This morning, I would like to take the opportunity to briefly address some of the issues and priorities that are currently directing the Bank’s work in this area. We have substantially completed a review of the existing corporate governance frameworks for the banking and insurance industries and expect to be able to consult with industry on our specific proposals to update and harmonise the frameworks later this year. As part of this review, the insurance industry can expect that what is currently described as “best practice” in the prudential framework on corporate governance will be elevated to principles or minimum expectations to be met by all institutions. We do not expect this to substantially alter current practice in the industry given that for some time now, the Bank already holds insurers to higher standards that reflect the maturity of the industry and the more sophisticated nature of the business over time. But we also set out in the review to take a fresh and critical look at some key elements of the governance framework to ensure that our requirements remain fit for purpose in the context of the changing financial landscape. Independence, board size and composition, and expectations of subsidiary boards are among some themes addressed in our proposals. We have drawn extensively on our supervisory observations and thematic reviews of governance practices over the course of the past two years in informing our review. In many areas, positive changes can be observed in the governance practices of insurers.
This has the intended effect of encouraging firms to shift from a compliance focus to developing a deeper understanding of the risk drivers in their business. In turn, conversations between management and the board, and between insurers and supervisors, have moved to focus on how key risks are being controlled rather than on whether particular rules have been breached. This reflects our expectation that boards, supported by the audit and risk committees, must monitor changes to their risk profiles and actively review risk strategies and internal controls in the light of those changes. An area in which Bank Negara Malaysia is currently seeking to better understand industry practice is with respect to the interactions between the audit and risk committees of the board. Audit committees have a clear interest in risk management within their organisations. Most internal audits adopt a risk-based approach to auditing which requires an understanding of material risks within the organisation. Audit committees also obtain independent assurance from internal audit on the effectiveness of risk management processes within the organisation and this requires a reasonably deep knowledge of risk management. Conversely, risk committees must consider the quality of internal controls, including financial reporting practices, which are an important part of any risk management framework. The Walker Review of corporate governance in the financial industry acknowledged an important link between these two functions. In Malaysia, we have moved ahead of many countries in requiring an organisational separation of the audit and risk committees in order to encourage an enhanced focus on audit and risk.