Executive Summary

Structure of this Module

The Comply or Explain Principle

Monitoring and Enforcement of Module HC

Legal Basis

Effective Date

HC-A.2.1

This Module was first issued in April 2005 by the BMA and updated in January 2007 to reflect the switch to the CBB. Following the issuance of the Corporate Governance Code by the Ministry of Industry and Commerce in March 2010, the Module was amended in January 2011 to be in line with the new Code and to include previous requirements that were in place in the originally issued Module HC. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

HC-A.2.2

A list of recent changes made to this Module is detailed in the table below:

HC-A.2.3

Guidance on the implementation and transition to Volume 3 (Insurance) is given in Module ES (Executive Summary).

HC-B.1.1

The contents of this Module - unless otherwise stated - apply to all Bahraini insurance licensees, incorporated under the Legislative Decree No. 21 of 2001, with respect to promulgating the Commercial Companies Law ('Company Law'), except those companies operating as Bahraini single person company.

HC-B.1.2

For insurance brokers, Sections HC-3.2 Audit Committee and HC-3.3 Audit Committee Charter are to be considered as Guidance and the Comply or Explain Principle (see Paragraph HC-A.1.8) applies. In addition references to the Nominating and Remuneration Committees do not apply for insurance brokers.

HC-B.1.3

For insurance consultants, insurance managers, Insurance Aggregators and captive insurance firms the applicable Guidance Paragraphs are included in Chapter HC-10. The Comply or Explain Principle (see Paragraph HC-A.1.8) applies to the content of Chapter HC-10.

HC-B.1.4

Overseas insurance licensees must satisfy the CBB that equivalent arrangements are in place at the parent entity level, and that these arrangements provide for effective high-level controls over activities conducted under the Bahrain license.

HC-B.1.5

In assessing compliance with Paragraph HC-B.1.4, the CBB will take into account regulatory requirements applicable to the parent entity, as well as the governance and systems and controls arrangements actually implemented by the parent entity and applied to the Bahrain operation. With the exception of specific requirements that explicitly apply to overseas insurance licensees (i.e. Paragraph HC-B.1.4), overseas insurance licensees should consider the remaining contents of this Chapter as guidance, in judging whether high-level controls applied to the branch satisfy HC-B.1.4.

HC-B.2.1

Bahraini insurance licensees must ensure that, as a minimum, the same or equivalent provisions of this Module apply to their branches, whether located inside or outside the Kingdom of Bahrain, such that these are also subject to effective high-level controls. In instances where local jurisdictional requirements are more stringent than those applicable in this Module, the local requirements are to be applied.

HC-B.2.2

Bahraini insurance licensees must satisfy the CBB that financial services activities conducted in subsidiaries and other group members are subject to the same or equivalent arrangements for ensuring effective corporate governance over their activities.

HC-B.2.3

Where an insurance licensee is unable to satisfy the CBB that its subsidiaries and other group members are subject to the same or equivalent arrangements, the CBB will assess the potential impact of risks — both financial and reputational — to the licensee arising from inadequate high-level controls in the rest of the group of which it is a member. In such instances, the CBB may impose restrictions on dealings between the licensee and other group members. Where weaknesses in controls are assessed by the CBB to pose a major threat to the stability of the licensee, then its authorisation may be called into question.

HC-1.1.1

All Bahraini insurance licensees must be headed by an effective, collegial and informed Board of Directors ('the Board').

HC-1.2.1

All directors must understand the Board's role and responsibilities under the Commercial Companies Law and any other laws or regulations that may govern their responsibilities from time to time. In particular:

HC-1.2.2

The Board's role and responsibilities include but are not limited to:

HC-1.2.3

With respect to Subparagraph HC-1.2.2(j), the Board should set a materiality threshold so that contractual obligations above this set threshold are regularly reported to the Board. In setting the materiality threshold, the Board will consider the financial impact the contractual obligation may have in relation to its capital.

HC-1.2.4

The directors are responsible both individually and collectively for performing these responsibilities and must have sufficient expertise as a Board to understand the important issues relating to operation and control of the insurance licensee. Although the Board may delegate certain functions to committees or management, it may not delegate its ultimate responsibility to ensure that an adequate, effective, comprehensive and transparent corporate governance framework is in place. This statement must be clearly communicated to Board members and senior management.

HC-1.2.5

When a new director is inducted, the chairman of the Board, or the licensee's legal counsel or compliance officer, or other individual delegated by the chairman of the board, should review the Board's role and duties with that person, particularly covering legal and regulatory requirements and Module HC (see also HC-4.5.1).

HC-1.2.6

The insurance licensee should have a written appointment agreement with each director which recites the directors' powers and duties and other matters relating to his appointment including his term, the time commitment envisaged, the committee assignment if any, his remuneration and expense reimbursement entitlement, and his access to independent professional advice when that is needed.

HC-1.2.7

The Board should adopt a formal Board charter or other statement specifying matters which are reserved to it, which should include but need not be limited to the specific requirements and responsibilities of directors.

Additional Guidance

HC-1.3.1

Captive insurance firms are exempt from the requirements of this Section, except for Paragraph HC-1.3.2, which apply to all Bahraini insurance licensees.

HC-1.3.2

The Memorandum and Articles of Association of licensees must adequately set out procedures for the appointment, removal and retirement of Directors.

