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APRIA 2014 Annual Conference, Moscow

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1 APRIA 2014 Annual Conference, Moscow
Board Characteristics and Profit Efficiency of Russian Non-life Insurance Companies Yulia Rozhkovskaya and Mike Adams University of Bath, UK Centre for Strategic Risk and Insurance APRIA Conference, Moscow 28th July 2014

2 APRIA 2014 Annual Conference, Moscow
Key findings Observed patterns of corporate governance: Independent directors

3 APRIA 2014 Annual Conference, Moscow
Key findings Observed patterns of corporate governance: Independent directors Only 2% of all board directors Iwasaki (2008) reports 7% for other OJSCs Employed by large Russian insurers with big boards Are ‘Busy’

4 APRIA 2014 Annual Conference, Moscow
Key findings Observed patterns of corporate governance: Independent directors Audit committees Only 2% of all board directors Iwasaki (2008) reports 7% for other OJSCs Employed by large Russian insurers with big boards Are ‘Busy’

5 APRIA 2014 Annual Conference, Moscow
Key findings Observed patterns of corporate governance: Independent directors Audit committees Only 2% of all board directors Iwasaki (2008) reports 7% for other OJSCs Employed by large Russian insurers with big boards Are ‘Busy’ Present in 3 out of 26 (or 11%) non-life insurers

6 APRIA 2014 Annual Conference, Moscow
Key findings Observed patterns of corporate governance: Independent directors Audit committees CEO/Chairman Separation Only 2% of all board directors Iwasaki (2008) reports 7% for other OJSCs Employed by large Russian insurers with big boards Are ‘Busy’ Present in 3 out of 26 (or 11%) non-life insurers

7 APRIA 2014 Annual Conference, Moscow
Key findings Observed patterns of corporate governance: Independent directors Audit committees CEO/Chairman Separation Only 2% of all board directors Iwasaki (2008) reports 7% for other OJSCs Employed by large Russian insurers with big boards Are ‘Busy’ Present in 3 out of 26 (or 11%) non-life insurers 96% of firms separate the CEO and Chairman positions

8 APRIA 2014 Annual Conference, Moscow
Y=PROFE Double-Hurdle Tobit Coefficient Std. Err. P-value OUTS proportion of independent (outside) directors -0.276 0.095 0.002 AUD 1=audit committee, 0 otherwise 0.360 0.017 SEP 1= CEO/Chairman separation, 0 otherwise 0.113 0.004 BSIZE number of board directors 0.257 PROFS proportion of professionally qualified directors on the board 0.53 0.333 0.055 GOV CEO government links -0.007 0.001 BUSY busy boards -0.060 TEN CEO tenure 0.020

9 APRIA 2014 Annual Conference, Moscow
Key findings Observed patterns of corporate governance: Board Size CEO tenure Professional qualifications Average board size = 7 members UK life insurance industry - 9 (Hardwick et al. ,2011) US non-life insurance – 11 (Huang ,2011) Prescribed by Law on JSCs

10 APRIA 2014 Annual Conference, Moscow
Key findings Observed patterns of corporate governance: Board Size CEO tenure Professional qualifications Average board size = 7 members UK life insurance industry - 9 (Hardwick et al. ,2011) US non-life insurance – 11 (Huang ,2011) Prescribed by Law on JSCs Average tenure = 5.2 years 7 years cross-country average (Iwasaki,2010) No CEO change for 15 out of 26 insurers

11 APRIA 2014 Annual Conference, Moscow
Key findings Observed patterns of corporate governance: Board Size CEO tenure Professional qualifications Average board size = 7 members UK life insurance industry - 9 (Hardwick et al. ,2011) US non-life insurance – 11 (Huang ,2011) Prescribed by Law on JSCs Average tenure = 5.2 years 7 years cross-country average (Iwasaki,2010) No CEO change for 15 out of 26 insurers Held by only 3% of all directors in the data set 38% of CEOs have government links

12 APRIA 2014 Annual Conference, Moscow
Y=PROFE Double-Hurdle Tobit Coefficient Std. Err. P-value OUTS proportion of independent (outside) directors -0.276 0.095 0.002 AUD 1=audit committee, 0 otherwise 0.360 0.017 SEP 1= CEO/Chairman separation, 0 otherwise 0.113 0.004 BSIZE number of board directors 0.257 PROFS proportion of professionally qualified directors on the board 0.53 0.333 0.055 GOV CEO government links -0.007 0.001 BUSY busy boards -0.060 TEN CEO tenure 0.020

13 APRIA 2014 Annual Conference, Moscow
Key findings Moderately-developed systems of corporate governance CG measures are most useful in combination An audit committee yields the best efficiency gains when it combines with a separate CEO and Chairman Value of CG measures varies with ownership type Audit committee + CEO/Chairman = most value if foreign/state investors are minority owners

14 APRIA 2014 Annual Conference, Moscow
Corporate Governance Insurer Performance Execs/non-execs Audit Committee CEO-Chairman Separation Board Size CEO Tenure Government Links Professional Qualifications

15 APRIA 2014 Annual Conference, Moscow
Corporate Governance Insurer Performance Execs/non-execs Audit Committee CEO-Chairman Separation Board Size CEO Tenure Government Links Professional Qualifications Control variables: Ownership concentration Distribution Insider ownership Firm size State ownership Leverage Foreign ownership Investment risk Group membership Product mix Reinsurance

16 Key findings Greater profit efficiency is associated with :
APRIA 2014 Annual Conference, Moscow Key findings Greater profit efficiency is associated with : Concentrated ownership Financial risk Group membership Reinsurance Use of external distribution channels

17 Key findings Lower profit efficiency is associated with :
APRIA 2014 Annual Conference, Moscow Key findings Lower profit efficiency is associated with : Insider ownership State ownership Insurer size

18 APRIA 2014 Annual Conference, Moscow
Corporate Governance Insurer Performance

19 APRIA 2014 Annual Conference, Moscow
26 OJSCs 8 years, 8 Governance parameters 11 Firm-specific control variables 208 observations

20 Profit efficiency Economic measure Predicted economic profit
APRIA 2014 Annual Conference, Moscow Profit efficiency Economic measure Predicted economic profit = accounting profit + residual Maximum attainable economic profit = accounting profit + maximum residual Predicted economic profit Efficiency score Maximum attainable economic profit

21 APRIA 2014 Annual Conference, Moscow
Distribution-Free Frontier Assumes stability over time Average CEO tenure in the sample – 5 years For 15 of 26 companies – no CEO change over 8 years

22 APRIA 2014 Annual Conference, Moscow
Distribution-Free Frontier Assumes stability over time Average CEO tenure in the sample – 5 years For 15 of 26 companies – no CEO change over 8 years

23 APRIA 2014 Annual Conference, Moscow
Alternative profit function Normalized quadratic form i, j = 1, 2, n; k, h = 1, 2, m-1.

24 Robustness tests and unobservable effects
APRIA 2014 Annual Conference, Moscow Robustness tests and unobservable effects Time-dummies in second-stage analysis Interaction terms (OUTS*AUD, OUTS*BSIZE) VIFs (all less then 2)

25 APRIA 2014 Annual Conference, Moscow

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