Our proposals

Proposals to improve corporate governance, financial management and operations at Ingosstrakh insurance company

Ingosstrakh shareholders’ proposals, detailed below, cover three key areas of running the insurance company:

I. Corporate Governance
II. Operating improvements
III. Improvements in financial management

I. Corporate Governance

The principles on which the activities of Ingosstrakh are currently based do not meet the corporate governance standards of transparency and effectiveness, as generally accepted as global best practice in the insurance industry. In addition, incidences of blatant violation of the rights of minority shareholders have taken place in the very recent past. Specifically in 2007, an Extraordinary General Meeting of Ingosstrakh shareholders was held to which minority shareholders were not invited and every effort was made to prevent minority shareholders’ official representatives from even taking part in that EGM. Minority shareholders have had to bring the case to court in order to protect their rights. In addition, at the 2008 Annual General Meeting of Ingosstrakh shareholders, minority shareholders’ votes were declared invalid by way of a mysterious order of execution about which neither the authorities nor the shareholders were able to find any information. Once again, the minority shareholders had to resort to a court to challenge the outcomes of the General Meeting.

Referring to the above, the following measures are proposed:

1. Establish a Public Consultation Board (Council)

In accordance with generally accepted international and Russian insurance market practices, and with a view to increase the effectiveness of the Company’s work, a consultation body is to be established, consisting of generally recognised experts and scientists in economics and corporate governance. We suggest addressing respected public figures, as well as scientists and business community representatives, to join the above-mentioned Council.

2. Strengthen the executive management team

Currently it can be said that Ingosstrakh’s financial performance has been falling during the current year (more details given in Part II). The reasons for this include, in particular, the insurance company’s personnel policy, which has resulted in a number of leading specialists leaving the company, causing a real loss to the organisation. We believe that it is necessary to take all possible measures to prevent and avoid such situations in the future and to develop effective mechanisms to improve the motivation and loyalty of employees.

In addition, it is clear that the adverse dynamics also testify to the decreasing effectiveness of the work of Ingosstrakh’s top management team. As the insurance business experience and professional expertise of the current members of the top management team have for the most part been acquired in Ingosstrakh itself, we consider it necessary to strengthen the top management body with managers who have gained their experience in foreign insurance companies and to appoint an expert with extensive knowledge of the best global business practices as the company’s General Manager.

3. Change of corporate policy

The process of distribution of information concerning the current transactions of the company and the results of its activities do not stand up to criticism. Contrary to the requirements of the company’s Articles, by which the file of documents to be discussed should be provided to the members of the Board of Directors no later than three business days prior to the date of the Board meeting, the members as a rule obtain the key documents (if they obtain them at all) only at the meeting itself or just one day before it: this does not allow Board members to familiarise themselves with the documentation and prepare arguments to be able to influence the Board’s decisions. In our opinion, this practice is unacceptable and, with respect to international practice, it cannot be tolerated in any company.

With respect to the above, we consider it necessary to make changes to the corporate documents and to bring them into line with international standards. We believe that the following documents should be adopted and finalised:

• provisions concerning the rules and deadlines for the submission to the members of the Board of Directors of a complete package of documents no later than five business days prior to the regular Board meeting date. It is necessary to define sanctions (loss of bonuses, inclusion of reprimands in personal files etc.) for department managers who fail to meet the deadlines for the submission to the Corporate Secretary (secretary of the Board of Directors) of documents to be distributed among the Board members;
• provisions concerning the establishment of a special independent commission to be authorised to determine that any transaction that involves obligations totalling more than 1 billion roubles be subject to additional external audit, and to assess the outcomes of the audit and prepare relevant recommendations for the Board of Directors;
• rules of inclusion of organisations and individuals in the list of parties related to the shareholders of Ingosstrakh, including all organisations under the Bazel Group, in compliance with the information available on the official web site of that Group. The incompleteness of such a list gives rise to fierce criticism by the media and is misleading for public authorities’ supervisors: this may, in the longer term, lead to undesired investigations and inspections, and unavoidably threaten the company’s business and reputation.
• rules of the formation and activities of committees under the Board of Directors. According to the current version of the rules, decisions on the composition of the committees is determined by a simple majority vote, which has resulted in a situation where minority shareholders are not represented on any of the four committees under the Board. However, according to generally accepted practices, all holders of larger blocks of shares should be evenly represented on the special committees under the Board of Directors. We propose to amend the rules and include in them a cumulative voting procedure for the appointment of the members of Board of Directors committees.

4. Establish control by Ingosstrakh’s Board of Directors over the subsidiary structures

It is necessary to establish a procedure by which Ingosstrakh’s Board of Directors appoints the Managing Director and key employees of each subsidiary (it is necessary in this context to define the criteria to be met by the candidates to be appointed to each key position). This will obviously contribute so that insurance professionals with ample experience in their respective areas will be attracted to the company.