HC-1.3.3

For insurance firms, the Board must comprise at least five Directors. For Bahraini insurance licensees, other than insurance firms, the Board must comprise at least three Directors. For all Bahraini insurance licensees, at least half the Board's members, including the Board's chairman, must be non-executive Directors.

HC-1.3.4

The Board should have no more than 15 members, and should regularly review its size and composition to ensure that it is small enough for efficient decision making yet large enough to have members who can contribute from different specialties and viewpoints. The Board should recommend changes in Board size to the shareholders when a needed change requires amendment of the insurance licensee's Memorandum of Association.

HC-1.3.5

Potential non-executive directors should be made aware of their duties before their nomination, particularly as to the time commitment required. The Nominating Committee should regularly review the time commitment required from each non-executive director and should require each non-executive director to inform the Committee before he accepts any Board appointments to another company. One person should not hold more than three directorships in public companies in Bahrain with the provision that no conflict of interest may exist, and the Board should not propose the election or reelection of any director who does.

HC-1.3.6

The Board must periodically assess its composition and size and, where appropriate, reconstitute itself and its committees by selecting new Directors to replace long-standing members or those whose contributions to the licensee or its committees is not adequate.

HC-1.3.7

A Board member may have a maximum of two Directorships of financial institutions inside Bahrain. However, two Directorships of licensees within the same category of licensees would not be permitted. For purposes of this Rule only, insurance firms and reinsurance firms are considered as different categories. Insurance firms may approach the CBB for exemption from this limit where the Directorships concern financial institutions within the same group.

HC-1.3.8

A non-executive Director is a Director who is not involved in the day-to-day management of the licensee and is not an employee of the licensee. The Chairman of the Board cannot, therefore, also perform the role of Chief Executive.

HC-1.3.9

The Board's non-executive Directors must comprise a sufficient number of independent Directors to apply independent judgement to, amongst other things, tasks where there is a potential for conflict of interest or there is a need for impartiality.

HC-1.3.10

The appointment of Board members is conditional on the approval of the CBB (See Section AU-1.2).

HC-1.4.1

The Board must be collegial and deliberative, to gain the benefit of each individual director's judgment and experience.

HC-1.4.2

The chairman must take an active lead in promoting mutual trust, open discussion, constructive dissent and support for decisions after they have been made.

HC-1.4.3

The Board must meet frequently but in no event less than four times a year. All directors must attend the meetings whenever possible and the directors must maintain informal communication between meetings.

HC-1.4.4

Individual board members must attend at least 75% of all Board meetings in a given financial year to enable the Board to discharge its responsibilities effectively (see table below). Voting and attendance proxies for board meetings are prohibited at all times.

HC-1.4.4A

The absence of Board members at Board and committee meetings must be noted in the meeting minutes. In addition, Board attendance percentage must be reported during any general assembly meeting when Board members stand for re-election (e.g. Board member XYZ attended 95% of scheduled meetings this year).

HC-1.4.4B

In the event that a Board member has not attended at least 75% of Board meetings in any given financial year, the insurance licensee must immediately notify the CBB indicating which member has failed to satisfy this requirement, his level of attendance and any mitigating circumstances affecting his non-attendance. The CBB shall then consider the matter and determine whether disciplinary action, including disqualification of that Board member pursuant to Article 65 of the CBB Law, is appropriate. Unless there are exceptional circumstances, it is likely that the CBB will take disciplinary action.

HC-1.4.5

To meet its obligations under Rule HC-1.4.3 above, the Board should meet preferably no less than four times per year. The CBB recommends that meetings should take place once every quarter to address the Board's responsibilities for management oversight and performance monitoring. Furthermore, Board rules should require members to step down if they are not actively participating in Board meetings. Board members are reminded that non attendance at board meetings does not absolve them of their responsibilities as directors. It is important that each individual director should allocate adequate time and effort to discharge his responsibilities. All Directors are expected to contribute actively to the work of the Board in order to discharge their responsibilities and should make every effort to attend board meetings where major issues are to be discussed. Insurance licensees are encouraged to amend their Articles of Association to provide for telephonic and videoconference meetings. Participation in board meetings by means of video or telephone conferencing is regarded as attendance and may be recorded as such.

HC-1.4.6

At least half the Board meetings of Bahraini insurance licensees in any twelve-month period must be held in the Kingdom of Bahrain.

HC-1.4.7

The chairman must ensure that all directors receive an agenda, minutes of prior meetings, and adequate background information in writing before each Board meeting and when necessary between meetings. All directors must receive the same Board information. At the same time, directors have a legal duty to inform themselves and they must ensure that they receive adequate and timely information and must study it carefully.

HC-1.4.8

The Board must also maintain adequate records of its meetings, such that key decisions and how they are arrived at can be traced.

HC-1.5.1

The CBB requires Boards of insurance firms to include at least two independent non-executive members. For Bahraini insurance licensees, other than insurance firms, Boards must include at least one independent non-executive member.

HC-1.5.2

In the case of a Bahraini insurance licensee, which is part of an overseas group, where there is sufficient independent scrutiny of the operations of the firm on a group wide basis, the CBB will consider exempting the licensee from the requirements of Paragraph HC-1.5.1.

