The Effect of Risk Governance in the Insurance Sector During the Financial Crisis - Empirical Evidence from an International Sample

Abstract

In this study, we analyze the relation between risk governance and risk and performance measures for a global sample of 107 insurance companies from 2004 to 2012. Our risk governance index covers several Solvency II provisions and includes the existence of chief risk officer on the executive board, risk committee characteristics and board industry experience. We find that, in general, during the asset meltdown phase in 2008, firms with a higher risk governance index have lower tail risk and lower expected default frequency (Moody’s EDF). Controlling for time-invariant heterogeneity across firms using a fixed effects approach, we identify that during our sample period risk governance does not have a risk-reducing effect in general but is positively associated with risk-adjusted performance measures and Tobin’s Q. Our findings challenge the notion that risk governance is typically risk reducing but rather support the role of risk governance as a business enabler. During our sample period risk governance increased and our findings should encourage insurers to continue enforcing their group wide risk governance structures.

Keywords: Risk Governance, Global Insurance Firms, Financial Crisis

JEL Classification: G22, M10