Corporate Governance and Risk Management of
Delta Lloyd
Summery
Table of content
Summery 2
Table of content 3
Introduction 4
Chapter 1: Delta Lloyd 5
1.1 Company profile 5
1.2 History of Delta Lloyd 5
1.3 Strategy 5
1.4 Big events at Delta Lloyd 5
Chapter 2: Corporate Governance framework 5
2.1 CORPORATE GOVERNANCE PRINCIPLES 5
2.2 Legislation about Risk Management 5
2.3 Analysis 6
Chapter 3: Risk Management 6
3.1 The Risk Management policy 6
3.2 Legislation about Risk Management 6
3.3 Analysis 6
Chapter 4: Conclusion and recommendation 6
4.1 Conclusion 6
4.2 Recommendation 6
Introduction
Risk Management and Corporate Governance are the two most important subjects in an organization. For this paper I made an analysis and description of the approach to and instruments used for Risk Management and Corporate Governance. The organization I have chosen for this analysis is Delta Lloyd. I chose this company because I had my first project there. I have worked there for such a short time that I could not get to know the company in depth. This way I can delve into this interesting organization.
For this paper I will analysis the Risk Management and Corporate Governance policies and see if they are conform the legislation and the standards and values of the stakeholders. Furthermore I will give my advice how they can improve their policies.
For my findings I have use the information of 2015.
Chapter 1: Delta Lloyd
1.1 Company profile
Delta Lloyd provides life insurance, pensions, general insurance, asset management and banking products and services to 4.2 million customers in the Netherlands and Belgium. They use multiple channels to distribute our products and services under well-known and respected brands: Delta Lloyd, BeFrank, OHRA and ABN AMRO Insurance.
They have 4,130 full-time employees, of which 3,647 are in the Netherlands and 483 in Belgium.
Delta Lloyd is listed on Euronext Amsterdam and Brussels.
In the Netherlands, they sell life and general insurance under the Delta Lloyd, OHRA and ABN AMRO labels, while BeFrank is a premium pension institution (PPI) that provides innovative group pensions at relatively low cost. OHRA insurance products are sold directly to consumers, while Delta Lloyd products and services are distributed through independent financial advisors, authorized agents and brokers. ABN AMRO insurance products are provided through our joint venture partner ABN AMRO bank.
In Belgium, they primarily sell Delta Lloyd life insurance through intermediaries such as insurance brokers, banks and specialist consultants.
Figure 1: Organization structure
1.2 History of Delta Lloyd
Delta Lloyd was established in 1807 as Hollandsche Sociëteit van Levensverzekeringen. In 1967, Hollandsche Societeit joint forces with Amstleven, The Amsterdamse Maatschappij van Levensverzekeringen NV, founded in 1892. They renamed it Delta. Two years after that, Delta merged with Nedlloyd, listed Delta Lloyd N.V.
Delta Lloyd was considered an attractive partner in the competitive insurance sector of the 1970s and was acquired by UK-based Commercial Union (now Aviva) in 1973, but continued to operate autonomously in the Dutch market under the Delta Lloyd name.
New channels
As a medium-sized insurance company with a single distribution channel – insurance intermediaries – Delta Lloyd set out on a new course in the 1990s to become a leading market player. We strengthened our distribution power with our multi-channel concept and expanded our sales market.
In 1999, Delta Lloyd merged with NUTS OHRA Management, a direct writer with a large health insurance portfolio. Fonds NutsOhra took an 8% stake in Delta Lloyd while Aviva retained the rest. In 2003, Delta Lloyd entered into a joint venture with ABN AMRO Bank, acquiring a 51% majority stake in ABN AMRO Verzekeringen, to sell insurance products through the bank’s distribution network in the Netherlands.
In 2007 they signed a strategic alliance with Dutch insurance company CZ to bear the risk for our health insurance business, opening up access to 3.3 million health insurance customers and gaining a market share of 20%.