HC-1.5.3

Every director must bring independent judgment to bear in decision-making. No individual or group of directors must dominate the Board's decision-making and no one individual should have unfettered powers of decision.

HC-1.5.4

Executive directors must provide the Board with all relevant business and financial information within their cognizance, and must recognise that their role as a director is different from their role as an officer.

HC-1.5.5

Non-executive directors must be fully independent of management and must constructively scrutinise and challenge management including the management performance of executive directors.

HC-1.5.6

At least half of an insurance licensee's Board should be non-executive directors and at least three of those persons should be independent directors. (Note the exception for controlled companies in Paragraph HC-1.6.2 and for possible exemption under Paragraph HC-1.5.2.)

HC-1.5.7

The chairman of the Board should be an independent director, so that there will be an appropriate balance of power and greater capacity of the Board for independent decision making.

HC-1.5.7A

The chairman and/or deputy chairman must not be the same person as the CEO.

HC-1.5.7B

The chairman must not be an executive director.

HC-1.5.8

The Board must review the independence of each director at least annually in light of interests disclosed by them and their conduct. Each independent director must provide the Board with all necessary and updated information for this purpose.

HC-1.5.9

To facilitate free and open communication among independent directors, each Board meeting should be preceded or followed with a session at which only independent directors are present, except as may otherwise be determined by the independent directors themselves.

HC-1.5.10

Where an independent director has served three consecutive terms on the board, such director will lose his/her independence status and must not be classified as an independent director if reappointed.

HC-1.5.11

Where a Chief Executive Officer of an insurance firm, who is also a Board member, no longer occupies the CEO position, whether due to resignation, retirement or termination, his/her Board Membership must also be immediately terminated.

HC-1.6.1

Each director must consider himself as representing all shareholders and must act accordingly. The Board must avoid having representatives of specific groups or interests within its membership and must not allow itself to become a battleground of vested interests. If the company has a controller (or a group of controllers acting in concert), the latter must recognise its or their specific responsibility to the other shareholders, which is direct and is separate from that of the Board of directors.

HC-1.6.2

In insurance licensees with a controller, at least one-third of the Board must be independent directors. Minority shareholders must generally look to independent directors' diligent regard for their interests, in preference to seeking specific representation on the Board.

HC-1.6.3

In insurance licensees with a controller, both controllers and other shareholders should be aware of controllers specific responsibilities regarding their duty of loyalty to the insurance licensee and conflicts of interest (see Chapter HC-2) and also of rights that minority shareholders may have to elect specific directors under the Company Law or if the insurance licensee has adopted cumulative voting for directors. The chairman of the board or other individual delegated by the chairman of the board should take the lead in explaining this with the help of company lawyers.

HC-1.7.1

The Board must ensure that there are agreed-upon procedures for individual directors to have access to independent legal or other professional advice at the insurance licensee's expense whenever they judge this necessary to discharge their responsibilities as directors and this must be in accordance with the insurance licensee's policy approved by the Board.

HC-1.7.2

Individual directors must also have access to the insurance licensee's corporate secretary, who must have responsibility for reporting to the Board on Board procedures. Both the appointment and removal of the corporate secretary must be a matter for the Board as a whole, not for the CEO or any other officer.

HC-1.7.3

Whenever a director has serious concerns which cannot be resolved concerning the running of the insurance licensee or a proposed action, he should consider seeking independent advice and should ensure that the concerns are recorded in the Board minutes and that any dissent from a Board action is noted or delivered in writing.

HC-1.7.4

Upon resignation, a non-executive director should provide a written statement to the chairman, for circulation to the Board, if he has any concerns such as those in Paragraph HC-1.7.3.

HC-1.8.1

The Board must encourage participation by management regarding matters the Board is considering, and also by management members who by reason of responsibilities or succession, the CEO believes should have exposure to the directors.

HC-1.8.2

Non-executive directors should have free access to the insurance licensee's management beyond that provided in Board meetings. Such access should be through the Chairman of the Audit Committee or CEO. The Board should make this policy known to management to alleviate any management concerns about a director's authority in this regard.

HC-1.9.1

For insurance firms, the Board must create specialised committees when and as such committees are needed. In addition to the Audit, Remuneration and Nominating Committees described elsewhere in this Module, these may include an Executive Committee to review and make recommendations to the whole Board on the insurance firm's actions, or a Risk Committee to identify and minimize specific risks of the insurance licensee's business.

HC-1.9.2

Insurance brokers should consider the Rules in this Section as guidance.

HC-1.9.3

For insurance firms, the Board should establish a corporate governance committee of at least three independent members which should be responsible for developing and recommending changes from time to time in the insurance licensee's corporate governance policy framework.

HC-1.9.4

The Board or a committee may invite non-directors to participate in, but not vote at committee meetings so that the committee may gain the benefit of their advice and expertise in financial or other areas.

HC-1.9.5

Board Committees must have:

HC-1.9.6

Committees must act only within their mandates and therefore the Board must not allow any committee to dominate or effectively replace the whole Board in its decision-making responsibility.

HC-1.9.7

Committees may be combined provided that no conflict of interest might arise between the duties of such committees, subject to CBB prior approval.

HC-1.9.8

Every committee should have a formal written charter similar in form to the model charters which are set forth in Appendices A, B and C of this Module for the Audit, Nominating and Remuneration Committees.

