"The Longer the Term of Insurance Company Outside Directors, the Worse the Profitability"

Longer Terms Lead to Declines in Profitability, Corporate Value, and RBC Ratio
Positive Correlation with CEO Tenure
"Outside Directors Must Secure Proper Expertise and Independence"

[Asia Economy Reporter Minwoo Lee] It has been found that the longer the tenure of outside directors at domestic insurance companies, especially non-life insurers, the more negative the impact on corporate profitability and corporate value. This contrasts with the fact that the longer the tenure of CEOs and presidents, the higher the profitability and soundness through long-term management. This is interpreted as being due to outside directors being appointed based on personal relationships with management or controlling shareholders rather than possessing expertise and independence, resulting in inadequate oversight of management activities.

On the 19th, the Korea Institute of Finance's report titled "Analysis of the Relationship Between the Tenure of Insurance Company Executives and Management Performance" analyzed the tenure of insurance company executives in this way.

The report analyzed the relationship between the tenure of executives and profitability, soundness, and short-term performance-seeking behavior at 14 life insurance companies and 10 non-life insurance companies operating domestically from 2010 to 2021.

The investigation found that the average tenure of executives at domestic insurance companies was 50.1 months for CEOs and presidents, 30.6 months for outside directors, and 43.9 months for other registered executives receiving compensation.

Analyzing CEO tenure with return on assets (ROA) and return on equity (ROE), profitability indicators were higher the longer the tenure. Soundness indicators such as the risk-based capital (RBC) ratio also showed a positive correlation with CEO tenure. Conversely, indicators of short-term performance-seeking behavior, such as growth rate and incomplete sales ratio, tended to increase as CEO tenure shortened.

The problem was with outside directors. Especially in non-life insurance companies, the longer the tenure of outside directors, the significantly lower the ROA, ROE, RBC ratio, and corporate value. In fact, the average tenure of outside directors was longer at non-life insurers at 33.4 months compared to 27.3 months at life insurers. When expanding the scope to all insurance companies, no significant correlation was found between outside directors' tenure and corporate value or profitability.

The report criticized, "The insignificant relationship between outside directors and ROA means that the outside director system, introduced to monitor and check management and controlling shareholders and to enhance corporate management performance and value, does not have a substantial or positive impact on the profitability of domestic insurance companies."

On the other hand, for life insurance companies, CEO tenure showed a significant positive relationship with profitability, corporate value, and RBC ratio. There was a significant negative relationship between CEO tenure and the incomplete sales ratio.

The background for the negative impact of longer outside director tenure on insurance companies, especially non-life insurers, was analyzed as being due to outside directors not being appointed for their original purpose.

Researchers Seokho Lee and Sangyong Han of the Korea Institute of Finance stated, "In domestic insurance companies, many outside directors are appointed not as individuals with expertise and independence but as persons with personal ties to management or controlling shareholders, resulting in inadequate monitoring and checking of management activities. In the future, as the management culture of insurance companies shifts toward improving the quality of management performance and enhancing long-term value, it is necessary not only to ensure sufficient tenure for CEOs but also to appoint outside directors who possess genuine independence and expertise."