Introduction – Definitions – Proportionality
Insurance and reinsurance companies play a crucial public role in the economy and the financial system. In particular, they take on a large number of long-term commitments (e.g. the accrual of supplementary pensions) which require a high degree of confidence in their solvency and stability. As a result, companies should commit to taking all measures necessary to ensure their business is governed well, not only in the interest of their own management but also to preserve the confidence of the public, their customers and the financial system. Sound governance is one of the cornerstones of the proper functioning of the industry and of the financial system in general.
The governance framework for insurance and reinsurance companies comprises multiple texts:
- Level 1: the Law of 13 March 2016 on the legal status and supervision of insurance or reinsurance companies (the Solvency II Law), which transposes the so-called Solvency II Directive i.e. Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance;
- Level 2: Commission Delegated Regulation 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC (Delegated Regulation 2015/35);
- Level 3: the Guidelines of the European Insurance and Occupational Pensions Authority (EIOPA) on the system of governance of 14 September 2015.
These subjects are also addressed by the International Association of Insurance Supervisors (IAIS) and, at Belgian level, a series of thematic Circulars and Communications also cover certain specific areas of governance.
This Circular has three objectives:
- compiling all legal and regulatory texts on governance which regulate the supervision of insurance or reinsurance companies (the Solvency II Law, the explanatory memorandum of the said Law, Delegated Regulation 2015/35 and the Regulations, Circulars and Communications of the NBB);
- transposing the Guidelines on System of Governance published by EIOPA on 14 September 2015 into Belgian regulatory law; and
- clarifying certain aspects of the Bank’s recommendations and expectations.
This Circular is called the “Overarching Governance System Circular” as it coordinates and structures different thematic Circulars and contains substantive rules on various subjects.
0.3. Methodology and relation with the underlying thematic circulars
The structure of the Overarching Governance System Circular is based, as far as possible, on the different elements listed in the Solvency II Law in view of the application of the principle requiring insurance and reinsurance companies to have an appropriate governance system in order to ensure efficient and sound management of the company (see in particular Article 42 of the Solvency II Law).
The Overarching Governance System Circular is comprised of 15 chapters:
- Management structure
- Suitability of managers and of the persons responsible for control functions
- Risk management system and ORSA
- Organisational structure and internal control system
- Independent control functions
- Financial management
- Integrity (company values, whistleblowing, prevention of money laundering and conflicts of interest)
- IT infrastructure
- Continuity policy, contingency plans and recovery plans
- Suitability of shareholders and members
- Group aspects
- Assessment of the effectiveness of the governance system by the management committee
- Reporting on governance
Each chapter starts by specifying the relevant provisions of the Solvency II Law, of Delegated Regulation 2015/35, of the EIOPA Guidelines on System of Governance and of the underlying thematic Circulars.
As a reminder, the following thematic Circulars and Communications remain applicable:
- Communication CBFA 2009_22 of 25 May 2009 on the derogation policy with regard to audit committees (cf. Chapter 1 of this Circular);
- The Fit & Proper Handbook, attached to the Circular NBB_2018_25;
- Regulation of 9 July 2002, Regulation of 6 December 2011 and Circular PPB-2006-13-CPB-CPA of 13 November 2006 on the exercise of external functions (cf. Chapter 2 of this Circular);
- Circular NBB 2012_14 on the compliance function (cf. Chapter 5 of this Circular);
- Regulation of 19 May 2015 and Circular NBB_2015_21 on the internal audit function
(cf. Chapter 5 of this Circular);
- Circulars on IT: Circular NBB_2009_17 of 7 April 2009 on IT security, Communication NBB_2012_11 of 9 October 2012 on cloud computing and Circular NBB_2015_32 on IT continuity for systemically important institutions;
- Communication NBB_2017_22 and Circular NBB_2017_23 of 22 September 2017 on the assessment of qualified shareholders (cf. Chapter 12 of this Circular);
- Communication NBB_2019_22 of 3 September 2019 on qualitative reporting to be provided through the eCorporate platform;
- Circular NBB_2019_30 of 3 December 2019 on the Own Risk and Solvency Assessment (ORSA);
- Circular NBB_2017_21 on loans, credits and guarantees to managers, shareholders and related persons;
- NBB Regulation of 6 February 2018 on the fitness of the persons responsible for the compliance function (Regulation approved by Royal Decree of 15 April 2018).