HC-1.10.1

At least annually the Board must conduct an evaluation of its performance and the performance of each committee and each individual director.

HC-1.10.2

Insurance brokers should consider the Rules in this Section as guidance.

HC-1.10.3

The evaluation process must include:

HC-1.10.4

While the evaluation is a responsibility of the entire Board, it should be organised and assisted by an internal Board committee and, when appropriate, with the help of external experts.

HC-1.10.5

The Board should report to the shareholders, at each annual shareholder meeting, that evaluations have been done and report its findings.

HC-1.11.1

The Board must assess and document each year whether the internal corporate governance processes that it has implemented have successfully achieved their objectives, and consequently whether the Board has fulfilled its responsibilities for directing and monitoring the overall conduct of the licensee's affairs.

HC-1.11.2

The requirements in Section HC-1.11 do not apply to captive insurance firms, but should be considered as guidance.

HC-1.11.3

The results of the review referred to in Paragraph HC-1.11.1 must be summarised in a written certification, to be signed by all Board members, and sent to the CBB within 3 months of the financial year-end of the licensee. The Board must report any material deficiencies identified during the review, along with an action plan and timescales for their correction.

HC-1.11.4

The Board certification comprises a prescribed standard statement, to be signed by all Board members, attached to which should be a summary of the steps the Board has taken in carrying out the review; a summary of the results of that review, and a summary action plan (with timescales) for addressing any identified material deficiencies. The prescribed standard statement is included in Part B of Volume 3 (Insurance), under 'CBB Reporting Forms': see 'Directors' High-Level Controls Certification' contained in the Insurance Firm Return (Form IFR) and the Insurance Intermediaries and Managers Return (Form IMR).

HC-1.11.5

The Board's review should cover the following specific matters:

HC-1.11.6

With respect to HC-1.11.5 (g), a Director's certificate received (for example) no later than 31 March 2004, covering the year ending 31 December 2003, would need to certify that the management letter for the year ending 31 December 2002 was received and reviewed by the Board by 30 June 2003.

HC-2.1.1

The approved persons must have full loyalty to the insurance licensee.

HC-2.2.1

The Board and its members must act with honesty, integrity, due skill and care, and in the best interests of the licensee, its shareholders and policyholders.

HC-2.2.2

In assessing compliance with Paragraph HC-2.2.1, the CBB will take into account all actions of the Board and its members. The interest of the licensee includes the licensee's continued compliance with all relevant Rules and Regulations, and the interests of employees, customers and other stakeholders. The interest of shareholders includes the current and future value of the licensee, its status as a going concern, transparency and disclosure of information to the market. The interest of policyholders includes ensuring that the licensee fulfils its obligations under its policies and treats all policyholders fairly and pays equal regard to the interests of all policyholders and groups of policyholders.

HC-2.2.3

Each member of the board must understand that under the Company Law he is personally accountable to the insurance licensee and the shareholders if he violates his legal duty of loyalty to the insurance licensee, and that he can be personally sued by the insurance licensee or the shareholders for such violations.

HC-2.2.4

An insurance licensee's Board must establish and disseminate to all employees and appointed representatives of the licensee a corporate code of conduct.

HC-2.2.5

The requirements of Paragraph HC-2.2.4 do not apply to captive insurance firms, but should be considered as guidance.

HC-2.2.6

The code of conduct must establish standards by giving examples or expectations of:

HC-2.2.7

The Board must establish and disseminate to employees and appointed representatives policies and processes for the identification, reporting and prevention or management of potential conflicts of interest, including matters such as:

HC-2.2.8

Any transaction in which Board members or any member of management have potential conflicts of interest should either be proscribed or require formal documented approval by the Board, with measures taken to manage those conflicts (See also Paragraph HC-2.4.1).

HC-2.2.9

The Board must ensure that policies and procedures are in place to ensure that necessary customer confidentiality is maintained.

HC-2.2.10

The duty of loyalty includes a duty not to use property of the insurance licensee for his personal needs as though it was his own property, not to disclose confidential information of the insurance licensee or use it for his personal profit, not to take business opportunities of the insurance licensee for himself, not to compete in business with the insurance licensee, and to serve the insurance licensee's interest in any transactions with a company in which he has a personal interest, such as in related party transactions.

HC-2.2.11

For purposes of Paragraph HC-2.2.10, an approved person should be considered to have a "personal interest" in a transaction with a company if:

is a party to the transaction or has a material financial interest in the transaction. (Transactions and interests which are de minimis in value should not be included.)

HC-2.3.1

Each approved person must make every practicable effort to arrange his personal and business affairs to avoid a conflict of interest with the insurance licensee.

HC-2.3.2

Any Board member should absent himself from any discussion or decision-making that involves a subject where he is incapable of providing objective advice, or which involves a subject, transaction or proposed transaction where there is a potential conflict of interest.

HC-2.3.3

Bahraini insurance licensees must have in place a board approved policy on the employment of relatives of approved persons and a summary of such policy must be disclosed in the annual report of the Bahraini insurance licensee.

HC-2.3.4

Overseas insurance licensees must have in place a policy on the employment of relatives of approved persons pertaining to their Bahrain operations.