II. Operating improvements

1. Company’s results

According to publicly accessible information (www.insur-info.ru), although the insurance market has increased (in financial terms) by almost 5% over the first six months of 2010, the total market share of Ingosstrakh has shrunk to 7.66% over the same period, which is 1 pp (or 12%) down on the same indicator last year.

The most marked decrease occurred in liability insurance: 1 pp (or 8.5%), and in personal insurance: 1.4 pp (or 24%).

    

Such a situation is alarming because there is a decrease in the company’s indicators in all key areas of its activities except compulsory third party motor liability insurance (ОSAGО), where the company has maintained its positions.

In our opinion, immediate measures should be taken to analyse the situation in detail and to develop a plan to stop the declining trend. We propose to establish a working group, comprising representatives of all the shareholders concerned; the group should be authorised to request (and obtain) any information on the current activities of the company in order to be able to develop a package of anti-crisis measures.

2. Effective marketing

As indicated above, the company’s market share has decreased considerably, which appears to confirm that the company’s marketing policy has not brought the expected results.

We believe that in order to strengthen the company’s market position, professional managers with extensive experience gained in leading foreign insurance companies should be attracted to the company and included in its top management structure.

Recruitment of new highly professional specialists will ensure that the marketing policy of Ingosstrakh is strengthened, the company’s development strategy is reviewed and the outcomes of marketing activities and effectiveness of marketing spending are greatly increased.

3. Business development

The company will have to focus on the organic growth of (exclusively) the insurance business as the basic line of investment in the development of the company. The company’s involvement in non-profile activities should be excluded.

For example, nobody understands the logics behind the purchase of the interest in the Soyuz Bank by Ingosstrakh, when the bank was in a critical financial condition at that time. It is absolutely clear that for an insurer this is a non-profile asset, which cannot be incorporated in the company’s structure.

Negotiations are currently under way, according to which the insurance company will put in escrow almost 14 million USD, against which five used Boeing 737 planes are to be acquired and leased to the Sky Express airlines. Ingosstrakh’s income from this investment is to be 15% p.a. Notwithstanding the fact that the company will not have these assets under its direct control, there is no doubt that putting a substantial amount of money in a holding account for a risky project cannot be regarded as a transaction that fits the profile of an insurer.

III. Improvements in financial management

1. Financial accountability/reporting

Rules for the financial reporting of Ingosstrakh top management should be laid down and an additional procedure should be established to ensure strict financial accountability of Ingosstrakh management towards the Board of Directors in respect of all and any issues of the company’s financial and business activities.

2. Audit

The results of the external audit of the company’s activities (currently Ernst&Young is Ingosstrakh’s auditor) have to be made available in full and in due course to the members of the Board of Directors, as well as to all shareholders who so wish, within no more than three business days of the receipt by the company of a relevant request. There is no doubt that each shareholder is entitled to know how the company is managed and what its current financial position is.

3. Adoption of the company’s budget and development plans

At present, minority shareholders holding almost a 40% interest are entirely excluded from the process of preparing and adopting the company’s business plan and its development strategy. In addition, the information is inaccessible to the shareholders, which is clearly in contradiction with the transparent business principles. Such practices must be removed.

Furthermore, the company’s draft budget, which is to be approved by the Board of Directors, is always presented in an extremely generalised manner. Specifically, members of the Board of Directors cannot obtain information about the individual salaries of the members of the top management team. This inevitably leads to misgiving. Remuneration items of this type are always of key importance in considering and adopting the next year’s budget and, consequently, information about such items has to be provided to the members of the Board of Directors in detail and in due course.

4. Transparency of subsidiaries‘ activities

It is necessary to ensure the highest possible transparency of the activities of all Ingosstrakh subsidiaries, which must be fully accountable to the Board of Directors of the parent company.

Specifically, it is necessary to recover the practice (which has been abandoned in recent years) of appointing representatives of minority shareholders to the Boards of Directors of the subsidiary companies.
In addition, a system of quarterly or half-yearly reporting by each of the subsidiaries to the Board of Directors of Ingosstrakh should be implemented.

At present, the management and reporting of practically all subsidiaries take place through the company InVest-Polis, and therefore the members of Ingosstrakh Board of Directors do not directly receive the detailed and relevant information about the activities of the subsidiary companies. This non-transparent practice must be removed.

5. Balance assets

It is necessary to develop and implement a policy of increasing the effectiveness of the utilisation of OSAO Ingosstrakh’s balance assets with a view to improving their performance and profitability.