The Role of Principles and Practices of Financial Management in the Governance of With-Profits UK Life Insurers

By Ian Dewing and Peter Russell

PPFMs have emerged as key internal and external governance documents for the management and regulation of with-profits funds as boards must ensure that financial management practices are in accordance with PPFMs.

This book presents the results of the special corporate governance arrangements of financial services firms. Management accountants have a role not only in the development and operation of systems producing PPFM information but will also need to use PPFM information to understand and compare financial performance.

• A significant contribution to the research literature on the regulation of the UK financial services industry and on the special corporate governance arrangements of financial services firms
• A greater knowledge of the development, use and perceived efficacy of principles and practices of financial management (PPFMs) will enhance the understanding of management accounting and reporting at varying levels of complexity so enabling management accountants to use PPFM information to understand and compare financial performance
• Enables Life Assurers to comply with the requirement by the Financial Services Authority to prepare and publish a document called 'Principles and Practices of Financial Management' which also has to be in a 'consumer friendly' version

• Language: English
• Publisher: Elsevier Science
• Release date: May 28, 2009
• ISBN: 9780080963853

Book preview

Table of Contents

Cover image

Copyright Page

Executive Summary

Acknowledgements

Chapter 1. Introduction

Chapter 2. Research Plan

2.1. PPFMs and with-profits Governance

2.2. PPFMs and with-profits Governance in Practice

2.3. Perceptions on PPFMs and the Governance of with-profits Funds

Chapter 3. Findings – The Role of PPFMs in the Governance of With-Profits Funds

3.1. Regulation and Governance

3.2. Life Insurers

3.3. With-profits Review, Emergence of PPFMs and Governance of with-profits Funds

Chapter 4. Findings – PPFMs and Corporate Governance

4.1. Internal Governance – PPFMs and Independent Judgement

4.2. External Governance – Reporting Opinions on Compliance with PPFM by Boards and with-profits Actuaries to Policyholders

4.3. FSA Reviews of PPFMs and of Advice and Communication with Policyholders

Chapter 5. Findings – Interviews

5.1. Internal Governance – PPFMs and Firms

5.2. External Governance – PPFMs and External Users

5.3. Benchmarking, Cost Allocation and PPFMs

5.4. Overall Governance

Chapter 6. Conclusion

6.1. Key Findings

6.2. Suggestions

6.3. Wider Implications

References

Index

Copyright Page

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The right of Ian Dewing and Peter Russell to be identified as the authors of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988

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British Library Cataloguing in Publication Data

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ISBN: 978-1-8561-7681-1

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09 10 10 9 8 7 6 5 4 3 2 1

Executive Summary

Background

Life insurance is a significant sector of the UK financial services industry, which in turn is one of the most significant sectors of the UK economy. The UK insurance industry is the largest in Europe and third largest in the world with investment holdings valued at £1,480 billion in 2006, of which with-profits assets account for some £423 billion assets invested. A feature of with-profits policies is the long-term nature of the contract and the high level of discretion retained by life insurers (firms) in respect of investments, bonuses and smoothing. The governance arrangements of with-profits funds are therefore of considerable interest and importance.

From April 2004 the UK Financial Services Authority (FSA) has required each firm undertaking with-profits business to prepare and publish Principles and Practices of Financial Management (PPFM) which explains how the firm manages its with-profits funds. Firms must make an annual report to policyholders about compliance with PPPM, which is also reviewed by the with-profits actuary who also makes a report to policyholders. There is an additional requirement that there is some independent input into the consideration of firms’ compliance with PPFM, which in many firms is undertaken by an established ‘with-profits committee’ or an independent reviewer.

The aims of this CIMA funded study were to explore how PPFMs are being used both internally in firms and externally by stakeholders and regulatory actors, and to consider the relative contribution of PPFMs to the overall corporate governance arrangements of the with-profits funds of firms. The study also contributes to the debate on the regulation of the UK financial services industry and on the special corporate governance arrangements of financial services firms.

Research questions

The specific research questions the study sought to address included the following:

■ What is the role of PPFMs in the corporate governance arrangements of firms’ with-profits funds? (RQ1)

■ How have PPFMs affected the internal management and oversight of firms’ with-profits funds? (RQ2)

■ How have PPFMs affected the external oversight of firms’ with-profits funds? (RQ3)

■ How are PPFMs used, or how might PPFMs be used, for benchmarking? (RQ4)

■ What has been the overall effect on the corporate governance of firms’ with-profits funds of the FSA’s reforms to the supervision of life insurers? (RQ5)

The research approach consisted of three stages. The first stage was to trace the emergence of PPFMs as a key element of the FSA’s governance arrangements of firms’ with-profits funds. The second stage was to review the corporate governance arrangements of the with-profits funds of different types of UK life insurers. The third stage was to conduct semi-structured interviews with individuals from firms and regulatory actors. Particular emphasis was placed on the role of PPFMs as both an ‘internal’ and ‘external’ governance mechanism.

Findings

T

he

R

ole of

PPFM

s

As regards the role of PPFMs in the corporate governance arrangements of firms’ with-profits funds (RQ1), PPFMs have an internal role, whereby firms must put in place internal corporate governance mechanisms to ensure funds are managed in compliance with PPFM, and an external role, whereby firms must put in place external corporate governance mechanisms to report compliance with PPFM to policyholders. The internal governance mechanisms consist of the with-profits committee (or equivalent), which includes non-executive directors, to oversee compliance with PPFM, the board itself and the with-profits actuary who advises the board and makes a report to the board on how discretion was exercised. The external governance mechanisms consist of an annual report from the board to policyholders stating that the board has complied with PPFM, and an annual report from the with-profits actuary stating whether, in the actuary’s opinion, the board has complied with PPFM and has taken the interests of the policyholders into account. The published PPFMs and the annual reports about compliance with PPFM can be used by consumers, policyholders and independent financial advisers in decisions about purchasing and holding with-profits policies. External governance mechanisms are of course backed-up by the activities of the FSA as regulator and the auditors.

I

nternal

M

anagement and

O

versight of

F

irms

’ W

ith

-P

rofits

F

unds

As regards PPFMs and the internal governance of with-profits funds (RQ2), from the example firms reviewed, boards obtained independent review and judgement either by the establishment of with-profits committees to advise the board, which was the case for proprietary firms, or by the appointment of independent advisers to advise the board directly, which was generally the case for mutual firms. It was easiest to identify the independent element of advice to boards as to compliance with PPPM from the documents of large, listed firms. For other firms, the process required more detailed scrutiny of PPFMs and annual reports to policyholders, often including the need to consult the annual report and accounts to obtain the information and to identify the members of the with-profits committee and/or the independent advisers, and even then, it was not always possible to identify individual members of with-profits committees.

An important question concerns the independence of members of with-profits committees. For example, is it appropriate that executive directors at group, or fellow subsidiary level, may be classified as non-executives of the insurance subsidiary? Formally, it may be the case that employees of other group companies, so long as they are not currently employed by the relevant insurance subsidiary, can be