As a result, Delta Lloyd now had three distribution channels in the Netherlands for its three Dutch brands: independent insurance intermediaries for Delta Lloyd; direct channels for OHRA; and ABN AMRO bank branches for ABN AMRO Verzekeringen.
Expansion in Belgium
In 2001, they turned their focus to the Belgian market. Within just a few years, Delta Lloyd Life, the result of several smaller companies merging in 1991, gained a top 10 position in the local life market. The company doubled in size when Delta Lloyd Life acquired pension insurer Swiss Life Belgium in 2008 and in 2013 life insurance company ZA Verzekeringen was added to the Belgian portfolio.
Today, Delta Lloyd is developing into a leading player in the Belgian pension and life insurance market, with a top four position in group insurance.
Initial Public Offering
In 2009, Delta Lloyd shares began trading on the Euronext Amsterdam. It was the biggest European IPO that year and the biggest in the financial services sector at the time. In the ensuing years Aviva gradually reduced its stake and by 2013 Delta Lloyd was a fully-independent listed company.
1.3 Products
Delta Lloyd offers their clients the following financial services what are divided in four categories Life Insurance, General Insurance, Bank and Asset Management
Life insurance
The main focus in the Netherlands is on providing group pensions. They offer also life insurance products through independent financial advisors. Delta Lloyd sells life insurance under the brand ABN AMRO Verzekeringen, a joint venture with ABN AMRO Bank. In Belgium, Delta Lloyd provides individual and group life insurance. These insurance are distributes through independent advisors and a network of bank branches and tied agents
BeFrank is an modern online pension provider. They want to keep the pensions simple and clear as possible
General insurance
Delta Lloyd offers mainly in the Netherlands a broad range of general insurance products for retail and corporate customers. They distributes the product through independent advisors, authorized agents, ANB AMRO bank branches and brokers. Delta Lloyd is active on several niche market like pleasure craft, offshore wind parks, installations and production facilities, and the transportation of commodities.
Bank
Mortgages and so-called ‘banksparen’ product are center in their banking activities. The mortgages of Delta Lloyd are issued by Amstelbuys. The Belgium banking business is sold mid 2015 to Anbang group.
Asset management
Delta Lloyd Asset Management is an independent asset manager that manages the assets of Delta Lloyds business lines. It also offers several investment funds for institutional and retail customers and discretionary mandates for institutional customers. Delta Lloyd Asset Management offers specialized products within different asset classes such as Fixed income, equity and Real Estate as well as balances solutions.
Figure 2: Products
1.4 Mission & Strategy
Mission
The mission of Delta Lloyd is as follow:
“We create value for our customers by offering convenient and sustainable solutions that help them manage uncertainty.”
To achieve their mission of getting closer to their customers and creating value for them, they identified three key factor that are very important:
1) Excel in fulfilling customer needs: Delta Lloyd wants to achieve this by a high level of customer service and an pro-active approach to their customers to get a better understanding of their customer’s needs.
2) Multi-channel distribution: By improving their multi-channel distribution capabilities by adapting it to the changing market. Customers can determine themselves how they want to interact with Delta Lloyd.
3) Leverage technology: Delta Lloyd want to use the technology more effectively and will invest in IT-systems so it will allows them to capture information better and across brands as well as supporting online sales, service and costumer communication for our brand and distributions partners.
Strategy
In 2015 they adapted there strategy. There starting point is that they want to anticipate on the long term industry trends and the continuously changing regulatory environment in which they are operating. Delta Lloyd wants to create value for their stakeholders providing easy, reliable, sustainable and highly valued financial services in the Netherlands and Belgium, with the focus on insurance. There new strategy “closer to the customers” is focused on customer satisfaction and retention, technology, efficiency and a capital light business model.
Figure 3: Strategy of Delta Lloyd
Their strategy is made possible by the following six elements; asset and liability management, risk and capital management, analytics and innovation, alliances and partnerships, values and way of working, human capital.
