SECTION 7.89. Corporate Governance Annual Disclosure

(a) Purpose. The purpose of this section is to implement Insurance Code Chapter 831 by providing the procedures for filing and the content of the corporate governance annual disclosures.

(b) Definitions. The definitions in Insurance Code §831.0002 apply to this section. Consistent with Insurance Code §831.0002(3), when used in this section the term "insurer" includes Health Maintenance Organizations. In addition, the following terms are defined as used in this section:

(1) Board--insurer's board of directors;

(2) CGAD--Corporate Governance Annual Disclosure;

(3) Senior Management--any corporate officer reporting information to the board of directors at regular intervals or providing this information to shareholders or regulators, and includes, but is not limited to, the chief executive officer, chief financial officer, chief operations officer, chief procurement officer, chief legal officer, chief information officer, chief technology officer, chief revenue officer, chief visionary officer, or any other senior level executive;

(4) TDI--Texas Department of Insurance.

(c) Filing procedures.

(1) Filing deadline. An insurer required to file a CGAD under Insurance Code §831.0001 must file it with TDI no later than June 1 of each calendar year.

(2) Signature. The CGAD must include a signature of the insurer's or insurance group's chief executive officer or corporate secretary attesting to the best of that individual's belief and knowledge that the insurer or insurance group has implemented the corporate governance practices and that a copy of the CGAD has been provided to the insurer's or insurance group's board of directors or appropriate committee.

(3) Submitting. Insurers and HMOs must submit the CGAD in an electronic format acceptable to TDI. The electronic filing address is provided on TDI's website at www.tdi.texas.gov.

(4) Format of CGAD. The insurer or insurance group have discretion over the format of the information required by this section and can customize the CGAD to provide the most relevant information necessary as long as it allows TDI to gain an understanding of the corporate governance structure, policies, and practices used by the insurer or insurance group.

(5) Level providing information.

(A) For purposes of completing the CGAD, the insurer or insurance group may choose to provide information on governance activities that occur at the ultimate controlling parent level, an intermediate holding company level or the individual legal entity level, depending on how the insurer or insurance group has structured its system of corporate governance.

(B) The insurer or insurance group is encouraged to make the CGAD disclosures at the level at which the insurer's or insurance group's risk appetite is determined, or at which the earnings, capital, liquidity, operations, and reputation of the insurer are overseen collectively and at which the supervision of those factors are coordinated and exercised, or the level at which legal liability for failure of general corporate governance duties would be placed.

(C) If the insurer or insurance group determines the level of reporting based on the criteria in paragraph (5)(B) of this subsection, it must indicate which of the three criteria was used to determine the level of reporting and explain any subsequent changes in level of reporting.

(6) Filing if CGAD is completed on insurance group level. If the CGAD is completed at the insurance group level, then it must be filed with the lead state of the group as determined by the procedures outlined in the most recent financial analysis handbook adopted by the National Association of Insurance Commissioners. In these instances, a copy of the CGAD must also be provided to the chief regulatory official of any state in which the insurance group has a domestic insurer, on request.

(7) Annual filing of amended versions. Each year following the initial filing of the CGAD, the insurer or insurance group must file:

(A) an amended version of the previously filed CGAD indicating where changes have been made; or

(B) a letter stating that no changes were made in the information or activities reported by the insurer or insurance group since the previously filed CGAD. The letter must state the date of the previously filed CGAD.

(d) Content of CGAD. The insurer or insurance group must be as descriptive as possible in completing the CGAD, with inclusion of attachments or example documents that are used in the governance process, since these may provide a means to demonstrate the strengths of their governance framework and practices. The insurer or insurance group may reference other filings that were previously submitted to TDI instead of resubmitting similar information.

(e) CGAD considerations. The CGAD must describe the insurer's or insurance group's corporate governance framework and structure including consideration of the following:

(1) the board and various board committees ultimately responsible for overseeing the insurer or insurance group and the level at which that oversight occurs. The level of oversight may be at the ultimate controlling parent level, intermediate holding company control level, or the individual legal entity control level, depending on how the insurer or insurance group has structured its system of corporate governance. The insurer or insurance group must describe and discuss the rationale for the current board size and structure; and

(2) the duties of the board and each of its significant committees and how they are governed under the bylaws, charters, and informal mandates, as well as how the board's leadership is structured, including a discussion of the roles of chief executive officer and chairman of the board within the organization.

