The 2008 financial crisis was the greatest financial crisis since the Great Depression and The Financial Crisis Inquiry Commission conclude that " dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis" (National Commission, 2011).
Although the board of directors bears primary responsibility for risk management (Tonello, 2012), many insurers have delegated this obligation to stand-alone risk committees (board risk committees). In fact, board risk committees have become more common since the 2008 financial crisis, partly due to Dodd Frank Act 2010. This paper uses the insurance industry to investigate whether a board risk committee adds value from the standpoint of rating agencies and impacts firm performance.
The study finds that firms with a board risk committee report higher A.M. Best's Financial Strength Ratings after controlling for corporate governance characteristics and other relevant factors. However, this result only holds during the post-financial crisis period. The authors suggest that external evaluators may have responded stronger after the financial crisis began, when regulators monitored insurer board-level governance mechanisms more closely.
In addition, firms adopting a board risk committee experience an immediate increase in financial strength ratings and the presence of a board risk committee appears to be related to long-term firm performance (it takes at least five years for ROE to improve). However, financial strength ratings does not appear to be related to board risk committee age or short-run performance.
Overall, the study provides evidence consistent with board risk committees being effective and beneficial from the standpoint of rating agencies and long-term financial performance.
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