1.5 Big events at Delta Lloyd
Sleutelman van Delta Lloyd
Overnamer NN
Chapter 2: Corporate Governance framework
Delta Lloyd is a public company based and registered in the Netherlands. It is subject to the Dutch Corporate Governance Code (the ‘ Code’ ) and the Banking Code. Delta Lloyd applies the principles and the best practice of the Code full.
The Dutch Bankers’ Association (Nederlandse Vereniging van Banken – NVB) drew up a self-regulation code of conduct, the Banking Code, which applies to all Delta Lloyd’s banking activities.
Delta Lloyd thinks that their shareholders benefit from the transparency that the Code requires. As an institutional investor Delta Lloyd follows the recommendations of the commission of the Code.
2.1 Governance principles
Dutch Association of Insurers drew up the Governance principles of Delta Lloyd to complete the Code of Conduct for Insurers and conform to the basic tenets of the Banking Code of the Dutch Banking Association. Delta Lloyds apply the follow principles.
Principals Description
Compliance with the code and
transparent accountability
1.1 Application of the Code
1.2 Reporting on the Code
Supervisory board
2.1 Composition and expertise
2.2 Tasks and working methods
Executive board
3.1 Composition and expertise
3.2 Tasks and working method
Risk management
Audit
Remuneration policy
6.1 Assumptions
6.2 Governance
6.3 Remuneration of members of the Executive Board
6.4 Variable remuneration
Compliance with laws
and regulations
2.2 Governance structure
Delta Lloyd has a two-tier structure. The Supervisory Board oversees and advises the Executive Board in setting and fulling the company’s objectives, strategies and policies. Because of the two-tier structure it requires a well-managed relationship between the two boards. Each board has its responsibilities, but they share the responsibility of the company’s strategy and risk profile.
The governance structure is as follow:
Figure 4: Governance structure
2.3 Role of the boards
Executive Board
The Executive Board is responsible for the day-to-day management of Delta Lloyd. The Board takes all major decisions in consultation with the responsible management of the company and, if necessary, with the Central and decentralized Works Council. Once a year, the Executive Board deliver the Supervisory Board a written report of the strategy, the general and financial risks and the risk management and control systems of the company. The Executive Board is responsible for formulating strategy and policy of the organization.
Supervisory Board
The Supervisory Board oversees the policy of the Executive Board and the general state of affairs within Delta Lloyd and its associated companies. Delta Lloyd is committed to a Supervisory Board in which the interests of all stakeholders are reasonably represented. To achieve this a third of the number of Supervisory on the proposal of the Works Council appointed. The profile is a guideline for the composition and the size of the Supervisory Board.
2.4 Committees of the board
The Supervisory Board can appoint one of its members as fixed and/or ad hoc committees give them tasks described by the Supervisory Board. Each committee reports its findings to the full the Supervisory Board through its chairman. The committees also provide written reports on the items on the items discussed. The composition of a Committee is determined by the Supervisory Board. These committees have the task of preparing the decision-making by the Supervisory Board.
Audit Committee
The Audit Committee advises the Supervisory Board about financial reporting, the internal risk management and control systems, the role and functioning of the internal audit function and the application of information and communication technology (ICT). The Audit Committee meets at least four times a year, of which at least one meeting is on the closure of the financial year and the preparation of the financial statements and the annual report.
Risk Committee
The Risk Committee advises the Supervisory Board about financial and non-financial risks of the company. The Risk Committee meets at least four times a year.
Remuneration Committee
The Remuneration Committee draw up the remuneration policy for the next and subsequent years for members of the Executive Board. The Remuneration Committee meets as often as necessary for the proper functioning of the Remuneration Committee. The Remuneration Committee meets at least twice a year.
