Best Practices for Compensation and Governance, Industry Standard Internal Control Criteria Established
"Best Practices to Be Piloted in Q1 Next Year... Internal Control Criteria to Take Effect in July"
The Financial Services Commission (FSC) will establish best practices regarding the compensation system and governance of insurance company executives and will pilot these from the first quarter of next year. It will also prepare standard internal control criteria for the insurance sector, to be implemented from July next year. There is also a possibility of reflecting the level of compliance with these best practices in the future insurance company management evaluation (RAAS). The plan is to comprehensively impose obligations related to the scale of executive performance compensation, CEO succession, support systems for outside directors, and the internal control roles of executives and compliance officers, thereby shifting the management approach from short-term performance focus to long-term management.
Financial Services Commission Chairman Kim Byung-hwan is speaking at a press briefing on recent issues held at the Government Seoul Office in Jongno-gu, Seoul, on the 22nd. Photo by Jo Yong-jun
On the 23rd, the FSC announced that it had created best practices by discussing measures to induce long-term management of insurance companies, including the restructuring of performance systems, at the 6th Insurance Reform Meeting held on the 21st, chaired by Kim So-young, Vice Chairman of the FSC, together with the Financial Supervisory Service. The working group for the meeting included academia, related organizations, research institutes, insurance companies, and the Insurance Association.
The FSC assessed that since insurance products have ultra-long maturities, it is desirable to establish a long-term management system. It pointed out that the compensation systems of insurance companies do not properly reflect long-term management performance, leading to an expansion of management methods focused on short-term performance creation.
The FSC announced that it had prepared plans for restructuring the performance system through consultations with the working group. It stated that it would establish the "Best Practices for Insurance Company Executive Compensation Systems," which comply with international recommended standards, for the first time in the financial industry.
The best practices for the compensation system consist of the compensation system, performance evaluation system, and disclosure sections. Mandatory items under the Governance Act will present concrete best practice examples, while recommended items based on international standards will be defined in principle-based terms.
First, the fixed-to-variable pay ratio in the compensation system will be balanced, and the scale of performance compensation for each company will be set considering the level of soundness. The proportion of non-cash assets in variable pay will be expanded, and clear criteria for deferred compensation adjustments will be established to ensure the effective operation of deferred compensation systems.
In the performance evaluation system, a system will be established considering the characteristics of executive duties. To induce long-term corporate growth, the proportion of non-financial indicators such as regulatory compliance and consumer protection will be increased. In the disclosure system, performance evaluation calculation criteria and deferred compensation adjustment policies will be disclosed. If these policies are changed, the reasons for the changes will also be disclosed in the annual compensation system report.
The FSC plans to specify the best practices after this year's preparation period and the pilot operation period in the first quarter of next year and will review whether to reflect the level of compliance with best practices in RAAS.
The FSC also stated that it would prepare best practices and standards related to improving insurance company governance and establishing standard internal control criteria. Similar to the performance system practices, the governance best practices will undergo a preparation period this year, followed by pilot operation from the first quarter of next year, and then a review of whether to reflect them in RAAS.
The governance best practices consist of support for outside directors, management succession, board composition and evaluation, governance evaluation and disclosure, and support for actuarial organizations. A support organization for outside directors will be established, and the head of the support organization will be granted the authority to report to the board. A succession plan covering all stages before the appointment of the CEO will be prepared, and the board will review and supplement the appropriateness of the succession plan. A board competency composition chart will be prepared to establish management standards regarding the terms of outside directors. The board and individual directors will be evaluated at least once a year, and the chief actuary will be granted the right to receive reports on major issues.
The FSC also pointed out that unlike banking, financial investment, and specialized credit finance sectors, the insurance sector lacks standard internal control criteria.
The standard criteria will require the inclusion of all matters that must be included in internal control standards under the Governance Act, such as company task assignments and employee compliance procedures during task execution. There will be an obligation to prepare detailed management standards for each item. Basic principles to be observed across the board, including product development, insurance solicitation, and contract review, will be stipulated. These basic principles include task assignments and organizational structure, employee compliance procedures during task execution, and the roles to be performed by the board, executives, and compliance officers related to internal control.
Kim So-young, Vice Chairman of the FSC, said, "Since the insurance industry has a much longer time horizon than other financial sectors, insurance companies must operate their compensation and performance systems in line with the company's long-term interests," and urged, "Please promote improvements in company performance systems and governance in accordance with international consistency."
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