Role Of Board Directors GrowingAmong Insurers

From once-hailed companies like Enron Corp. and AdelphiaCommunications to, more recently, biotech company ImClone Systems,management shenanigans in Corporate America–along with the passageof the Sarbanes-Oxley Act–have renewed the emphasis on corporateboards as overseers and guardians of corporate ethics.

This trend is also impacting the insurance industry, with someregulators intensifying their efforts to boost their interactionswith insurance companies' board members.

And insurers–even mutual companies not subject to Sarbanes-OxleyAct requirements–are taking steps to get their directors moreengaged in the management process.

“These board directors are very, very talented and smart people.I mean, they are captains of industry in their own right,”commented Julianne Bowler, insurance commissioner at Massachusettsdivision of insurance. Her department is currently working towardsthe goal of meeting with all board directors at Massachusettsinsurance companies on an annual basis.

In the post-Enron era, many insurers have been paying moreattention to board-related fiduciary responsibilities, such as “howto set up boards that are independent, and establishing checks andbalances between management and the board,” Commissioner Bowlersaid. “And what has been missing in all of this,” she added, “wasregulators' interaction with board directors.”

Massachusetts insurance regulators have long been meetingannually with top managers from insurers in the state to reviewpast results and discuss short-term and long-term business plans.But the commissioner recalled thinking, “You know, it would be areally good idea to bring in independent directors on these boardsto sit and listen to the questions regulators are asking, and thenthey can follow up on these issues throughout the year. That's howyou strengthen the system.”

Historically, Massachusetts regulators interacted with boardmembers only if their department needed to take these companiesinto receivership. “At that point, you have been dealing with thecompany's management team for a long time,” Commissioner Bowlersaid.

“And then you go in and meet with board directors, and everytime, they will all say the same thing,” she noted. “They had noidea that the company was in this bad of a shape. They had no ideathat the company was concentrating itself in a risky product. Theyhad no idea that the company was writing directors and officerscoverage, comp coverage, and had bonds with one company, and whenthat company went down they were exposed on three fronts, becausethey didn't have an enterprise-wide, risk-management program inplace.”

She argued that when regulators take over a troubled company,that is definitely not the right time to start interacting withboard directors. They are captains of industry and big players inlocal markets”and the last thing they want is to be a board memberfor a failed company,” she said. So it's not exactly the best timeto meet each other.”

Commissioner Bowler has also been sharing her ideas with othercommissioners around the country, and “they have all expressed aninterest in learning more about what we are doing,” she noted.

Also getting in on this trend of boosting board directors' roleare consulting companies–some are now offering educational seminarsfor directors still unfamiliar with concepts like state regulation,statutory accounting and solvency issues.

“Many insurance companies now offer seminars, both in-house andexternal, for board directors. The reason is that insurance is sodifferent from other businesses,” said Charles Bryan, president ofColumbus, Ohio-based CAB Consulting Services, which offerseducational courses for board directors at insurance companies.

Mr. Bryan, a past president of the Casualty Actuarial Society,developed and conducts the courses for insurance company boardswith Neil Rector, the president of the consulting firm Rector &Associates. Mr. Rector worked previously as a deputy director forthe Ohio insurance department.

“The demand for this sort of seminar is starting to build upnow,” Mr. Bryan said.

Mr. Bryan also observed that, by and large, most directors forinsurance companies don't have insurance backgrounds and that theyare not fully immersed in insurance issues. In many cases, thepercentage of outside directors, without an insurance background,can run anywhere from 50 percent and even higher. In largercorporations, outside directors usually make up the majority of theboard.

“Board directors try to stay informed, but insurance business isvery complex,” Mr. Bryan commented.

American Family Insurance Group, a mutual company based inMadison, Wis., was one of the insurers that recently offered itsdirectors a seminar from CAB Consulting.

“The consensus among our directors was that it would beworthwhile to have an outside group come in to speak to the boardabout insurance issues,” said James Eldridge, executive vicepresident at the company.

“All the scandals that went on with the boards outside theinsurance industry caused insurance companies' board directors totake a second look and ask, 'Okay, are we looking at the correctthings when the board meets?' And I think that's what our boarddid,” Mr. Eldridge added.

And there are a number of insurance issues where directors maylack sufficient knowledge, Mr. Eldridge explained: “Certainly, thestatutory accounting is a little different. And a lot of boardmembers don't realize how heavily regulated the insurance industryis. A lot of things that can go on in the general business areaaren't allowed in the insurance industry because of theregulation.”

This may be a common problem among many insurance companies. Mr.Eldridge, who had served on a National Association of MutualInsurance Companies taskforce that examined board governance, saidoutside directors can often make up around 50 percent of the boardamong members of Indianapolis-based NAMIC.

Commissioner Bowler from Massachusetts also added: “A lot of thepeople who sit on the board of directors are not themselvesinsurance people. They come from banking, from high-tech andvarious other industries.”

And the insurance regulation is inherently different fromregulations for anything else, the commissioner noted. “Insuranceis regulated by 51 jurisdictions, which means you have 51 differentbosses.”

“The laws of the states are not necessarily homogenous–theregulatory philosophies of the states certainly are not homogenous.And if you want to sell a product nationwide, it's going to takeyou a considerable amount of time to get that product approved inall 51 jurisdictions.”

And most people who are on these boards are not comfortable withstatutory accounting results, which is a big concern, she added,because “the statutory accounting system is what triggersregulatory actions.

“The other important thing is that the insurance itself is nothomogenous. If you have a holding company structure that has bothlife and property-casualty subsidiaries, skill sets required toreview those lines are different.”

In the current environment, board directors are given greaterresponsibilities to make sure management runs the business fairlyand that their companies do not face unexpected financialdifficulties, commented Mr. Bryan from CAB Consulting Services.

“The question now, for many board directors is, 'How do I getthis insurance knowledge and make sure that I am not vulnerable toshareholder or policyholder suits?'” he said.

One potential tool board directors can use to gauge theircompanies' corporate and board governance practices is governancerating services offered by firms such as Rockville, Md.-basedInstitutional Shareholder Services and The Corporate Library inPortland, Maine.

The Corporate Library, for instance, currently has boardgovernance ratings for 67 publicly traded U.S. corporations in theinsurance industry, according to Jackie Cook, senior researchassociate for boardroom analysis at the firm. Among the ratedinsurers and brokerage firms are Travelers Property Casualty Corp.,St. Paul Companies, Progressive Corporation, Aon Corporation andArthur J. Gallagher & Co.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, July 28, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.