Corporate governance in the insurance industry: Global evidence on risk-taking and performance

Abstract

The insurance industry plays a pivotal role in maintaining both domestic and international economic stability, making the governance of insurance companies and the mechanisms influencing their operations and performance crucial areas of academic and practical interest. This thesis aims to expand the existing body of knowledge on the role of corporate governance (CG) in the insurance industry from a global perspective through three distinct but interconnected papers. The first paper presents a comprehensive systematic literature review (SLR) on the effects of CG in the insurance industry. It appraises, synthesises and extends knowledge on the theoretical perspectives and empirical evidence regarding internal and external governance mechanisms and their impacts on a wide range of financial and non-financial outcomes for insurance firms. This review, encompassing 130 articles published in 63 journals from 1980 to 2021, reveals several key findings: (a) agency theory is the most commonly applied theory, with a lack of application of multi-theoretical frameworks; (b) certain internal governance mechanisms, such as state, family and foreign ownership, board diversity, finance and Shariah committees and debt-based compensation, are rarely investigated; (c) external governance mechanisms, such as Shariah law and external actuaries, receive limited attention; (d) cross-country studies are scarce; and (e) methodological limitations include a scarcity of qualitative studies, inconsistency and lack of precision in certain variable measurements. The paper concludes by outlining several opportunities for future research. Building on insights from the SLR, the second paper investigates the influence of multiple facets of board diversity (i.e., gender, nationality, tenure and age) on two critical aspects of risk-taking in insurance firms: insolvency risk (financial risk) and underwriting risk (operational risk). Using an international sample of 3,333 firm-years from publicly traded insurers across 44 countries over 2003–2019, the paper finds that board diversity in terms of gender, nationality and age significantly reduces both insolvency and underwriting risk. However, board tenure diversity shows mixed results, with a negative association with insolvency risk but a positive association with underwriting risk. Further analysis uncovers the mechanisms through which diverse boards influence risk management, demonstrating that they tend to adopt more conservative investment and financial policies. Yet importantly, this conservative approach does not compromise financial returns. Additionally, the implementation of gender quotas leads to a significant reduction in insurer risk. The third paper completes the picture of how board diversity affects risk-taking by considering the moderating role of institutional factors and adopting a holistic view of diversity through a composite board diversity index encompassing gender, nationality, tenure, and age. Using a global dataset of 3,187 firm-year observations from publicly listed insurers over a 17-year period, the findings confirm that increased board diversity is associated with reduced insolvency and underwriting risk among insurance firms. The paper further reveals significant moderating effects of institutional factors on this relationship. Specifically, strong national governance quality amplifies the risk-mitigating benefits of board diversity. Moreover, drawing on Hofstede’s (1980) cultural dimensions, the paper demonstrates that societies with high uncertainty avoidance strengthen the risk-reducing effects of board diversity, while cultures characterised by high individualism, power distance, and masculinity attenuate these benefits. Additional analyses focused on the global financial crisis (2007-2009) reveal that the effectiveness of diverse boards in mitigating risk is especially pronounced during periods of economic stress.