HC-2.4.1

On an annual basis, each approved person must inform the entire Board of conflicts of interest as they arise. Board members must abstain from voting on the matter in accordance with the relevant provisions of the Company Law. This disclosure must include all material facts in the case of a contract or transaction involving the approved person. The approved persons must understand that any approval of a conflicted transaction is effective only if all material facts are known to the authorising persons and the conflicted person did not participate in the decision.

HC-2.4.1A

The chief executive/general manager of the Bahraini insurance licensee must disclose to the board of directors on an annual basis those individuals who are occupying controlled functions and who are relatives of any approved persons within the Bahraini insurance licensee.

HC-2.4.1B

The chief executive/general manager of the overseas insurance licensees must disclose to a designated officer at its head office or regional manager on an annual basis those individuals who are occupying controlled functions and who are relatives of any approved persons within the overseas insurance licensee.

HC-2.4.2

The Board of the Bahraini insurance licensee should establish formal procedures for:

HC-2.5.1

The insurance licensee must disclose to its shareholders in the Annual Report any abstention from voting motivated by a conflict of interest and must disclose to its shareholders any authorisation of a conflict of interest contract or transaction in accordance with the Company Law.

HC-3.1.1

The Board must have rigorous controls for financial audit and reporting, internal control, and compliance with law.

HC-3.2.1

The Board must establish an audit committee of at least three directors of which the majority should be independent including the Chairman. The committee must:

HC-3.2.2

The Audit Committee should ensure that the external auditor firm and its partners are truly independent of the licensee and have no financial or other relationship with the licensee. Audit findings should be used as an independent check on the information received from management about the licensee's operations and performance and the effectiveness of internal controls.

HC-3.3.1

The audit committee must adopt a written charter which shall, at a minimum, state the duties outlined in Paragraph HC-3.2.1 and the other matters included in Appendix A to this Module.

HC-3.3.2

A majority of the audit committee should have the financial literacy qualifications stated in Appendix A.

HC-3.3.3

The Board should adopt a "whistleblower" program under which employees can confidentially raise concerns about possible improprieties in financial or legal matters. Under the program, concerns may be communicated directly to any audit committee member or, alternatively, to an identified officer or employee who will report directly to the Audit Committee on this point.

HC-3.4.1

To encourage management accountability for the financial statements required by the directors, the insurance licensee's CEO and chief financial officer must state in writing to the audit committee and the Board as a whole that the insurance licensee's interim and annual financial statements present a true and fair view, in all material respects, of the insurance licensee's financial condition and results of operations in accordance with applicable accounting standards.

HC-4.1.1

The insurance licensee must have rigorous procedures for appointment, training and evaluation of the Board.

HC-4.2.1

The Board must establish a Nominating Committee of at least three directors which must:

HC-4.2.2

The committee must include only independent directors or, alternatively, only non-executive directors of whom a majority is independent directors and the chairman is an independent director. This is consistent with international best practice and it recognises that the Nominating Committee must exercise judgment free from personal career conflicts of interest.

HC-4.3.1

The Nominating Committee must adopt a formal written charter which must, at a minimum, state the duties outlined in Paragraph HC-4.2.1 and the other matters included in Appendix B to this Module.

HC-4.4.1

Each proposal by the Board to the shareholders for election or reelection of a director must be accompanied by a recommendation from the Board, a summary of the advice of the Nominating Committee, and the following specific information:

HC-4.4.2

The chairman of the Board should confirm to shareholders when proposing re-election of a director that, following a formal performance evaluation, the person's performance continues to be effective and continues to demonstrate commitment to the role. Any term beyond six years (e.g. two three-year terms) for a director should be subject to particularly rigorous review, and should take into account the need for progressive refreshing of the Board. Serving more than six years is relevant to the determination of a non-executive director's independence.

HC-4.4.3

Licensees must notify the CBB immediately on any change in board categorisation.

HC-4.5.1

The chairman of the Board must ensure that each new director receives a formal and tailored induction to ensure his contribution to the Board from the beginning of his term. The induction must include meetings with senior management, visits to company facilities, presentations regarding strategic plans, significant financial, accounting and risk management issues, compliance programs, its internal and external auditors and legal counsel.

HC-4.5.2

All continuing directors must be invited to attend orientation meetings and all directors must continually educate themselves as to the insurance licensee's business and corporate governance.

HC-4.5.3

Management, in consultation with the chairman of the Board, should hold programs and presentations to directors respecting the insurance licensee's business and industry, which may include periodic attendance at conferences and management meetings. The Nominating Committee shall oversee directors' corporate governance educational activities.

HC-5.1.1

The insurance licensee must remunerate approved persons fairly and responsibly.

HC-5.2.1

The Board must establish a remuneration committee of at least three directors which must:

HC-5.2.2

The committee may be merged with the nominating committee.

HC-5.3.1

The committee must adopt a written charter which must, at a minimum, state the duties in Paragraph HC-5.2.1 and other matters in Appendix C of this Module.

HC-5.3.2

The committee should include only independent directors or, alternatively, only non-executive directors of whom a majority are independent directors and the chairman is an independent director. This is consistent with international best practice and it recognises that the remuneration committee must exercise judgment free from personal career conflicts of interest.

