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Independent Control Functions: Do You Meet the Requirements in Practice?

The insurance industry is governed, among other things, by the Solvency II regulatory framework, which sets out rules on capital requirements, corporate governance, and reporting. The purpose of the framework is to ensure that insurance undertakings are financially stable, have effective governance structures, and maintain a robust system for risk management. It has also strengthened requirements for transparency by introducing more extensive obligations to report and disclose relevant information.

It is no longer sufficient for companies to merely hold adequate capital; they must also demonstrate that the business is managed professionally – with appropriate competence, sound internal controls, and a strong risk management framework. Governance must be documented, transparent, and subject to regular evaluation.

Specific provisions on how insurance operations should be governed are found in Chapter 9, Section I of the Solvency II Delegated Regulation. A central aspect of the regulation is the requirement for companies to establish four key functions:

risk management,
compliance,
actuarial and,
internal audit.

These functions must operate independently, possess the necessary expertise, and remain free from undue influence. Each function must be headed by a responsible person, although it is also possible for multiple individuals to work within the same function. To ensure that these functions can act appropriately and objectively, the company’s organisational structure must safeguard their independence. The regulation therefore sets requirements both for how these functions are positioned within the organisation and for the reporting lines that must be in place.

Enhanced Internal Governance Through Independent Control Functions

In an era of increasing regulatory demands and heightened supervisory scrutiny, it is no longer sufficient to merely have control functions – they must also be truly independent.

When key functions such as risk management, compliance, actuarial, and internal audit are allowed to operate free from influence by both operational activities and executive management, it strengthens both trust in the organisation and its ability to manage risk effectively.

However, when these boundaries become blurred, there is a risk of losing the objective perspective needed to identify weaknesses, prevent regulatory breaches, and protect customer interests.

This is why independence is not just a principle – it is a critical safeguard in any sound system of corporate governance.

Protects against conflicts of interest

Independent functions can objectively assess and evaluate operations without being influenced by internal loyalties or business interests. This reduces the risk of errors or deficiencies being ignored or deliberately concealed.

Strengthens board oversight

The board relies on accurate and impartial information from internal control functions. If these functions are operationally involved or influenced by executive management, the board’s ability to make well-informed decisions is compromised.

Builds trust in the company

Regulators, investors, and consumers must be able to trust that the company complies with applicable regulations and manages risks effectively. Independent control functions are essential to maintaining that trust.

Prevents regulatory breaches and sanctions

An independent compliance or internal audit function can identify shortcomings in time – before they result in legal violations, regulatory fines, or reputational damage affecting both customers and the company.

How Advisense Can Support Your Business

It can, in some cases, be difficult to ensure independence within the key control functions, especially in smaller or growing insurance businesses. This is where Advisense can truly make a difference. With one of the largest teams of specialized insurance consultants on the market, we offer tailored solutions within: