Insurance - Update of the overarching circular on governance

boulevard de Bertaimont 14-BE-tOOOBrussels Phone +32 2 221 44 74 Company number: 0203. 201. 340 RPM (Trade Register) Brussels www.nbb. be mBanqueNqtionaleBank DE BELGIQUE VAN BELGIE Eurosystem Communication Brussels, 5 May 2020 Référence: Contact person: Nicolas Strypstein Phone +32 2 221 44 74 nico)as, strypstein@nbb. be NBB 2020 017 Insurance - Update of the overarching circular on governance Scope Insurance or reinsurance companies under Belgian law, with the exception of small insurance companies under Belgian law as referred to in Articles 275 and 2761 or local insurance companies under Belgian law as referred to in Article 294 of the Law of 13 March 2016 on the légal status and supervision of insurance or reinsurance companies (hereinafter the "Solvency II Law"); Branches of third-country companies pursuing an insurance or reinsurance activity in Belgium, with the understanding that due account is taken ofthe absence ofa légal person and of certain corporate bodies and mechanisms in the Belgian branch: and Entities responsible2 for an insurance or reinsurance group under Belgian law within the meaning of Articles 339, 2° and 343 of the Solvency II Law or for a financial conglomerate under Belgian law within the meaning of Articles 340, 1 ° and 343 of the Solvency II Law. Summarv/Obiectives Through this Communication, fhe National Bank of Belgium (Bank) informs insurance and reinsurance companies ofthe update offhe overarching circular on governance NBB_2016_31. The main changes from the previous version are: ï. indication of how to reconcile the new rules of the Companies and Associations Code with prudential governance requirements; n. simplification of the rules on the distribution of fasks between members of the management committee; Si. révision of Chapter 7 on outsourcing to reinforce the operational resilience of insurance and reinsurance companies and ta assign a spécifie monitoring responsibility to the compliance and internai audit functions: Provisions referring in particular to Article 272 of the Solvency l) Law, which provides for conditions relating to premium income, total technical provisions, insurance activities covering liability, crédit, surety and reinsurance risk and activities abroad. And more precisely insurance or reinsurance companies under Belgian law which are participating undertakings in at least one insurance or reinsurance company from the European Economie Area or from a third country, insurance or reinsurance companies under Belgian law of which the parent company is a mixed insurance holding company or a mixed financial holding company from the European Economie Area or from a third country, and insurance holding companies or mixed financial holding companies under Belgian law that are parent companies of an insurance or reinsurance company under Belgian law, insofar as thèse are subject to the provisions of the Solvency II Law. NBB_2020_017 - 5 May 2020 Communication - Page 1/6

ni iv. révision of Chapfer 8 on rémunération to clarify the prudential expectations to be met by Identifiée! Staff receiving significant variable rémunération, in accordance with the recommendations proposée! by EIOPA; v. update of Chapter 10 on IT infrastructure fo emphasise cyber security and compliance with the new rules on cloud outsourcing; and vi. introduction o f certain recommendations on sustainable finance. For an overview of thèse changes, please refer to the website of the Bank, which in particular contains a version in review mode of the overarching circular on governance, in which changes from fhe previous version (of September 2018) are shown in track changes. The new recommendations on outsourcing and rémunération apply from 2021. Dear Sir, Dear Madam, The entry into force of the Companies and Associations Code, the new Guidelines on cloud outsourcing and rémunération published by EIOPA3 and other regulatory developments require an update of Circular NBB_2016_31 setting oui the expectations of the National Bank of Belgium (hereinafter "Bank") with regard to governance for the insurance and reinsurance sector (hereinafter "overarching circular on governance"). The main changes to this Circular relate to the following aspects: i. indication of how to reconcile the new rules of the Companies and Associations Code with prudential requirements in relation to the decision-making structures: management structure, independence criteria, expectations regarding the social status of directors and members of the management committee, conflicts of interest etc.; ii. simplification of the rules on the distribution of tasks between members of the management committee; clarification of recommendations on outsourcing; iv. reinforcement of rémunération rules; v. strengthening of the rules on IT infrastructure; and vi. introduction of new recommendations on sustainable finance. The purpose of this Communication is to présent thèse différent developments, highlighting the changes from the version of September 2018.

1. Modifications followina the entrv into force of the Comoanies and Associations Code The adoption and entry into force of the Companies and Associations Code4 (hereinafter "CAC") do not fundamentally change the governance framework for insurance and reinsurance companies. However, some of the Bank's expectations were revised to integrate the new rules of the CAO and to clarify how ta reconcile thèse rules with prudential requirements. The main modifications can be summarised as follows: a) The current management structure, which consists of a board of directors and a management committee, is being maintained. As indicated in Section 1. 1. 1, unlike the "fully-fledged" two-tier structure provided for in the CAC, the management structure which consists of a board of directors and a management committee is a spécifie two-tier structure that is distinct in two ways: on the one hand, the powers of the management committee are delegated by the board of 3 European Insurance and Occupationa! Pensions Authority. 4 Law of 23 March 2019 introducing the Companies and Associations Code and containing various provisions (Belgian Officiai Gazette of 4 April 2019. pp. 33 239 to 33 530). NBB_2020_017 - 5 May 2020 Communication - Page 2/6

m directors and, on the other. at least two or three members of the management committee are directors, which means that there is overlapping between the board of directors and the management committee; b) The nine independence criteria previously set out in Article 526ter ofthe former Companies Code shall continue to apply unchanged to insurance and reinsurance companies, even if the CAC adopts a slightly différent approach. The intention is to confirm this approach through an amendment to the Solvency II Law which would reintegrate the old criteria of Article 526ter but provide for a so-called "comply or explain" System. In this regard, the Circular spécifies that if a company intends not to meet one of the aforementioned nine independence criteria, it should send a formai statement justifying the reasons behind this décision to the Bank together with the "Fit & Proper" file of the person concerned; e) In Chapter 9, référence is made to the new rules on conflicts of interest involving members of the management committee as included in the Solvency II Law. In this regard, the impact ofthe CAC is limited as the management committee remains compétent for conflicts of interest. However. members involved in conflicts of interest should inform the other members and incorporate the opposing interests in the minutes, a copy of which should be submitted to the board of directors during its next meeting. As regards the rules applicable to the board of directors, there is no spécifie provision in the Solvency II Law regulating situations of conflict of interest involving members of the board of directors. It should be deduced that the ordinary law rules of Article 7:96 of the CAC apply; d) Chapter 12 on shareholders was modified to specify that insurance and reinsurance companies (except those incorporated as coopérative companies) may now have a single shareholder. Furthermore. the Bank wishes to use this Communication to clarify its expectations regarding the social status of directors and members of the management committee for insurance and reinsurance companies. The Bank stresses that a position of director or member of the management committee of a insurance or reinsurance company cannot be exercised under an employment contract. This rule, which was expressly set out in the CAC adopted on 23 March 2019, applies to both directors and members of the management committee of insurance and reinsurance companies. In case of non-compliance, the Bank expects companies to remedy this situation. Additionally, the Bank considers that the combination of two statuses (the status of self-employed as director or member of the management committee and the status of employée in a relationship of subordination for another technical or administrative service function) within the same company Is not reconcilable with the principles of sound governance applicable ta jnsurance and reinsurance companies, neither for members of the management committee, nor for directors: for members of the management committee, a relationship of subordination - if proven - would compromise the proper functioning of the management committee since the relevant member of the management committee would be in a relationship of suborctination to his/her colleagues, which is not acceptable from a govemance perspective given that collegiality is an essential élément for the proper functioning of any management committee; for members of the board of directors, a relationship of subordination - if proven - would jeopardise the effectiveness of the board of directors' supervision of the company's management, which is also unacceptable in terms of governance as management supervision is an essential task of any board of directors. Thus, having regard to the above-mentioned governance requirements, the Bank considers that a combination of statuses is prohibited for members of the management committee and directors of insurance and reinsurance companies and requests that, if companies should discover the existence of such a combination of statuses by their managers, they terminale it. NBB 2020 017-5 May 2020 Communication - Page 3/6

ni 2. Introduction of standard schemes for the distribution of tasks between members of the management committee for significant companies In Chapter 1, the expectations relating to the distribution of tasks between members of the management committee were simplified with a view to enhancing flexibility. For companies that are considered significant in accordance with the criteria included in the introduction of the overarching circular on governance, the Bank's expectations are shown in the form of standard schemes. Thèse schemes are indicative schemes that translate the expectations of the Bank regarding the distribution of tasks without prohibiting insurance and reinsurance companies from adopting a more complète model if they comply with size recommendations. Less significant companies are free to organise the distribution of tasks between the members of their management committee as they wish as long as obvious conflicts of interest are prevented, such as (i) the combination of Risk Management and Commercial or Risk Management and Investment and (ii) the combination of Internai Audit and Commercial. 3. Outsourcing: clarification of certain général reauirements The operational resilience of insurance and reinsurance companies is a point of attention for the Bank. Thus, a certain number of aspects of its expectations regarding outsourcing were clarified. The main changes to Chapter 7 of Circular NBB_2016_31 are: a) Clarification of the prudential expectations of the Bank relating ta the governance of the outsourcing process for a critical or important function or activity taking into account the différent stages of the outsourcin.q cycle: o pre-contractual stage (monitoring conditions, due diligence of the service provider and performance of a risk assessment); o contractual stage (content of the outsourcing agreement); o post-contractual stage (outsourcing monitoring System and exit strategy). b) Clarification of the Bank's expectations relating to intraaroup outsourcina and outsoyreingjo_a third countrv. e) The spécification of the outsourcing monitoring tasks assignée! to the compliance and internai audit functions. In this regard, attention is drawn to the fact that this does not involve assigning new tasks to thèse control functions, but concretising tasks in relation to outsoureing that are already expected of thèse control functions. The Bank expects files for the notification of critical or important outsourcings to now include an opinion of the persons responsible for the compliance function certifying compliance with the governance requirements pertaining to outsourcing. d) Clarification of the Bank's expectations for documentation and reporting. In this context, a new standard form for notifying the Bank of a critical or important outsourcing has been appended as Annex 4 to the overarching circular on govemance. Similarly, Annex 5 comprises the standard opinion to be filled in by the person responsible for the compliance function to confirm that he/she has vérifiée! the governance aspects relating to a critical or important outsourcing as well as the completeness and accuracy of the reporting submitted to the Bank. Thèse changes to the général outsourcing framework also make it possible to ensure consistency with the new Circular on cloud outsourcing. NBB_2020_017 - 5 May 2020 Communication - Page 4/6