HC-5.4.1

Remuneration (including incentives, bonuses and other rewards) of approved persons must be sufficient enough to attract, retain and motivate persons of the quality needed to run the insurance licensee successfully, but the insurance licensee must avoid paying more than is necessary for that purpose.

HC-5.4.2

Where remuneration is structured so as to link rewards to corporate and individual performance, criteria should avoid excessive focus on short-term profitability measures.

Alignment of All Staff Remuneration with Compliance with AML/CFT Requirements

HC-5.5.1

The review of Directors' remuneration must be a standing item on the insurance licensee's Annual General Meeting agenda, and must be considered by shareholders at every Annual General Meeting. Policies in respect of Directors' remuneration (including pension and severance arrangements) and bonuses must be clearly disclosed in the annual financial statements.

HC-5.5.2

Directors' remuneration must comply with all applicable laws and Regulations, including the provisions contained in Legislative Decree No. 21 of 2001, with respect to promulgating the Commercial Companies Law, capping Directors' remuneration as a percentage of net profits.

HC-5.5.3

Remuneration of non-executive directors must not include performance-related elements such as grants of shares, share options or other deferred stock-related incentive schemes, bonuses, or pension benefits.

HC-5.6.1

Remuneration of senior management must be structured so that a portion of the total is linked to the insurance licensee's and individual's performance and aligns their interests with the interests of the shareholders.

HC-5.6.2

Such rewards may include grants of shares, share options and other deferred stock-related incentive schemes, bonuses, and pension benefits which are not based on salary.

HC-5.6.3

If a senior manager is also a director, his remuneration as a senior manager must take into account compensation received in his capacity as a director.

HC-5.6.4

All share incentive plans must be approved by the shareholders.

HC-5.6.5

All performance-based incentives should be awarded under written objective performance standards which have been approved by the Board and are designed to enhance shareholder and the insurance licensee's value, and under which shares should not vest and options should not be exercisable within less than two years of the date of award of the incentive.

HC-5.6.6

All policies for performance-based incentives should be approved by the shareholders, but the approval should be only of the plan itself and not of the grant to specific individuals of benefits under the plan.

HC-6.1.1

The Board must establish a clear and efficient management structure.

HC-6.2.1

The Board must approve and review at least annually the insurance licensee's management structure and responsibilities.

HC-6.2.2

The Board must appoint senior management whose authority must include management and operation of current activities of the insurance licensee, reporting to and under the direction of the Board. The senior management must include at a minimum:

and must also include such other approved persons as the Board considers appropriate and as a minimum must include persons occupying controlled functions as outlined in Paragraph AU-1.2.2.

HC-6.3.1

The Board must adopt by-laws prescribing each senior manager's title, authorities, duties and internal reporting responsibilities. This must be done with the advice of the Nominating Committee and in consultation with the CEO, to whom the other senior managers should normally report.

HC-6.3.2

These provisions must include but should not be limited to the following:

HC-6.3.3

The Board should also specify any limits which it wishes to set on the authority of the CEO or other senior managers, such as monetary maximums which they authorise without separate Board approval.

HC-6.3.4

In conjunction with the Board, the Chief Executive Officer/General Manager must maintain a clear mapping of the risks faced by the business and document the organisational and other controls maintained to meet those risks.

HC-6.3.5

In conjunction with the Board, the Chief Executive Officer/General Manager must maintain a clear and appropriate apportionment of significant responsibilities amongst senior management.

HC-6.3.6

The apportionment must be clear as to who has which responsibility, and must permit the business and affairs of the licensee to be adequately monitored and controlled by the Board, the Chief Executive Officer/General Manager, and relevant heads of function.

HC-6.3.7

The apportionment must also ensure appropriate segregation of duties where these are required for effective controls.

HC-6.3.8

The corporate secretary should be given general responsibility for reviewing the insurance licensee's procedures and advising the Board directly on such matters. Whenever practical, the corporate secretary should be a person with legal or similar professional experience and training.

HC-6.3.9

At least annually the Board shall review and concur in a succession plan addressing the policies and principles for selecting a successor to the CEO, both in emergencies and in the normal course of business. The succession plan should include an assessment of the experience, performance, skills and planned career paths for possible successors to the CEO.

HC-6.4.1

Bahraini insurance firms must consider the need to establish an Executive Management Committee to support the Chief Executive Officer/General Manager.

HC-6.4.2

Insurance intermediaries and insurance managers, unlike other insurance licensees, are not required to consider the need to operate an Executive Management Committee.

HC-6.4.3

Executive Management Committees can facilitate proper corporate governance by ensuring that senior management discuss key issues affecting the licensee openly and collectively. Where an insurance firm does not consider it necessary to create an Executive Management Committee, it must be prepared to give reasons for its decision to the CBB, and to explain what checks and balances will apply to executive management.

HC-6.4.4

The Committee should comprise the Chief Executive Officer/General Manager and appropriate heads of functions, such as the head of risk management, the Chief Finance Officer, the Chief Operations Officer, the head of underwriting and other key business divisions.

HC-6.4.5

The Committee's responsibilities should include the oversight of day-to-day implementation of strategy, limits and procedures. It should also monitor the day-to-day performance of individual business lines and departments relative to targets, limits, and policies (in conjunction with other committees and functions, such as the Risk Committee or the Risk Management or Compliance functions).