Nomination Committee
This Committee is preparing, within its area of responsibility, the decision-making process of the Supervisory Board. Their standard tasks are the evaluation process of the Supervisory Board, the assessment of the Supervisory Board and the preparation of agreements and the monitoring of corporate governance.
2.9 Analysis
Chapter 3: Risk Management
3.1 The Risk Management policy
Risk management is fully embedded in their daily operations, to identify, analyze, measure, manage, control and audit risks that may arise in the course of our business operations, in a timely manner. Our approach to risk is based on the following elements: risk governance, risk processes an systems, risk culture, risk taxonomy an mitigation, capital model
Delta Lloyd use a partial Internal Model, because they believe it reflects the specific risks they face better than a standard formula does. They continue to update and test the internal model. Delta Lloyd had been informed by DNB that it expects to apply for the partial internal model and that Delta Lloyd need to have made progress on applying the model before 1 January 2017. If not it will impose capital add-ons or other measures.
Risk governance
The Executive Board announced in October 2015 that they plan to reorganize the risk management organization in 2016. The reorganization aims to improve the risk management, more strictly implement key functions as described in the guidelines for Solvency II, and support the pure division of the responsibilities of the second line of defence. The changes include splitting the actuarial and risk management functions at group level and in the business units and appointing chief risk officers to the boards of the business units. The current description of the governance is based on the risk management organization as it is before implementation.
Delta Lloyd’s risk governance structure is based on roles and delegated authorities; the risk management policy, which comprises guidelines for all major risk types described in ‘Risk Taxonomy’; and the risk committee structure.
Risk management at Delta Lloyd has three lines of defence:
● Day-to-day risk management in each business unit: This includes implementing risk policies and reporting and managing information. This line of defence is executed by the management of each business unit.
● The risk management and compliance organization: This line of defence focuses on coordinating and developing policies, reporting structures and monitoring compliance with statutory rules and internal policies. It is executed by Group Actuarial & Risk Management, Group Integrity, Group Finance, Control & Tax, the risk management committees and the risk management and compliance departments or officers in each division.
Internal audit function: Risk Committee reviews the governance, processes, appetite and risk positions for the Supervisory Board. Group Audit performs regular internal audits of key controls.
●
Risk management is organized as follows:
The risk management committees analyze and monitor risks within their areas of expertise, prepare reports and advice for the Group Risk Committee and for the Executive Board to help them with their decision-making.
Risk management responsibilities
● The Executive Board is responsible for decisions relating to Delta Lloyd’s risk profile and determines their overall risk appetite at least once a year. The Executive Board also review and approves the GRAS. The risk appetite sets the limit for key risks in each business unit.
● The Supervisory Board reviews how the Executive Board manages risks and monitors the consequences of decisions for the risk profile.
● The Group Risk Committee prepares this decision-making by regularly analyzing Delta Lloyd’s risk profile and solvency and making specific policy proposals. The Risk Committee’s risk analyses focus on the consolidated economic balance sheet and risks that Delta Lloyd faces, taking account of restrictions arising from banking and insurance regulations at entity level.
● The management of each business unit is responsible for identifying, reviewing and controlling the risks falling within their unit’s responsibility.
● The chief risk officer carries overall responsibility for the independent oversight of all risks. GARM is responsible for the overall risk framework and monitors the effective management of these risks.
● Group Integrity is responsible for compliance, security, business continuity and the financial crime unit.
● Group Finance, Control & Tax is responsible for financial management and reporting and advises and instructs the business units
● Group Audit reports to the Executive Board and the Audit Committee of the Supervisory Board and is responsible for internal audits to establish the effectiveness of our internal control systems.
● Group policy owners are responsible for providing oversight of specific risks and for monitoring the risks group-wide.
Risk processes and systems
Delta Lloyd’s risk management framework is based on the enterprise risk management (ERM) model of the Committee of Sponsoring Organizations of the Treadway Commission (COSO). It meets future Solvency II requirements. This framework helps us to understand, quantify and manage the risks to which we are exposed. Management information and governance are linked according to the cycle below.
