Board Role In Recognizing, Identifying and Mitigating Risk Constance B Board Role In Recognizing, Identifying and Mitigating Risk Constance B. Foster, Esq.

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.

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

Board’s Role Provide oversight of Management’s Enterprise Risk process through which it: identifies, measures and mitigates risk

Ten Principals of Effective Risk Oversight Source: Oct. 2009 National Association of Corporate Directors Report – Risk Governance: Balancing Risk and Reward Understand the company’s key drivers of success Assess the risks in the company’s strategy Define the role of the full board and its standing committees with regard to risk management Consider whether the company’s risk management system is appropriate and has sufficient resources

Ten Principals of Effective Risk Oversight Work with management to understand and agree on the types of risk information Encourage a dynamic and constructive risk dialogue between management and the board, including a willingness to challenge assumptions Closely monitor the potential risks to the company’s culture and its inventive structure Monitor critical alignments of strategy, risk, controls, compliance, incentives and people Consider emerging and interrelated risks Periodically assess the board’s risk oversight processes

Three Examples of Risk that Insurance Company Boards Must Monitor Market / Industry Investment Leadership

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

1. Market / Industry Risks Real World Example: Collapse of residential real estate market

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

2. Investment Risks Real World Example: Executive Life Insurance Company (junk bonds)

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

3. Leadership Risks Real World Example: AIG

How to provide oversight? 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

Questions?