HC-6.4.6

The Board is responsible for ensuring that there is a clear framework of delegated authorities and a clear demarcation of duties between the Board, the Executive Committee, the Chief Executive Officer and other members of senior management.

HC-6.5.1

Bahraini insurance licensees must establish an internal audit function to monitor the adequacy of their systems and controls.

HC-6.5.2

The internal audit function should be independent of the senior management, reporting to the Audit committee.

HC-6.5.3

The CBB considers it best practice for captive insurers to fall within the remit of the internal audit functions of their groups and be subject to periodic review, although no formal arrangements for internal audit cover captive insurers.

HC-6.5.4

Part or all of the internal audit function may be outsourced, or provided at group level, subject to the requirements of Section RM-7.6. Amongst other things, these require licensees to retain responsibility for their internal audit programme, and that appropriate safeguards are built into the outsourcing contract. Furthermore, a licensee cannot outsource its internal audit function to its external auditor (with limited exceptions). Prior approval from the CBB is required for significant outsourcing arrangements, including all outsourcing of internal audit. A licensee's head of internal audit is a controlled function and requires CBB approval prior to being appointed (see Section AU-1.2).

HC-6.5.5

Internal audit functions must have terms of reference that clearly indicate:

HC-6.5.6

Paragraph HC-6.5.5 applies irrespective of whether the internal audit function is outsourced. Where it is outsourced, the CBB would expect to see these matters addressed in the contract with the outsourcing provider.

HC-6.5.7

Internal audit functions must report directly to the Audit committee or, where none exists, to the Board. They must have unrestricted access to all the appropriate records of the insurance licensee. They must have open and regular access to the Audit Committee, the Board, the Chief Executive, and the licensee's external auditor.

HC-6.5.8

Internal audit functions must have adequate staff levels with appropriate skills and knowledge, such that they can act as an effective challenge to the business. Where the function is not outsourced, the head of the function should be a senior and experienced employee. Internal audit functions must not perform other activities that compromise their independence.

HC-6.5.9

The CBB would expect to see in place a formal audit plan that:

HC-6.5.10

Internal Audit reports should also be:

HC-6.5.11

Insurance licensees should also have processes in place to deal with recommendations raised by internal audit to ensure that they are:

HC-6.5.12

The internal auditor is considered as a head of function (see Paragraph AU-1.2.11) and is subject to CBB prior approval for the approved person occupying this controlled function as outlined in Section AU-1.2.

HC-6.6.1

Insurance licensees must take reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements in the Kingdom's legislation and those set by the CBB, and those established under any other statute or regulator to which the insurance licensee is subject.

HC-6.6.2

Depending on the nature, scale and complexity of its business, an insurance licensee should consider having a separate compliance function. A compliance function should:

HC-6.6.3

The compliance function may not be combined with the internal audit function or any other operational function as such combination may lead to a conflict of interest.

HC-7.1.1

The insurance licensee must communicate with shareholders, encourage their participation, and respect their rights.

HC-7.2.1

The Board must observe both the letter and the intent of the Company Law's requirements for shareholder meetings. Among other things:

HC-7.2.2

The insurance licensee should require all directors to attend and be available to answer questions from shareholders at any shareholder meeting and, in particular, ensure that the chairs of the audit, remuneration and nominating committees are ready to answer appropriate questions regarding matters within their committee's responsibility (it being understood that confidential and proprietary business information may be kept confidential).

HC-7.2.3

The insurance licensee should require its external auditor to attend the annual shareholders' meeting and be available to answer shareholders' questions concerning the conduct and conclusions of the audit.

HC-7.2.4

An insurance licensee should maintain a company website (see HC-8.2.1 for website disclosures). The insurance licensee should dedicate a specific section of its website to describing shareholders' rights to participate and vote at each shareholders' meeting, and should post significant documents relating to meetings including the full text of notices and minutes. The insurance licensee may also consider establishing an electronic means for shareholders' communications including appointment of proxies. For confidential information, the insurance licensee should grant a controlled access to such information to its shareholders.

HC-7.2.5

In notices of meetings at which directors are to be elected or removed the insurance licensee should ensure that:

HC-7.3.1

The chairman of the Board (and other directors as appropriate) must maintain continuing personal contact with controllers to solicit their views and understand their concerns. The chairman must ensure that the views of shareholders are communicated to the Board as a whole. The chairman must discuss governance and strategy with controllers. Given the importance of market monitoring to enforce the "comply or explain" approach of this Module, the Board should encourage investors, particularly institutional investors, to help in evaluating the insurance licensee's corporate governance (see also HC-1.4 for other duties of the chairman).

HC-7.4.1

In insurance licensees with one or more controllers, the chairman and other directors must actively encourage the controllers to make a considered use of their position and to fully respect the rights of minority shareholders (see also HC-1.3 for other duties of the chairman).

HC-8.1.1

The insurance licensee must disclose its corporate governance.

HC-8.2.1

The requirements in this Section do not apply to captive insurance firms, but should be considered as guidance.

HC-8.2.2

The Board must oversee the process of disclosure, including corporate governance, to all stakeholders. The Board must ensure that the licensee's communications are fair, transparent, comprehensive and timely.

HC-8.2.3

In each insurance licensee:

HC-8.2.4

The CBB may issue a template as a guide for an insurance licensee's annual meeting corporate governance discussion.