Specific risk management and control systems have been set up for key risk areas as follows:
● The management of each business unit assesses and manages its own risks and controls and updates its risk profile every quarter. These reports and processes include own risk and solvency assessments (ORSA), which are also a requirement of Solvency II. They cover the control of inherent risks, effectiveness of controls and an assessment of the probability and consequences of residual risks. One major objective is to keep residual risks within the limits of the defined risk tolerance. ORSA is a more forward-looking risk management exercise, to oversee and manage the effects of risk scenarios over a longer period.
● Each quarter, GARM draws up a financial risk report for Delta Lloyd. It addresses financial factors, such as recent developments in the financial markets and their consequences for our capital position. We use an economic capital model based on stress test analyses and stochastic scenario analyses. Risk positions (including hedges) are assessed to determine whether they are still compatible with our risk appetite. Collateral is managed on a day-to-day basis.
● Delta Lloyd Bank carries out its own annual risk assessment, known as the internal capital adequacy assessment process (ICAAP). This is in line with CRD IV, the revised solvency framework for the banking sector based on Basel III, as implemented in the Dutch Financial Supervision Act. The ICAAP indicates whether the current capital position is still sufficient, given the financial risks to which Delta Lloyd Bank Netherlands is exposed.
● Our investment firm, Delta Lloyd Asset Management (DLAM), carries out its ICAAP in line with CRD IV, as implemented in the Dutch Financial Supervision Act. The ICAAP indicates whether the current capital position is still sufficient, given the financial risks to which DLAM is exposed.
● GARM coordinates the annual GRAS, which defines the appetite for all risks within Delta Lloyd. It is used to cascade risks down to the risk appetite statements of the business units.
● Delta Lloyd has set up its own internal financial control framework based on the top-down risk approach of the Sarbanes-Oxley Act.
● To assess our operational risk, the bank, asset management and insurance segments use a series of key risk indicators that are partly based on Basel II. In addition, we have a system for recording all operational losses above € 10,000 in all business units and, as a member of ORIC International loss data consortium, we have access to a database of external losses.
● Business units with large corporate customers apply a risk analysis and a risk management method that is subject to verification by external auditors. These units issue an ISAE 3402 statement regarding their internal controls (the standard for auditing service organizations).
● The Group Legal and Group Integrity departments guide our legal and regulatory risk management. Group Integrity is also responsible for our compliance network and for the Regulators Desk unit within Group Compliance.
Risk culture
The Executive Board an directors determine Delta Lloyd’s risk culture. They set the example for the rest of the organization. It is imperative they are approachable on risk management issues and open to discussions about improvement. In addition:
● Executive Board members include risk management objectives in the performance goals of directors.
● Business unit directors are directly responsible for implementing enterprise risk management activities.
● The Executive Board and heads of the various risk committees provide an overview of risks and the actions they have taken to address these.
● Executive Board members and directors regularly encourage staff to comply with the company’s code of conduct.
● To promote effective risk-based decisions the chairman of the Executive Board, chief risk officer and chief financial officer ensure that senior and operational managers put into practice the principles contained in Delta Lloyd’s CEO Guide ‒ Better Business Decisions and CFO Guide ‒ Better Business Decisions.
The Model Board reviews the effectiveness of the controls on the systems and tools that we use to manage risk.
Risk taxonomy and mitigation
Capital model
Solvency II is a new regulatory framework for insurance firms operating in the European Union. The framework will be implemented on 1 January 2016.
Solvency I used liability volumes to calculate capital requirements. Solvency II takes into account all balance sheet and operational risks. It measures balance sheet assets, liabilities and risk exposures based on economic principles and the capital requirements relate directly to these risk exposures. This means insurance companies will have to review their internal risk management and control environment, risk governance, test existing processes and implement improvements.
