SYSTEMIC BARRIERS TO THE IMPLEMENTATION OF A MODERN INTERNAL CONTROL SYSTEM IN INSURANCE COMPANIES

Abstract

The state plays a crucial role in the economic system of any country, with one of its key functions being the regulation of economic activities across all sectors. Accordingly, the successful development of any industry, including the insurance sector, largely depends on effective state regulation that reflects the specific features of insurance as an economic category. Establishing clear requirements for the insurer’s management system is an important step toward ensuring proper oversight that encompasses not only financial stability but also the ethical and legal dimensions of corporate activity, thereby strengthening customer trust and supporting sustainable industry development. In this context, internal control within insurance companies becomes especially significant, as its purpose extends beyond compliance with regulatory requirements to the timely identification and management of emerging risks. Building an internal control system that aligns with modern regulatory and international standards is fundamental to preserving the financial resilience of an insurance company and its ability to meet obligations to policyholders. Ensuring an adequate level of internal control enables insurers not only to comply with national and global frameworks but also to mitigate operational, financial, and compliance risks that may arise in the course of business, reinforcing overall economic resilience. The article examines the key systemic barriers that impede the full implementation of a modern Internal Control System (ICS) in Ukrainian insurance companies. This is particularly relevant given the harmonization of national standards with the COSO concept and Solvency II principles. The study identifies a complex gap between the targeted ICS model and the actual practice of its implementation, isolating three core groups of difficulties: financial, human resource (HR), and cultural-managerial barriers. Financial barriers include the high cost of digital solutions for Governance, Risk, and Compliance (GRC), complex actuarial modeling, and essential IT infrastructure upgrades. HR barriers manifest in a severe deficit of qualified risk managers, compliance officers, and actuaries capable of applying quantitative methods and conducting stress testing. Furthermore, cultural-managerial barriers involve the fundamental underestimation of the ICS's strategic role by senior management and the presence of systemic conflicts of interest within companies. Overcoming these impediments is proven to be a critical condition for transitioning from formal compliance to a practical and effective risk management system. The study proposes key directions for enhancing implementation effectiveness, including the adoption of cloud-based SaaS solutions to mitigate cost burdens, strengthening methodological support from the National Bank of Ukraine (NBU) regarding the principle of proportionality, and fostering the development of corporate competency programs to address the skills deficit. Ultimately, the successful implementation of the ICS requires its strategic integration into the overall corporate governance model of the insurer.