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Captive Insurance Company Leaders Should Consider Audit Committee Best Practices

December 01, 2016

Most captive insurance company owners recognize the role an audit committee plays in the general good governance of their captives. However, with the increase in regulatory scrutiny of financial service firms, the importance of a competent and well-educated audit committee cannot be overstated.

PricewaterhouseCoopers (PwC) hosts an annual financial services audit committee conference in New York City. attended the conference in early October, and this article provides a summary of the current best practice ideas, many of which should be considered by captives for their own audit committees.

Current best practices and trends are as follows.

  • Of PwC's audit clients' audit committees, 50 percent have at least three financial experts on the committee.

  • The trend is toward increasing the participation of CEOs on audit committees because of skill sets including long-range planning, global analysis, and depth of knowledge.

  • Another growing trend is to have at least one individual with information technology (IT) expertise due to the growing importance of data analytics and Fintech.

  • Many companies are splitting out a risk committee from an audit committee to handle cyber-security and enterprise risk management (ERM) matters.

    — As ERM has grown in importance, the need to focus on the risks embedded in the risk map and their relative positions has increased.

    — Risk committees frequently bring in various business units of the company to discuss their operational risk and assess their overall knowledge of the issues.

    — The risk committee also focuses on the key assumptions being used in management's strategic plans and the implications of the strategy on the company's business and reputation.

  • Key questions may include "Does your company have a 'ransomware policy'?"

Current hot topics for audit committees are as follows.

  • The building of better relationships with key management talent below the C-suite is important.

  • This relationship-building is a result of the increasing focus on succession planning and talent acquisition and retention (deemed to be one of the top ERM risks over the next 5–10 years).

  • Is there a written succession plan and methodology for identifying potential outside talent for filling key roles?

  • Broadening the scope of internal audits to include analysis of the "culture" in business units, creation of after action reports on new business initiatives and acquisitions, rotating business unit management personnel into internal audit for a year, and allowing internal auditors to hire external expertise to expand the knowledge base for specific products, lines of business, and operational risk have become talking points.

  • Operational review of the external auditor to include reviewing expertise of the entire team assigned, the workload of the engagement partner, linkage with the internal auditors, and an annual external auditor written review have become topics of discussion.

  • With the growing importance of IT, IT risk assessment should not be conducted by the IT management team.

  • Audit committee self-assessments are growing in importance and are moving from being based on surveys to chair/lead director interviews with all of the committee members.

While some of these ideas may not be practical for a captive to entertain, they nonetheless serve as markers for comparison when judging how your own audit committee is working.

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