“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 Massachusetts division of insurance. Her department is currently working towards the goal of meeting with all board directors at Massachusetts insurance companies on an annual basis.

In the post-Enron era, many insurers have been paying more attention to board-related fiduciary responsibilities, such as “how to set up boards that are independent, and establishing checks and balances between management and the board,” Commissioner Bowler said. “And what has been missing in all of this,” she added, “was regulators' interaction with board directors.”

Massachusetts insurance regulators have long been meeting annually with top managers from insurers in the state to review past results and discuss short-term and long-term business plans. But the commissioner recalled thinking, “You know, it would be a really good idea to bring in independent directors on these boards to sit and listen to the questions regulators are asking, and then they can follow up on these issues throughout the year. That's how you strengthen the system.”

Historically, Massachusetts regulators interacted with board members only if their department needed to take these companies into receivership. “At that point, you have been dealing with the company's management team for a long time,” Commissioner Bowler said.

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

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

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

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

“Many insurance companies now offer seminars, both in-house and external, for board directors. The reason is that insurance is so different from other businesses,” said Charles Bryan, president of Columbus, Ohio-based CAB Consulting Services, which offers educational 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 boards with Neil Rector, the president of the consulting firm Rector & Associates. Mr. Rector worked previously as a deputy director for the Ohio insurance department.

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

Mr. Bryan also observed that, by and large, most directors for insurance companies don't have insurance backgrounds and that they are not fully immersed in insurance issues. In many cases, the percentage of outside directors, without an insurance background, can run anywhere from 50 percent and even higher. In larger corporations, outside directors usually make up the majority of the board.

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

American Family Insurance Group, a mutual company based in Madison, Wis., was one of the insurers that recently offered its directors a seminar from CAB Consulting.

“The consensus among our directors was that it would be worthwhile to have an outside group come in to speak to the board about insurance issues,” said James Eldridge, executive vice president at the company.

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

And there are a number of insurance issues where directors may lack sufficient knowledge, Mr. Eldridge explained: “Certainly, the statutory accounting is a little different. And a lot of board members don't realize how heavily regulated the insurance industry is. A lot of things that can go on in the general business area aren't allowed in the insurance industry because of the regulation.”

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

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

And the insurance regulation is inherently different from regulations for anything else, the commissioner noted. “Insurance is regulated by 51 jurisdictions, which means you have 51 different bosses.”

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

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

“The other important thing is that the insurance itself is not homogenous. If you have a holding company structure that has both life and property-casualty subsidiaries, skill sets required to review those lines are different.”

In the current environment, board directors are given greater responsibilities to make sure management runs the business fairly and that their companies do not face unexpected financial difficulties, commented Mr. Bryan from CAB Consulting Services.

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

One potential tool board directors can use to gauge their companies' corporate and board governance practices is governance rating services offered by firms such as Rockville, Md.-based Institutional Shareholder Services and The Corporate Library in Portland, Maine.

The Corporate Library, for instance, currently has board governance ratings for 67 publicly traded U.S. corporations in the insurance industry, according to Jackie Cook, senior research associate for boardroom analysis at the firm. Among the rated insurers and brokerage firms are Travelers Property Casualty Corp., St. Paul Companies, Progressive Corporation, Aon Corporation and Arthur 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.