and the holding company does not answer to the institution’s concerns, or the institution’s Board of Supervisory Directors is not otherwise satisfied that actions are appropriate, members of the Board of Supervisory Directors should dissent on the record and consider appropriate action to protect the institution. In such a situation, a Board of Supervisory Directors might initiate a special investigation by an independent (legal) counsel or accountant reporting to the Board of Supervisory Directors and/or raise the issue with the supervising authority.’
Karel Frielink
Attorney (Lawyer) / Partner
(23 February 2011)
.