- Communication NBB_2019_15 on expectations regarding the content of the statutory governing body’s report on the assessment of the compliance function.
- Circular NBB_2020_018 on the recommendations of the Bank in relation to cloud outsourcing
 The application of this Communication is extended to the remuneration committee and the risk committee for aspects relating to the derogation from the obligation to set up those committees (see point 1.8.3. of this Circular).
This Circular applies to:
- insurance and reinsurance companies governed by Belgian law, with the exception of small insurance companies governed by Belgian law as referred to in Articles 275 and 276 or local insurance companies as referred to in Article 294 of the Solvency II Law; and
- branches of third-country companies that exercise an insurance or reinsurance activity in Belgium, with the proviso that, for the branch in Belgium, account is duly taken of the absence of a legal person and of certain management bodies and mechanisms; and
- the entities responsible for an insurance or reinsurance group governed by Belgian law within the meaning of Articles 339, 2°, and 343 of the Solvency II Law or of a financial conglomerate governed by Belgian law within the meaning of Articles 340, 2°, and 343 of the Solvency II Law. Chapter 13 of this Circular contains more information on the legal rules on governance that apply at a group level.
 Provisions that specifically refer to Article 272 of the Solvency II Law, which include conditions on income from premiums, total technical provisions, insurance activities to cover liability risks, credit risks and surety insurance risks, and activities abroad.
 More particularly to insurance or reinsurance companies governed by Belgian law which are a participating undertaking in at least one insurance or reinsurance company in the European Economic Area or are from a third country, to insurance or reinsurance companies governed by Belgian law which have a mixed-activity holding company or mixed financial holding company in the European Economic Area or from a third country as their parent undertaking, and to insurance holding companies or mixed financial holding companies governed by Belgian law that are parent undertakings of an insurance or reinsurance company governed by Belgian law, insofar as these are subject to the legal provisions of this Circular.
The Bank expects the companies referred to in this Circular to enforce all requirements contained herein, taking into account the fact that they are essential for the status of insurance or reinsurance company. These requirements should in any case be complied with and only the scope and intensity thereof may vary based on the nature, scale and complexity of the risks inherent to the company’s business model and activity (principle of proportionality, cf. Article 42, § 2 of the Solvency II Law).
0.5.1. Proportionality criteria – significant / less significant companies
The notions of ‘nature’, ‘scale’ and ‘complexity’ of risks and activities must be assessed by the National Bank of Belgium.
In practice, the National Bank of Belgium verifies whether the conditions for the application of the principle of proportionality have been met, notably on the basis of the following indicative criteria:
- the size of the company and the scale of the risks to which it is exposed, the assumption being that a company is less significant if it meets at least two of the following three criteria:
- balance sheet total of less than or equal to € 3 billion,
- turnover (premiums without deducting reinsurance) of less than or equal to € 1 billion, and
- SCR operational risk  of less than or equal to € 40 million; and
- the nature and complexity of the insurance transactions carried out by the company or by the group to which it belongs (cf. in particular, the insurance classes operated, the types of insurance products distributed, the international character of the activities performed, etc.) as well as the expected development of its risk profile and internal organisation.
As a result, where the principle of proportionality could be applied because of the scale of the risks to which the company is exposed, the nature and complexity of its transactions and the expected development of its risk profile and its internal organisation could lead the National Bank of Belgium to consider that the principle of proportionality cannot be applied. In other words, the National Bank of Belgium may decide that a company meeting the conditions relating to the size of the company and the scale of the risks as referred to in point a), and which should therefore be considered less significant, should nevertheless be considered significant due to the nature and complexity of its transactions and the expected development of its risk profile and internal organisation.
