APRIA 2014 Annual Conference, Moscow

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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

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

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’

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’

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

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

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

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

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

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

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

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

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

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

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

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

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

APRIA 2014 Annual Conference, Moscow Corporate Governance Insurer Performance

APRIA 2014 Annual Conference, Moscow 26 OJSCs 8 years, 2005-2012 8 Governance parameters 11 Firm-specific control variables 208 observations

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

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

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

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

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)

APRIA 2014 Annual Conference, Moscow