Education Needed For Insurance Company Boards Now

Board members must insist they have the training they need to fulfill their responsibilities and protect themselves from the agony of lawsuits and public censure. The need is immediate and critical.

What are these board education needs?

The needs are in two categoriesthose common to all boards and those unique to insurance company boards.

All boards need education on effective corporate governance structures; what board committees to have and who should be the members; how board members remain independent; what the board and committee charters contain; and similar matters. Excellent sources of information and education for these items are the National Association of Corporate Directors (Web site: www.nacdonline.org), the companys external auditors and law firms, and a variety of seminar offering organizations.

Corporate boards also need detailed knowledge of the Sarbanes-Oxley Act. By now, most boards have been provided extensive information on the provisions of this act and the interpretations of the Securities and Exchange Commission, defining more clearly how the law must be implemented.

Even non-public companies find this information useful because it provides benchmarks that the board, if non-public, must select from according to the appropriateness for their company.

Another board responsibility is acquiring a reasonable level of competence and comfort with the most important aspects of the companys business. Companies normally provide this education via board orientation courses for new board members.

The tradition in the United States is for the board to deal with issues at a broad strategic level and the orientation courses usually emphasize that sort of information.

Insurance company boards require the same general education and training as other boards, but have many additional needs only satisfied by tailored education.

Topics unique to insurance are: mutual and reciprocal types of organization; statutory accounting compared to GAAP accounting; the role of the insurance department; the role of rating agencies; and the special emphasis on solvency.

These educational needs are particularly critical because many insurance company boards include primarily local executives or members of the affinity group that the insurer serves. Familiarity with business practices in financial institutions is often not sufficiently ingrained.

Although specialized education is more difficult to find, several specialty firms and some of the accounting firms offer excellent seminars.

Unless a board member comes from the insurance business, he or she probably has no exposure to mutual and reciprocal forms of organization. Thus, the education process must thoroughly discuss how these forms of organization differ from stock organization and the different trade-offs between profits, surplus, dividends, availability and pricing levels.

For reciprocals, it is useful to familiarize board members with special tax considerations such as subscriber savings accounts.

Most accomplished business people serving on boards are familiar with the accounting conventions of generally accepted accounting principles and the major issues such as matching of income and expenses and revenue recognition. However, they are unlikely to be familiar with statutory accounting or with the statutory annual statements.

An effective insurance education program familiarizes the board member with the most important differences, including: the effect of affiliate and subsidiary dividending policies on income; treatment of unrecoverable reinsurance; differences in the valuing of assets, including goodwill and non-admitted assets; and similar items. Such knowledge is especially critical for members of the audit committee of the board.

The education process must also provide the board member with a clear understanding of the role the state Department of Insurance (DOI) plays in the companys governance. Topics include the information provided to the DOI, regulatory powers regarding rate regulation and company control, market conduct examinations, and the role of the liquidation bureau in suing board members if a company goes insolvent.

The board education process must be particularly aggressive in sensitizing the board members to the very critical role that solvency protection must play in their responsibilities. Four areas should be emphasized in substantial detail: risk-based capital calculations; adequate loss reserve levels; premium-to-surplus ratios; and the threats to solvency from natural catastrophes.

Of these, the most difficult to address is risk-based capital. Although very painful with respect to the mathematics involved, at least going through the five risk categories of the risk-based capital formula provides a board member with an understanding of the complexity of the calculations and the number of items considered.

I also recommend that the board be educated to the point where they can reasonably select benchmark targets for the RBC level and monitor achievement of the targets.

I would like to end these observations with personal comments about the state of board education today and where it must head. Despite the added risks inherent in board membership now, companies still attract excellent board candidates who are very enthusiastic about serving.

In preparation for this article, I reviewed the board memberships of many insurance companies. The people who serve on these boards are outstanding with respect to business experience, proven abilities to make things happen, broad background and recognition as influential people. However, most come from outside the industry and do not have a knowledge gained from years of insurance experience. This lack of insurance knowledge is often inherent in the board selection process since a board with a wide variety of backgrounds is sought.

Education must remedy this lack of specific insurance knowledgeboth for the protection of the company and for the protection of the board member.

Developing and providing periodic educational seminars to the board members can best equip board members for their critical role in governing insurance companies.

Charles A. Bryan is president of CAB Consulting in Columbus, Ohio. He has served as an executive officer with several insurers including USAA, Nationwide Insurance and Direct Response Corp., and is a former partner for Ernst & Young. Mr. Bryan, a past president of the American Academy of Actuaries and the Casualty Actuarial Society, is the co-chief instructor of the "Inoculation Course"a course on insurance company governance issues by Rector & Associates founded by Neil Rector, a former deputy director for the Ohio Department of Insurance (www.rector-associates.com).

Mr. Bryan can be reached at chuckbryan66@hotmail.com

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 5, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.