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10 best practices for boards overseeing insurers


As the insurance industry's ability to better fulfill its historical role of protecting its customers has been transformed by new risk management tools, ingenious financial models and innovative products, it has also faced unprecedented challenges ranging from expanded regulation to high-profile litigation to unparalleled media and investor scrutiny.

Hard as it is to believe, a generation ago insurance was considered to be one of the most tranquil sectors of the financial services industry, a sleepy place where change came slowly and stability was the norm. Fast-forward a couple of decades and those of us in the insurance industry are reminded of the ancient Chinese curse, "May you live in interesting times."

On the whole, the industry has responded well to the demands placed upon it.

However, individual companies have run into severe problems with regulators, investors, financiers, the courts and other stakeholders and overseers.

Following are the 10 best practices that insurance company boards can quickly implement to enhance how their business is run (and that smart managers will put in place before their boards tell them to do so):

1. Understand and respond to concerns expressed by analysts. Analyst reports provide some of the best third-party critiques of Corporate America, and boards--especially independent directors who may not be as familiar with a given industry--need to read the reports and commentary by analysts covering their competitors as well as their own company--and have management respond to any identified weaknesses.

2. Implement a strong and effective general counsel. Good legal counsel is even more important in avoiding problems than it is at solving them. Lead in-house counsel needs to be fully qualified, given adequate resources and be empowered to respond to issues as they arise.

3. Hire quality people for internal auditor, chief accounting officer and chief actuary. Companies all too often focus only on the chief financial officer, but it is equally important to have a deep bench of finance officers, both to run the business today and to serve as potential leaders for tomorrow.

4. Build strong relationships with sub-CEO officers. The board and its committees need to meet with sub-CEO officers regularly, preferably in executive session, to get their unvarnished opinions on relevant matters. This is especially important in companies with forceful CEOs who discourage dissent.

5. Understand the financial closing process. The board needs to fully understand the closing process--how it works, how robust it is, what analysis is performed. With technology expanding the possibilities for transparency, boards should drill down into the process to reach their own conclusions about managerial judgments.

6. Review reports on the status of unreconciled balance sheet accounts. At every meeting, the board should receive reports of unreconciled premium receivables, unreconciled reinsurance recoverables and similar data, together with projected time frames for when the reconciliations will be completed. Keeping on top of these potential risk areas can help significantly manage risk.

7. Review the Securities and Exchange Commission Staff Accounting Bulletin 99. The SEC requires that registrants assess the materiality of errors that have been found or of adjustments that have not been booked. The board should be able to review these analyses and be comfortable that these matters are being appropriately addressed.

8. Monitor implementation of key projects and systems. In recent years, almost every company has integrated acquisitions, introduced new technologies or upgraded systems. These are complex undertakings. Boards need to understand the plans and the expectations, be able to monitor progress and evaluate results.

9. Evaluate financial reporting fraud risk assessment. Management needs to identify potential risk areas for fraud--for example, performance-based compensation structures that could tempt individuals to manipulate results--and then explain the steps it takes to prevent such exploitation.

10. Build and maintain an effective whistle-blower process. Some board members, corporate officers themselves, are uncomfortable with whistle-blower programs. Yet, if heeded, whistle-blowers can provide one of the best early warning systems for boards, helping catch problems before they evolve into full-blown crises.

This short list of steps is only a start. More important than any of them is an alert, informed and committed board of directors.

The best companies, in any industry, are led by people of unquestioned professionalism and integrity, and such leadership starts at the top with the board. If there is one thing that we have learned in our industry during the past several years, it is that when the buck stops, it ultimately stops with the board.

John S. Scheid is chairman, Americas Insurance Group for New York-based PricewaterhouseCoopers L.L.P.