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

2. 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.

3. 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

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

5. Ten Principals of Effective Risk Oversight
Source: Oct 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

6. 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

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

8. 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

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

10. 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

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

12. 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

13. 3. Leadership Risks
Real World Example: AIG

14. 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

15. Questions?