Based on the indicative criteria, the National Bank of Belgium classifies annually insurance and reinsurance companies as well as insurance and reinsurance groups into two main categories: less significant companies/groups, on the one hand, and significant companies/groups, on the other.
Insurance and reinsurance companies companies that are responsible for an insurance or reinsurance group are informed thereof through an ad-hoc letter from the Bank.
0.5.2. Implications of proportionality
The application of the principle of proportionality does not imply that less significant companies can be exempted from the fundamental requirements, but rather that the expectations regarding the sophistication and formalisation of the governance system can be adjusted for them.
Possible examples are  :
- a less frequent revision of the Regular Supervisory Report (every three years instead of every year);
- the possibility for a person responsible for an independent control function to hold several functions simultaneously;
- the possibility to outsource an independent control function externally (outside the group);
- less strict fitness rules for managers and the persons responsible for independent control functions;
- the possibility to request a derogation to appoint the Chief Risk Officer at ‘N1’ level;
- the possibility to request a derogation from the requirement to set up a management committee (implementation of senior management);
- lower level of sophistication required from the policies, procedures, implementation processes and internal control mechanisms to be implemented;
Additionally, less significant companies are not required to apply a number of best practices recommended by the National Bank of Belgium. These best practices are recognisable from the statement “recommended...” or “...is deemed a best practice”. If the insurance company does not apply these best practices, it must justify this in the RSR and state which alternative measures it has taken.
 Operational risk was chosen because it is determined on a flat-rate basis (it is modelled by very few companies) and because legal and governance risk can be classified as operational risk under international standards.
 These examples of implications of the principle of proportionality are without prejudice to the exemptions and derogations that can be granted based on ad-hoc criteria in accordance with the Solvency II Law (e.g. the possibility to be exempted from the requirement to establish an audit committee, a risk committee and a remuneration committee, which is clarified in point 1.8.1. of this Circular).
The following terms used in this Circular have the following definitions:
‘Bank’: the National Bank of Belgium as prudential supervisor of insurance and reinsurance companies governed by Belgian law;
‘Belgian Code on Corporate Governance’: corporate governance code established by the ‘Corporate Governance Committee’ pursuant to Article 3:6, § 2, fourth paragraph of the Companies and Associations Code and promulgated by the King by Royal Decree of 12 May 2019;
‘CAC’: the Companies and Associations Code introduced by the Law of 23 March 2019;
‘entity responsible for the group’: the participating insurance or reinsurance company governed by Belgian law, the insurance holding company or the mixed financial holding company governed by Belgian law which is the parent undertaking of an insurance or reinsurance company governed by Belgian law or deemed to be responsible for the governance aspects at group level .
‘independent control functions’: the risk management function, the actuarial function, the compliance function and the internal audit function .
‘less significant company/group’: the insurance or reinsurance company or the insurance or reinsurance group that meets the proportionality criteria set out in point 0.5. of this introduction and implemented by the National Bank of Belgium in accordance with its internal methodology;
‘significant company/group’: the insurance or reinsurance company or the insurance or reinsurance group that does not meet the proportionality criteria set out in point 0.5. of this introduction and implemented by the National Bank of Belgium in accordance with its internal methodology.
‘Solvency II Law’: the Law of 13 March 2016 on the legal status and supervision of insurance or reinsurance companies.
The term ‘insurance companies’ must be understood in this Circular to mean ‘insurance or reinsurance companies’, including the companies listed in point V. above, which fall under the scope of this Circular. Where there is no management committee, the term ‘management committee’ must be interpreted as meaning the ‘senior management’.
 In most cases, the entity responsible for the group aspects is the parent entity that heads up the group. In exceptional circumstances and insofar as the Bank has granted its approval, a subsidiary may be accepted as the entity tasked with complying with requirements at group level rather than the parent entity. In such a case, it is this subsidiary which must enforce the governance measures at group level (cf. Chapter 13 of this Circular).
 If under the implementation of its governance system, the company opts to deem other functions key staff because it considers that they are of particular importance for its activity and organisation, it is recommended to apply, to the degree in which they are relevant, the same rules as those included in this Circular for the independent control functions.