The nation's insurers need to shrink the size of their boards and make their membership more knowledgeable in order to manage effectively and satisfy the demands of regulators, according to a report by Moody's Investors Service.
New York-based Moody's ratings service observations came in a report on corporate governance titled "No Assurance of Good Governance: Observations on Corporate Governance in the U.S. Insurance Sector."
The report said companies are facing significant pressure from a number of regulatory probes. The probes cover such issues as finite risk, conflicts of interest and mutual funds. These investigations have put the spotlight on the manner in which the boards ensure that compliance and governance processes are in place.
In doing so, Moody's said, insurers' boards would benefit from greater industry knowledge and smaller sizes because the rating service believes that some of the boards are larger than optimal.
The rating agency pointed out that common strengths in carriers' governance include good committee structures staffed by independent directors, strong oversight of both financial risk and investment practices, and a focus on perceived credit quality, particularly for life insurers and reinsurers.
"Insurers' governance mechanisms operate with a less consistent safety net than banks' do," said Mark Watson, Moody's senior vice president and author of the report. "This then places a heavier burden on insurers' boards to ensure that robust compliance and controls are in place."
The report notes that a significant majority of insurance company directors come from outside the industry.
"Clearly," Mr. Watson explained, "having directors bring insights into the boardroom from other industries helps inform any discussions. However, for fear of creating conflicts of interest, too few insurers have adopted the approach of appointing retired industry executives or advisers with industry experience, such as accountants or consultants."
Moody's said it is looking for boards that are strongly independent in composition, are highly knowledgeable, are organized effectively to hold senior management accountable, and can act decisively and effectively.
Mr. Watson said such a board is particularly important for insurance companies because of the following factors:
o Current regulatory probes of the industry.
o The vulnerability of businesses to charges of conflicts of interest.
o The critical importance of reputation to customers.
o The complexity of the insurance business.
The report cites other challenges that insurance company boards are struggling to meet, including informed oversight of establishing reserves and actuarial assumptions, and setting executive pay with regard to long-tailed liabilities, which can be very challenging.
Historically, some boards have also been drawn too much into detailed investment decisions. Moody's said this distraction could limit discussion on broader investment issues.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.