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The Corporate Governance Code (the “Code”) which was
published by the Malta Financial Services Authority (the
“MFSA”) on the 5th August 2022 is applicable
to all persons authorised by the MFSA to provide financial services
in or from within Malta such as credit institutions, financial
institutions, payment institutions, insurance companies and
investment firms. Nevertheless, the Code is not applicable to:
- Authorized Listed Entities falling within the scope of the MFSA
Capital Market Rules; and
- Authorized persons who are natural persons.
The Code has provided a set of core principles which are
considered essential for good corporate governance, and which
should be applied on a ‘best effort basis’. The
core principles relate to the following sections which insurance
entities are expected to implement:
- The effective board: What can be done to
assess the effectiveness of the board? By the board defining its
remit and power in a written document which is approved by the
Board, such as a Board Charter or Board Terms of Reference and
ensuring that such document is known to the entity. The Code also
goes into the structure and composition of the Board of Directors
whereby the importance of the appointment of at least one
independent non-executive director is emphasised. The process of
appointing directors should also be applied by the insurance entity
in order to ensure that the proposed director is indeed fit and
proper to carry out their extensive and demanding responsibilities
as a director of an insurance entity. The Code further recommends
that an effective succession plan should be in place to avoid key
person risk. More importantly, the Code suggests that an evaluation
of the board performance should be carried out, ideally by an
independent, external third party in order to recognize the
strengths and weaknesses identified by each director. Such
evaluation will lead to recommendations and action plans which will
improve the effectiveness of the board.
- Internal controls: the board should ensure
that appropriate internal control mechanisms are in place to ensure
any exposure to any risks identified are understood and managed.
Insurance entities are expected to embed the principles of the
updated Three Lines Model in their controls, operation and culture.
The Board should also engage an effective and robust Information
and Communication Technology and security risks management process
is in place, establishing a sound internal control framework that
will set clear responsibilities for the staff of the insurance
entity. Furthermore, insurance entities are to establish, implement
and maintain adequate policies and procedures designed to detect
any risk of failure by the insurance entity to comply with legal
and regulatory obligations. The setting up of an Audit Committee
being responsible for overseeing the financial reporting process
and the relationship with the external and internal auditors has
also been recommended in the Code to strengthen the internal
control framework of an insurance entity.
- Stakeholder engagement: the Code stresses the
importance of effective engagement with the shareholders and should
utilize the annual general meeting to communicate effectively with
the shareholders. Furthermore, the board should also encourage
active cooperation between the entity and its stakeholders,
including suppliers, customers, employees and public authorities
since this contributes to growth and success of the insurance
- Corporate culture, CSR and ESG: the importance
of establishing a corporate culture aligned with the entity’s
strategy together with cultivating a robust compliance culture. The
board should endeavor to embrace environmental, social and
governance (ESG) standards and corporate social responsibility
(CSR) principles in the insurance entity’s strategy which
focuses on sustainable finance activities and projects. The board
should implement ESG specific criteria into the strategies,
business models and overall governance practices. It is recommended
that sustainable finance should be embedded into the insurance
entity’s core values. The Code further recommended that
insurance entities should implement a ESG strategy whereby reports
on ESG initiatives are regularly provided.
The principle of proportionality is to be adopted and applied
across the insurance entities, whereby such methodology is in line
with the corporate governance policies advocated by international
bodies such as the European Commission and OECD.
Upon the implementation of such principles highlighted in the
Code, such entities will enhance their legal, institutional and
regulatory framework for good corporate governance, which will
complement and add strength and value to the effectiveness of good
corporate governance within the structure of an insurance entity.
The MFSA pushes for the implementation of such principles to
strengthen trust, transparency and accountability which is
necessary for long -term success in the insurance market.
Is the insurance entity you are involved in adopting and
implementing the core principles in the Code? Has a gap analysis
been carried out to ensure that such insurance entity is executing
the above mentioned principles?
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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