HC-8.2.5

The Board must outline in its annual report its criteria and materiality thresholds for the definition of 'independence'. The Directors must be identified in the annual report as executive, non-executive, or independent non-executive.

HC-8.2.6

Licensees should refer to Module PD (Public Disclosure) regarding all specific disclosures required.

HC-9.1.1

Companies which refer to themselves as "Takaful or Retakaful" must follow the principles of Islamic Shari'a.

HC-9.2.1

Takaful and Retakaful companies which are guided by the principles of Islamic Shari'a have additional responsibilities to their stakeholders. In ensuring compliance with Shari'a principles, each Takaful or Retakaful insurance licensee must establish a Shari'a Supervisory Board ('SSB') consisting of at least three Shari'a scholars and must comply with AAOIFI Governance Standard for Islamic Financial Institutions No.1 ('Shari's Supervisory Board: Appointment, Composition and Report').

HC-9.2.2

The function of the Shari'a Supervisory Board is to review the operations of the takaful company and ensure that these are compliant with the principles of the Shari'a. In doing so, the Shari'a Supervisory Board is likely to provide guidance and advice to the takaful company's Board and management on all aspects of a takaful operation, with a particular focus on product design, the handling of claims and surpluses, the calculation and allocation of the operator's costs, the approval of investments and accounting issues.

HC-9.2.3

In the case of overseas insurance firms operating according to takaful principles, the requirement to appoint a Shari'a Supervisory Board in Paragraph HC-9.2.1 may be waived by CBB, if the firm has appointed an equivalent Shari'a Supervisory Board at the parent entity level, of sufficient expertise and credibility.

HC-9.2.4

An insurance firm licensed to conduct insurance business according to takaful principles must comply with all other AAOIFI governance standards for Islamic Financial Institutions.

HC-9.2.5

For takaful firms, full compliance with AAOIFI Governance Standard No.1 is required. The CBB would actively encourage full compliance with all the AAOIFI governance standards but in so doing accepts that these standards themselves include not only standards but also guidance.

HC-9.2.6

The office of Shari'a Board Member is a controlled function: see Module AU (Authorisation).

HC-9.2.7

The Shari'a Board requirements contained in Section HC-9.2 are additional to the other high-level control requirements contained in this Module.

HC-9.3.1

Insurance firms which refer to themselves as "Takaful" or "Retakaful" are subject to additional governance requirements and disclosures to provide assurance to stakeholders that they are following Shari'a Principles.

HC-9.3.2

In addition to its duties outlined in Chapter HC-3 and Appendix A, the Audit Committee shall communicate and co-ordinate with the insurance licensee's Corporate Governance Committee and the Shari'a Supervisory Board (where applicable) to ensure that information on compliance with Islamic Shari'a rules and principles is reported in a timely manner.

HC-9.3.3

The Board shall set up a Corporate Governance Committee (see also Chapter HC-8). In this case, the Committee shall comprise at least three members to co-ordinate and integrate the implementation of the governance policy framework.

HC-9.3.4

The Corporate Governance Committee established under Chapter HC-9 shall comprise at a minimum of:

HC-9.3.5

The Corporate Governance Committee shall be empowered to:

SSB Competence/ Fit and Proper Criteria

HC-10.1.1

All insurance consultants, insurance managers, insurance aggregators and captive insurance firms should be headed by an effective, collegial and informed Board of Directors ('the Board').

Role and Responsibilities

Composition

Decision Making Process

Directors' Communication with Management

HC-10.2.1

The approved persons shall have full loyalty to the insurance consultants, insurance managers, insurance aggregators or captive insurance firms.

Personal Accountability

Avoidance of Conflicts of Interest

Disclosure of Conflicts of Interest

Disclosure of Conflicts of Interests to Shareholders

HC-10.3.1

The Board shall have rigorous controls for financial audit and reporting, internal control, and compliance with law.

CEO and CFO Certification of Financial Statements

HC-10.4.1

The insurance consultants, insurance managers, insurance aggregators and captive insurance firms should have rigorous procedures for appointment, training and evaluation of the Board.

Induction and Training of Directors

HC-10.5.1

The insurance consultants, insurance managers, insurance aggregators and captive insurance firms should remunerate approved persons fairly and responsibly.

HC-10.5.2

Remuneration of approved persons should be sufficient enough to attract, retain and motivate persons of the quality needed to run the insurance consultants, insurance managers, insurance aggregators and captive insurance firms successfully, but the insurance consultants, insurance managers, insurance aggregators and captive insurance firms should avoid paying more than is necessary for that purpose.

HC-10.6.1

The Board should establish a clear and efficient management structure.

Establishment of Management Structure

Titles, Authorities, Duties and Reporting Responsibilities

HC-10.7.1

The insurance consultants, insurance managers, insurance aggregators and captive insurance firms should communicate with shareholders, encourage their participation, and respect their rights.

Conduct of Shareholders' Meetings

Direct Shareholder Communication

Controllers

HC-10.8.1

The insurance consultants, insurance managers, insurance aggregators and captive insurance firms should disclose its corporate governance framework.

Disclosure under the Company Law

HC-10.9.1

Companies which refer to themselves as "Islamic" should follow the principles of Islamic Shari'a.

Governance and Disclosure per Shari'a Principles