Why Corporate Boards need Insurance expertise on the board…
Understand Enterprise Risk Management
Insurance Underwriters and experts have a strong understanding of many types of risk frameworks and standards (i.e. ISO 31000 or COSO ERM); they understand pure and speculative risks, subjective and objective risks, diversifiable and non-diversifiable risks. On a daily basis they review hazard risk, operational risk, financial risk and strategic risk. This broad understanding of risk is valuable at the board level for working with the executive team in finding ways to protect shareholders and earnings volatility.
Based upon the recent financial crisis is 2007-08, although some insurers did have risk management issues most did not. When the rest of the financial system was on the brink of collapse, insurers with their better risk management skills were somewhat insulated. Keep in mind, if the banking system collapsed it’s tough to argue that insurers would be unharmed, but removing hypotheticals there were only a few insurers who were harmed, due to poor risk management.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires a separate risk committee composed of independent directors for publicly traded bank holding companies with $10 billion or more in assets and publicly traded nonbank financial companies supervised by the Federal Reserve.
According to the Harvard Law School Forum on Corporate Governance,
“Over time, we may see some ‘trickledown effect’ from this approach to the board risk oversight of nonfinancial companies. Given this context, the question arises as to whether the board should establish a separate risk committee for the board… A risk committee focuses director attention on the company’s most critical risks and risk management capabilities. To this end, the board will want to be sure that the directors assigned to this committee have the requisite knowledge and expertise to provide effective oversight over the risks falling within the committee’s scope… This approach can assist the board in focusing on the ‘big picture.’ A risk committee can also provide greater support for company executives who are given broad risk management responsibilities, resulting in a stronger focus at the board level on the adequacy of resources allocated to risk management.”
Diversity of thought and expertise
By having a risk expert such as an insurance professional on a corporate board it allows the audit committee and other board committees to focus on their respective core responsibilities. Studies have found that without a sufficient number of independent directors who possess deep knowledge and experience in dealing with critical risks, a risk committee will lack effectiveness.
We will further discuss Enterprise Risk Management in greater detail, please see our discussion of Risk Management to start.