(f) Factors. The insurer or insurance group must describe the policies and practices of the most senior governing entity and its significant committees, including a discussion of the following factors:

(1) How the qualifications, expertise, and experience of each board member meet the needs of the insurer or insurance group.

(2) How an appropriate amount of independence is maintained on the board and its significant committees.

(3) The number of meetings held by the board and its significant committees over the past year as well as information on director attendance.

(4) How the insurer or insurance group identifies, nominates, and elects members to the board and its committees. The discussion should include:

(A) Whether a nomination committee is in place to identify and select individuals for consideration.

(B) Whether term limits are placed on directors.

(C) How the election and re-election processes function.

(D) Whether a board diversity policy is in place and if so, how it functions.

(5) The processes in place for the board to evaluate its performance and the performance of its committees, as well as any recent measures taken to improve performance, including any board or committee training programs that have been put in place.

(g) Additional factors. The insurer or insurance group must describe the policies and practices for directing senior management, including a description of the following factors:

(1) Any processes or practices (suitability standards) to determine whether officers and key persons in control functions have the appropriate background, experience and integrity to fulfill their prospective roles, including:

(A) identification of the specific positions for which suitability standards have been developed and a description of the standards employed; and

(B) any changes in an officer's or key person's suitability as outlined by the insurer's or insurance group's standards and procedures to monitor and evaluate such changes.

(2) The insurer's or insurance group’s code of business conduct and ethics, the discussion of which considers, for example:

(A) compliance with laws, rules, and regulations; and

(B) proactive reporting of any illegal or unethical behavior.

(3) The insurer's or insurance group's processes for performance evaluation, compensation, and corrective action to ensure effective senior management throughout the organization, including a description of the general objectives of significant compensation programs and what the programs are designed to reward. The description must include enough detail to allow the director to understand how the organization ensures that compensation programs do not encourage and reward excessive risk taking. Elements to be discussed may include:

(A) the board's role in overseeing management compensation programs and practices;

(B) the various elements of compensation awarded in the insurer's or insurance group's compensation programs and how the insurer or insurance group determines and calculates the amount of each element of compensation paid;

(C) how compensation programs are related to both company and individual performance over time;

(D) whether compensation programs include risk adjustments and how those adjustments are incorporated into the programs for employees at different levels;

(E) any "clawback provisions" built into the programs to recover awards or payments if the performance measures upon which they are based are restated or otherwise adjusted; and

(F) any other factors relevant in understanding how the insurer or insurance group monitors its compensation policies to determine whether its risk management objectives are met by incentivizing its employees.

(4) The insurer's or insurance group's plans for chief executive officer and senior management succession.

(h) Oversight. The insurer or insurance group must describe the processes by which the board, its committees, and senior management ensure an appropriate amount of oversight to the critical risk areas impacting the insurer's business activities, including a discussion of:

(1) how oversight and management responsibilities are delegated between the board, its committees, and senior management;

(2) how the board is kept informed of the insurer's strategic plans, the associated risks, and steps that senior management is taking to monitor and manage those risks; and

(3) how reporting responsibilities are organized for each critical risk area. The description should allow the board to understand the frequency at which information on each critical risk area is reported to and reviewed by senior management and the board. This description may include the following critical risk areas of the insurer:

(A) risk management processes. An ORSA summary report filer may refer to its ORSA summary report under Insurance Code Chapter 30;

(B) actuarial function;

(C) investment decision-making processes;

(D) reinsurance decision-making processes;

(E) business strategy/finance decision-making processes;

(F) compliance function;

(G) financial reporting/internal auditing; and

(H) market conduct decision-making processes.

(i) Severability. If any portion of this section, or its application to any person or circumstance, is held invalid, the determination does not affect other portions of this section or its applications that can be given effect without the invalid portion or application. To this end, the provisions of this rule are severable.

Source Note: The provisions of this §7.89 adopted to be effective November 25, 2020, 45 TexReg 8344