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Do board and audit governance matters for insurer performance? A meta-analytical review

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Abstract

Amassing a dataset of 32 empirical studies published between 2003 and 2021, the article meta-analyzes the effect of board and audit governance on insurer performance. Utilizing the Schmidt and Hunter (2015) approach, it also investigates whether variations in findings are attributable to definitions of governance variables, performance measures, corporate governance systems, endogeneity issues, and publication quality. The study particularly focuses on four board (board size, outside directors, CEO duality, and board meetings) and three audit attributes (presence of an audit committee, its size, and independence). The results show that outside directors and the audit committee presence significantly improve insurer performance. However, board size and duality hold a positive influence only in Anglo-American economies. The study advocates that simply occupying the insurer’s board with outside directors is insufficient. Instead, they should be “operationally independent” for the effective functioning of the insurers’ boards. Our study recommends implementing distinct governance norms for insurers aligned with the country’s internal environments instead of reproducing a common set of practices.

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Fig. 1

Source: Authors’ design

Fig. 2

Source Authors’ elaboration

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Notes

  1. For instance, the US adopted the “Financial Solvency Framework by the National Association of Insurance Commissioners” (NAIC) for insurers in 2010, European Commission launched Solvency II in 2009 (and implemented w.e.f. 1st January 2016), Insurance Regulatory and Development Authority of India (IRDAI) introduced “Governance codes for Indian insurers” in 2009 (recently amended in 2016), among others.

  2. The variable selection is made on the basis of the data availability. However, initially, we have also collected data on other governance attributes such as gender diversity, board busyness, board experience, CEO tenure, and other board committees, but due to insufficient observations, we have constrained our analysis to only four key board and three audit governance aspects.

  3. Takaful insurers operate under Sharia or Islamic laws and are based on a risk-sharing model, where member policyholders contribute funds into a pool system and promise to protect each other against unforeseen events (Karbhari et al. 2018). These are introduced as an alternative to conventional insurers since it is believed that the latter is incompatible with Islamic regulations, such as charging interest (riba) and uncertainty (al-gharar) – which are forbidden in Islam (Kader et al. 2014). The salient feature of takaful insurers is that they maintain shareholders’ and policyholders’ (takaful) funds separately and use the shareholders’ funds only if they face underwriting losses. Nonetheless, in the other case, the surplus generated from policyholders’ (takaful) funds is shared among only policyholders (either in the form of cash dividends or by curtailing their future contributions) instead of giving to shareholders (Hemrit 2020).

  4. The “vertical” agency problem arises due to the separation between managers (agents) and shareholders (principals) since the latter delegates the responsibility of running the business to the former and expects that they will work in their favour (Jensen and Meckling 1976). However, managers might succumb to self-benefits and ignore the shareholders’ interests. Further, the “horizontal” agency problem arises between the minority and majority (controlling) shareholders because of their unequal ownership (Shleifer and Vishny 1986). Since the controlling shareholder can expropriate the minority shareholders to maximise their own profits, both agency issues can contribute to total agency costs, individually or jointly, and deteriorate the firm value.

  5. Due to the fewer observations of the communitarian business system, we have merged the communitarian business system with emerging business system and considered as one category.

  6. Initially, we searched articles without applying any specific year limit, and we found only one study (Diacon and O’Sullivan 1995) that linked corporate governance with insurer performance, and it was published before 2003. This study is based on primary data; therefore, we have not included it and considered only studies that have been published from 2003 onwards and relied on secondary data.

  7. We have also computed meta-estimates using bivariate correlations (rxy) and found a significant positive influence of duality and board meetings on insurer performance. In the case of the duality, the mean effect size is 0.109 (z = 4.04, p = 0.000), and for meetings, it is 0.179 (z = 2.09, p = 0.036). The results will be provided upon request.

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  1. Department of Humanities and Social Sciences, Indian Institute of Technology Roorkee, Roorkee, 247667, Uttarakhand, India

    Barkha Goyal & Rachita Gulati

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  1. Barkha Goyal
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Appendices

Appendix A

See Table 6.

Table 6 Existing meta–studies on corporate governance and performance
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Appendix B

See Fig. 3-9.

Appendix C: Forest plot

See Figs. 10-16.

Fig. 10
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Board size

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Outside directors

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CEO duality

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Board meetings

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Presence of an audit committee

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Audit committee size

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figure 10

Audit committee independence

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Goyal, B., Gulati, R. Do board and audit governance matters for insurer performance? A meta-analytical review. Decision 50, 285–319 (2023). https://doi.org/10.1007/s40622-023-00351-2

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