Article 80, § 2 of the Solvency II Law sets out that the “management committee” [...] report[s] at least once a year to the statutory governing body, the accredited statutory auditor and the Bank on the evaluation of the effectiveness of the governance system [...] and on the measures that, where applicable, are taken to tackle any non-conformity”. 

This Article therefore implies two actions for the management committees of insurance companies:

• introducing a method to specifically implement an assessment of the suitability of the governance system; and
• drawing up and annually approving a report on the assessment of the effectiveness of the governance system and the measures taken to tackle any deficiencies identified.

Based on this, the board of directors of the insurance companies must, pursuant to Article 77 of the Solvency II Law “regularly and at least once a year assess the effectiveness of the company’s governance system [...] and the extent to which it complies with the obligations laid down by or pursuant to the [Solvency II Law] [...]” and ensure “that the management committee take[s] the necessary measures to tackle any non-conformity”.

14.3.1. Objectives of the report

The reporting by the management committee of the insurance companies to the board of directors, the accredited statutory auditor and the Bank on the assessment of the effectiveness of the governance system has the following objectives:

• ensuring that the company verifies that the legal and regulatory requirements relating to the governance system are complied with and verifying that the measures taken to guarantee such compliance are effective; and
• where applicable, enabling the Bank to monitor the application of the measures undertaken by the management committee to tackle any potential deficiencies in the governance system.

14.3.2. Changes as regards the “reporting by the senior management on the internal control”

The management committee report on the assessment of the effectiveness of the governance system is along the lines of the “reporting by the senior management on the assessment of the internal control system”, the content of which is detailed in Circular CBFA_2009_26 of 24 June 2009.  The “reporting on the internal control” is in fact replaced by the “reporting on the effectiveness of the governance system”. 

The main changes in the “reporting by the management committee on the assessment of the effectiveness of the governance system” compared to the “reporting by the senior management on the internal control system” are the following:

• a ratione materiae extension of the scope of application of the reporting, which must relate to all aspects that form part of the notion of ‘governance system’ (cf. the domains included in Annex 1);
• elimination of the descriptive part on the organisation, work and risk management of the insurance company, in the reporting on the internal control, given that this information must already be included in the RSR (Regular Supervisory Report, cf. Chapter 15 of this Circular); and
• special attention in the assessment for the aspects relating to the effectiveness of the measures taken as part of the implementation of the governance system.

14.3.3. Content of the report on the assessment of the effectiveness of the governance system

The reporting by the management committee on the assessment of the effectiveness of the governance system must comprise two parts:

1. the assessment of the governance system conducted during the financial year; and
2. an overview of the measures that were or will be taken to tackle any potential deficiencies established.

When preparing these two parts, account must be taken of the nature, scale and complexity of the risks inherent to the company’s business model and activity.

§1. Assessment by the management committee of the governance system (PART 1 of the report)

Part 1 of the report is in fact a self-assessment by the management committee of the various components of the governance system.  Self-assessment is conducted based on the method explained in point 14 above.

The Bank expects this part to include an assessment of the various domains included in Annex 1 (recommended template for the reporting to the management committee on the assessment of the effectiveness of the governance system). It should be noted that this template is in line with the structure of the RSR as established in Annex XX (20) of Delegated Regulation 2015/35.

If the self-assessment for a particular domain results in a positive assessment of the suitability of the measures taken in that domain, in view of the legal requirements, the report may be limited to stating the same.  If, however, deficiencies are identified in a specific domain during the financial year, and if during the period covered measures were taken to remedy this situation, the management committee gives a clear explanation of these deficiencies, the measures taken, and the aspects taken into account to justify the positive assessment of that domain.

If, however, an aspect leads to a nuanced or even a negative assessment, this must be explained in the report in such a way that the board of directors, the accredited statutory auditor and the Bank can clearly identify the deficiencies established.

§2. Overview of the measures that were or will be taken to tackle any potential deficiencies established (PART 2 of the report)

The Bank expects part 2 of the report to include the list of measures that the management committee has taken or plans to take to tackle any potential deficiencies.  This list of measures also follows, as much as possible, the structure included in Annex 1 of this Circular.

14.3.4. Form, executive summary and regularity

§1. Form

Annex 1 of this Circular is a template recommended by the Bank constituting a minimum checklist.  The companies must adjust it based on their organisation and the risks to which they are exposed.  The form and structure of the reporting must be consistent from year to year however, to be able to make comparisons and identify developments.  The report shall be signed by the person/persons who may jointly represent the management committee and is provided to the Bank through e-Corporate.

§2. Preparation of an executive summary

The detailed report must be preceded by an executive summary of the main aspects of the two parts of the report.

1. The “high level” results of the assessment of the eight parts of the report, with special attention for serious deficiencies established after this assessment; and
2. Where applicable, a list of measures that the company has taken or plans to take to tackle any potential deficiencies.

A clear distinction is therefore made between the important and less important aspects, to give more weight to the message of the report (cf. communication of 16/11/2015 on the internal control reporting).

§3. Regularity of the reporting

The report shall be drawn up on an annual basis. It shall be provided to the Bank and the accredited statutory auditor along with the RSR and the Solvency and Financial Condition Report (SFCR). Subsequently, the report on the effectiveness of the governance system and the annual update of the governance memorandum should also be submitted.

The report on the effectiveness of the governance system must be provided to the Bank through the e-Corporate platform.