ni 4. New requirements on rémunération Following an Opinion published by EIOPA on 7 April 2020 to ensure a better convergence between supervisors with regard to the supervision of rémunération rules, the Bank decided to reinforce its expectations on rémunération for Identifiée! Staff receiving a significant variable rémunération i. e. persons who receive a variable rémunération which exceeds 50. 000 and represents more than a third of their total annual rémunération. In concrète terms, the new additional rules included in Chapter 8 can be summarised as follows: a) Fixed/variable balance: if the ratio of fixed/variable rémunération exceeds the référence ratio of 1:1 or 1:0.5 for persons responsible for the independent control functions, the insurance company should justify to the Bank why it does not comply with this ratio. b) Deferral of a substantial portion of the variable rémunération: the Bank considers that a three￾year deferral of 40 % of the variable rémunération constitutes a "substantial portion of the variable rémunération within the meaning of Article 275 of Delegated Régulation 2015/35. e) Financial and non-financial criteria to be used when assessina individual performance: the individual performance of Identifiée Staff receiving significant variable rémunération should be based on (quantitative) financial and (qualitative) non-financial criteria. The financial criteria should cover a sufficiently long period to reflect the risks taken by the Identified Staff concerned and should be risk adjusted. d) Downward adiustments: downward adjustments comprise all types of adjustments: malus, clawback and in-year adjustments. The Bank requires insurance companies to ensure that downward adjustments for Identified Staff receiving significant variable rémunération are well described in the rémunération policy. e) Termination pavments: insurance companies are expected to specify their policy for the potential granting oftermination/severance payments in their rémunération policies and to ensure that the following information is included: (i) the maximum amount of the termination payment or the criteria used to détermine the amount of the payment and (ii) the fact that a substantial portion ofthe termination payment should be deferred in time. Furthermore, a slightly modifiée) template for reporting figures is included in Annex 3 to the overarching circular on governance. 5. IT infrastructure Chapter 10 of the overarching circular on governance was modified in two ways: a) An explicit référence to cyber security was added in Section 10. 1. "IT security", and b) It was spécifiée! that the Bank extends the scope of Communication NBB_2015_32 on continuity to all significant companies. Moreover. référence is also made to the new Circular NBB_2020_18 on cloud outsourcing which transposes EIOPA's guidelines on the subject published on 6 February 2020. 6. Recommendations on sustainable finance In line with the ongoing work on Environmental Social Governance at the level of EIOPA, the following recommendations regarding sustainable development were introduced in the overarching circular on governance: NBB 2020_017 - 5 May 2020 Communication - Page 5/6

ni a) In Chapter 1 "Management structure", it is indicated in Section 1. 1. 5. "Training" that the Bank recommends that the training programmes cover all risks to which the insurance company is exposed, including sustainability risks; b) In Chapter 5 "Independent control functions", it is indicated that the risk management function should identify sustainability risks and that the actuarial function should take sustainability risks into considération in the context of the opinion to be given on the underwriting policy; e) In Chapter 6 "Financial management", it is specified in Section 6. 1. "Prudent person principle" that the company should take into account sustainability risks; d) In Chapter 8 "Rémunération", it is spécifiée) that environmental criteria are a good example of non-financial criteria to be used for determining variable rémunération. Entry into force of the changes to the overarching circular on governance The changes to the overarching circular on governance are shown in track changes in the attachée) document (changes from the version of September 2018 of this Circular). Moreover, for the convenience of the insurance and reinsurance companies, the overarching circular on governance is published on the Bank's website in a web format, each chapter being provided as a separate web page, with links to any underlying thematic circulars. The changes to the overarching circular on governance are effective immediately, with the exception of (i) the new recommendations on outsourcing which companies should comply with from 1 January 2021 (the date from which the standard form and the opinion of the person responsible for the compliance function should also be submitted) and (ii) the expectations regarding rémunération that shall apply to variable rémunérations paid in 2021 for 2020 (in this regard, the modified template for rémunération figures should be used for the first time in the context of the reporting to be submitted inApril2021). A copy of this Circular will be forwarded to the accréditée! statutory auditor of your company. Yours faithfully, Pierre WL1NSCH GoveimSr innex: Updated Overarching Circular on System of Governance (version with track changes). NBB_2020_017 - 5 May 2020 Communication - Page 6/6