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NAIC Makes Model Corporate Governance Regulation Applicable to Fraternals

April 1, 2014
Earlier this week, at the  National Association of Insurance Commissioners (NAIC) Spring National  Meeting, the Corporate Governance (E) Working Group amended a proposed corporate governance model act to ensure that it applied to fraternal life insurers.  The model act is expected to be adopted at the NAIC's August 2014 meeting.  From there, it will be up to each state to enact the model. The Alliance strongly supported this amendment.  The fact that regulators made a specific revision to the proposal to include fraternals is a clear sign that they understand the important link between corporate governance and organizational sustainability. Over the past three years, the Alliance has focused a considerable amount of energy compiling research and conducting educational programs for member societies on "best practices" for corporate governance.  We are proud of the results of this effort.  Thanks to the information and instruction provided by the Alliance, many member societies have taken significant steps to enhance their corporate governance structures – and, in turn, improve their organizations' financial and fraternal performance. board14 But as we all know, some fraternal boards and executives have a way of clinging to the past despite all the evidence that changes must be made.  Steadily declining surplus?  Not a problem.  Downward trend in RBC?  We'll assess the members.  Fewer and fewer members participating in community service events?  Just an anomaly.  Local chapters becoming irrelevant to younger members?  This too shall pass. It is for these organizations that the NAIC Corporate Governance Model Act is needed.  Without a regulatory mandate to change, these societies would go to their graves  – and some of them are well on the way there – fighting to maintain the status quo.  And while the status quo may be an effective way – perhaps the only way – for some of the leaders to retain their vice-like grip on control of their organizations, it is certainly not in the best interests of the long-term financial health of the society or its members. That's why in addition to supporting the application of the NAIC Corporate Governance Model Act to fraternals, the Alliance is also supporting legislation in Illinois, SB 3404, which includes a provision that would end the practice of fraternals electing their CEO.  That's right, among a host of other solvency and governance components, SB 3404 would require fraternal CEOs to be hired by the society's Board of Directors by January 1, 2019. Many Alliance member societies have already made this transition.  And the vast majority of those that haven't support this provision because they know that without a regulatory requirement to modernize their governance, the very constraints of that structure make it almost impossible for the society to update it on their own. Certainly, the requirement to hire rather than elect a CEO cannot guarantee that any society will hire the perfect candidate.  However, it will ensure that the responsibility for making that decision rests where it should: on the shoulders of the Board of Directors.  Moreover, it will greatly enhance the chances of a CEO being hired based on his or her qualifications rather than being elected based on a popularity contest or the quality of the tchotchkes handed out to delegates at a convention. And that, my friends, is no April Fool's Day joke...