Board Role In
Recognizing, Identifying
and Mitigating Risk
Constance B. Foster, Esq.
1
Disclaimer
The provision and receipt of the information in this
presentation (a) is not legal advice, (b) does not
create a lawyer-client relationship, and (c) should
not be acted on without seeking professional
counsel who have been informed of the specific
facts.
2
Risk:
A Critical Element of Board Oversight
• Change in regulatory approach by the NAIC after the
financial crisis
Retrospective
Prospective
 Prospective focus includes Enterprise Risk
3
Board’s Role
• Provide oversight of Management’s Enterprise
Risk process through which it: identifies,
measures and mitigates risk
4
Ten Principals of Effective Risk Oversight
Source: Oct. 2009 National Association of Corporate Directors
Report – Risk Governance: Balancing Risk and Reward
1.
Understand the company’s key drivers of success
2.
Assess the risks in the company’s strategy
3.
Define the role of the full board and its standing committees with
regard to risk management
4.
Consider whether the company’s risk management system is
appropriate and has sufficient resources
5
Ten Principals of Effective Risk Oversight
5.
Work with management to understand and agree on the types of risk
information
6.
Encourage a dynamic and constructive risk dialogue between
management and the board, including a willingness to challenge
assumptions
7.
Closely monitor the potential risks to the company’s culture and its
inventive structure
8.
Monitor critical alignments of strategy, risk, controls, compliance,
incentives and people
9.
Consider emerging and interrelated risks
10. Periodically assess the board’s risk oversight processes
6
Three Examples of Risk that Insurance
Company Boards Must Monitor
1. Market / Industry
2. Investment
3. Leadership
7
1. Types of Market / Industry Risks
• Disruptive external risks that could threaten the
company’s strategy (both megatrends and
microbumps)
• Changes in supply of needed input or demand
for company’s product/services
• Emerging risks: Demographic shifts, climate
change, catastrophic events, new security risks
8
1. Market / Industry Risks
• Real World Example: Collapse of residential
real estate market
9
2. Investment Risks
• Regulatory compliance (non-compliance)
• Excessive risk-taking for short-term gains
• Slow response to underperforming funds
• Investment strategy that is too conservative
• Failure to diversify investments
10
2. Investment Risks
• Real World Example: Executive Life
Insurance Company (junk bonds)
11
3. Leadership Risks
• Loss of key leaders in management or Board
• Rogue board member or officer
• Threats to company culture
• Excessive emphasis on short-term numbers at
expense of long-term health of the company
12
3. Leadership Risks
• Real World Example: AIG
13
Key Question
• How to provide oversight?





Through traditional Board committees
Board review of ERM
Establishment of a Risk Committee
Establishment of ERM Oversight Committee
Some combination of the above options
14
Questions?
15