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Corporate Governance in the Insurance Industry: A Synthesis

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Handbook of Insurance

Abstract

In this chapter, we synthesize the literature and empirical research on the nature and consequences of corporate governance in the insurance industry. We focus on several mechanisms of corporate governance such as the Board of Directors, CEO compensation, ownership structure, among other things and discuss their impact on firm performance and risk taking. The chapter finally identifies several avenues for future research on the subject.

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Notes

  1. 1.

    Please refer to Harrington (2009) for a study on the role of AIG and insurance sectors in the financial crisis and overall implications for insurance regulation. Also refer to Dionne (2009) for a discussion of the main causes of the crisis as well as the implications in terms of risk management.

  2. 2.

    More exhaustive definitions abound in the literature. For instance Shleifer and Vishny (1997, p. 737) state that corporate governance “deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.” A similar definition is proposed by John and Senbet (1998, p. 372) who consider all stakeholders in the firm and argue that “corporate governance deals with mechanisms by which stakeholders of a corporation exercise control over corporate insiders and management such that their interests are protected.” A contemporaneous definition is proposed by Zingales (1998, p. 4) who states that corporate governance is “the complex set of constraints that shape the ex-post bargaining over the quasi-rents generated by a firm.”

  3. 3.

    Independence here is understood as the CEO not chairing the BOD.

  4. 4.

    Using the distinction in the organizational structure of property/liability insurance companies, Mayers et al. (1997) document a larger proportion of outside directors in mutual companies compared to stock companies.

  5. 5.

    As reported by Kang (2011), as many as 95% of Fortune 500 companies maintain D&O liability insurance.

  6. 6.

    This lack of evidence is largely due to the fact that firms, other than in Canada and the USA, are not required to disclose information about their D&O insurance.

  7. 7.

    In an earlier study, Bhagat et al. (1987) examine stock price performance around the announcement of the purchase of D&O insurance and find no evidence that D&O insurance purchase adversely affects shareholders’ wealth.

  8. 8.

    Previous studies on the link between corporate governance and risk taking include John et al. (2008), Laeven and Levine (2007), and Sullivan and Spong (2007). Available empirical evidence documents that corporate governance, and particularly the audit quality, has a mitigating effect on risk taking (Firth and Liau-Tan 1998).

  9. 9.

    Please refer to Sullivan and Spong (2007) for instance.

  10. 10.

    One earlier contribution on the subject dates back to the 1980s (Cheng and Forbes 1980).

  11. 11.

    See Mayers et al. (1997), Lamm-Tennant and Starks (1993), and Lai and Limpaphayom (2003), among others.

  12. 12.

    The audit committee is also responsible for monitoring risk management activities.

  13. 13.

    As defined on the web page of the Financial Services Authority (www.fsa.gov.uk): Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry. It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current solvency requirements.

  14. 14.

    He et al. (2011) provide a partial answer by stating that frontier efficiency scores are better adapted to a study of public and private insurance firms since most of them are private and stock prices are not available.

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Acknowledgements

This chapter is an updated version of “Corporate Governance issues from the Insurance Industry” published by the Journal of Risk and Insurance, 2011, volume 78, issue 3, pp 501–518.

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  1. School of Business and Management, Department of Finance, American University of Sharjah, Sharjah, 26666, United Arab Emirates

    Narjess Boubakri

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  1. Finance, HEC Montreal, Montreal, Québec, Canada

    Georges Dionne

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Boubakri, N. (2013). Corporate Governance in the Insurance Industry: A Synthesis. In: Dionne, G. (eds) Handbook of Insurance. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-0155-1_26

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