Although the preparations for Solvency II are far-reaching and wide-ranging, Delta Lloyd endorses the underlying principles. It enforces uniformity and creates a level playing field for insurers in Europe. This is in line with our strategy, which revolves around simplicity.
The valuation of technical liabilities under Solvency II is a key topic for insurers that provide long-term guarantees. In 2014, the European Parliament adopted Omnibus II, providing further clarity on what the long-term guarantees package entails. Early in 2015, the Delegated Acts were endorsed by the European Parliament and Council, effective immediately. Lower legislation and guidelines will be finalized in 2015.
The Solvency II framework consists of three main pillars:
Pillar 1: quantitative requirements (such as the amount of capital an insurer must hold);
Pillar 2: governance and risk management requirements, as well as effective supervision of insurers;
Pillar 3: disclosure and transparency requirements.
Preparatory guidelines EIOPA
As a stepping stone to implementing Solvency II, supervisors such as the European Insurance and Occupational Pensions Authority (EIOPA) have to put guidelines in place for insurers:
Forward-looking assessments of own risks (based on the ORSA principles);
Guidelines on pre-application of internal models;
Guidelines on governance systems;
Reporting guidelines.
The Dutch central bank (DNB) complies with implementation in these areas, and intends to comply with the guidelines on reporting. DNB has monitored the gradual implementation by insurance companies in 2014 and will continue to do so in 2015.
Delta Lloyd’s approach to Solvency II
European legislators set 1 January 2016 as the implementation date. Delta Lloyd set up a Solvency II programme and a Steering Committee to closely monitor all preparations for Solvency II. The committee consists of senior executives from the Executive Board, the business units and staff departments. The focus of the Solvency II programme, which reports to the committee, is on the requirements for Pillar 3.
Solvency II Pillar 1
Delta Lloyd has opted to report its required solvency using an internal model. In 2014, we made progress on meeting the requirements for using the internal model. All sub-parts of the internal model have been officially submitted to the DNB for review. Timely remediation of the shortcomings identified by the DNB before the final application in 2015 remains challenging, but we are committed to achieve approval by the end of 2015.
Solvency II Pillar 2
We continue to carry out annual own risk and solvency assessments (ORSA) and update Delta Lloyd’s risk profile every quarter. In December 2014, we submitted our ORSA report to the DNB. In 2014 and 2015, the ORSA report serves as the Forward Looking Assessment of Own Risks, as required under the preparatory guidelines set out by EIOPA. We updated, approved and tested policies as part of the annual cycle.
Solvency II Pillar 3
The preparatory guidelines on reporting entail insurance companies submitting Quantitative Reporting Templates (QRTs) to the regulator based on the year-end 2014 balance sheet. In 2014, Delta Lloyd worked on the required governance, IT systems, processes and control framework. Dutch insurance companies must also submit quarterly QRTs to the DNB based on the second and third quarter of 2015. Delta Lloyd is preparing to generate the other required reports from 1 January 2016. These include the Regular Supervisory Report (RSR) and the Solvency and Financial Conditions Report (SFCR).
3.2 Analysis
Chapter 4: Conclusion and recommendation
4.1 Conclusion
Delta Lloyd has changed a lot within the organization. Especially in the field of Risk management. In 2015, delta Lloyd differed risks run. There have several issues place found that a threat to the organization. To reduce/prevent those threats they have adapted their risk management policy. On paper it looks out them well organized. We will never know whether these changes really were effective. on 23 December 2016, Delta Lloyd and Nationale Nederlanden announced they will merge. Delta Lloyd continues under the name national Netherlands. One of the reason for this is that Nationale Nederlanden a better risk management.
4.2 Recommendation
List of resources
Internet:
www.deltalloyd.com
http://www.commissiecorporategovernance.nl/
Reports:
Annual report of 2015
Annual review of 2015
Application of the Governance principles
Books:
Articles: