CORPORATE GOVERNANCE IN INSURANCE: A “BOTTOM UP” APPROACH TO MANAGING RISK

Because the issues that typically expose a company to the threat of litigation and similar risks often occur at the operational level, the board must ensure that the company’s corporate governance framework is structured in such a manner that will foster the free flow of information up the corporate ladder, while also facilitating decision-making at all levels of the organization.  In an effort to effectively manage risks, boards should consider adopting an expansive view of corporate governance that focuses on more than the traditional compliance framework that is established by state-based corporate and insurance laws.  In addition to adopting a culture of compliance with such laws, it is important to understand how an insurance company carries out its day-to-day business and claims handling practices, as well as how the company processes information to adapt to its business environment.  In that regard, a corporate governance system should be viewed as an information gathering and decision-making processes by which information flows from the operating level of an organization up through the chain of command to where decisions are made.  Indeed, identification of risk is in many ways a “bottom up” process.

Boards do not have perfect knowledge of everything that happens within their organizations, but advances in the way boards receive and process information can help improve a company’s ability to effectively manage risks.  Establishing a corporate governance framework that facilitates the flow of information and promotes decision-making at all levels of the organization can be vital for an insurance company to ensure it has effective processes in place to understand, identify, and manage risks.  To do so, it is important to maintain a robust system of reporting mechanisms that allows information to flow from the operating level of the organization to decisions-making bodies, such as board committees.  The right people in the organization should be empowered to feed information up, and need to have regular training as to how they are expected to react and what they are expected to report.

Viewed broadly, governance implies not only litigation exposure that typically arises from issues related to corporate control functions and fiduciary duty claims, but also from operational matters, including those related to claims handling and bad faith allegations.  Harnessing good information flow and decision-making structures allows isolated pieces of information to be considered in their proper context.  For example, an analysis of the company’s corporate governance system might reveal information related to particular claims practices and level of corporate review.  Such an analysis, along with open channels for allowing lower-level personnel to escalate matters up the chain-of-command, provides a more measured, and potentially more reasonable and defensible, basis for an insurer’s claims defense and settlement decision-making.

Viewed in the larger governance framework, isolated information that may otherwise be portrayed as problematic from a bad faith or claims handling perspective may be addressed by recognizing that the appropriate decision-makers carefully considered all information at issue.  Bad faith or extra-contractual lawsuits may become easier to defend (or avoid altogether) if the information upon which the litigation is based has been vetted through a system of appropriate decision-makers.

This article first appeared in the Winter 2018 issue of The Demotech Difference, a publication of Demotech, Inc.