Corporate Governance Changing For Insurers

Insurance carriers need to improve board oversight of the risk the companies face in a world where regulatory scrutiny is growing, according to a report from a major ratings service.

Moody’s Investor Service released a report titled “North American Insurers Face Three Significant Governance Challenges,” covering succession planning, executive pay practices and risk management.

The report, authored by Mark Watson, managing director at Moody’s, pointed out that increasing regulation is forcing insurers to improve their governance and risk management practices. Boards, the report said, need to “engage actively with management in approving the insurer’s overall risk appetite and specific risk limits.”

Due to the increased complexity of risks that insurers are dealing with, and the inexperience of board members in the insurance industry, carriers are investing “heavily” in ongoing training of board members.

Too few insurers, however, are not establishing separate board committees committed to overseeing risks and risk management, the report continued. Audit committees, the report asserted, are overburdened dealing with investment issues and other regulatory matters, underscoring the need for risk management committees.

On the issue of executive compensation, regulations are making more data available to investors. Moody’s warns that scrutiny of executive pay will grow as the investing public understands the data. The investors service noted that the scrutiny insurers will face on this issue will be no different from other sectors where questions might be raised.

When it comes to succession planning, carriers appear to be shying away from hiring CEO’s from outside the insurance industry and are looking inside the company instead. While there appeared to be a trend toward hiring chief executive officers from the banking industry for their background in technology and risk management in the 1990s, carriers are leaning toward hiring within today.

The report said company boards recognize “the inherent difficulties in such recruiting.” Outside CEOs can have difficulty adjusting to the culture of the insurance industry and can have difficulty developing a “rapport with key executives and employees.”

There is also a demoralizing factor for senior executives who have lost the opportunity to rise up in the company.