Does governance structure affect the insurance risk-taking?

While the corporate governance of banks and its relation with regulation, performance and risk-taking, are some of the main issues of the emerging financial literature, corporate governance of insurance companies and its effects are still unexplored, even though in recent years insurance companies have faced a series of regulatory investigations that includes governance and risk management practices. We want to investigate whether the governance structure affects risk-taking in the insurance industry by focusing on the incentives of owners and CEOs, and on the monitoring role performed by the board of directors and the audit committee, respectively, and by taking into account that the results reported by the banking literature cannot necessarily be generalized to the insurance companies. We select a sample of 54 US listed Property and Casualty insurance companies taking into account a sample period (1995–2005) that covers an entire business cycle. Our results suggest that the interest of the main shareholder is aligned with the interest of all shareholders while CEO’s ownership cannot be considered an effective corporate governance mechanism, indeed the CEO’s compensation structure seems to affect insurance risk-taking. However, the strength and the level of activity of the audit committee can be a deterrent to risk-taking whereas the monitoring role of the board of directors does not seem to produce effects on insurers’ risk-taking.