As a New Zealand taxpayer – and therefore collectively on the hook for a possible $0.5 – $1.0 billion support package (read ‘bailout’) – I was delighted to see that the Government has appointed an experienced insurance professional, John Pritchard, to the board of AMI Insurance.
It may come as a surprise – as it did to me when I read AMI’s latest annual report – to find that not one of the existing board members appears to have a background in either insurance or risk … unless you count the ownership of racehorses in the latter category. I know, and have considerable respect for, some of the directors: an outstanding retired banker, a leading former retailer, a successful market gardener, and so on. But nobody about whom I could find any experience in the industry in which AMI operates.
Going one step deeper, the Chief Executive’s own earlier career was mainly in banking, not insurance. When you look at the executive management team, you see Heads of Customer Division, Customer Experience, Marketing and Products, all of which helps us to understand how the company has been so successful in growing market share over the last decade, from a relatively small Christchurch-based insurer to one of the leaders nationwide.
However, nobody in the top team has a title that suggests deep involvement in risk management. You have to delve to what appears to be at least third tier to find someone described as Actuarial Team Leader.
I doubt whether anybody could have foreseen the destruction caused by the seismic bombs that hit Christchurch last September and more tragically on 22 February. But a part of risk management is about assessing events of low probability but high impact.
Much of AMI’s business was, not surprisingly, centred on Christchurch, where it had acquired a large share of the House and Contents insurance market, and a disproportionate concentration of its portfolio. And I have read that its reinsurance rates were among the industry’s lowest. Not being from the industry, I wouldn’t have a clue about appropriate reinsurance levels, but I do understand a little about concentration of risk.
What bothers me is that I’m not convinced that anybody else on the board would have had much more knowledge, so would not have been in a strong position to ask whether the reinsurance rates were too low for the high concentration of the company’s exposure.
My daytime business is ‘Building boards into leading teams’, and I’m the last person to suggest that everyone at the board table should come from the same industry background. To the contrary, I believe that having a range of backgrounds and perspectives is vital in achieving effective board oversight. However, having nobody at the board table with a background in the industry seems to defy common sense – because directors must be sure they are receiving the information they need in order to make good decisions. If you don’t have somebody with experience, you won’t know what you don’t know.
Without knowing the background, I can only make some assumptions about AMI’s board practices and (lack of) evolution. The Chairman has been on the board for about twenty years and several of the other directors have been there for a long time, while the CEO was appointed more than 15 years ago.
I’d imagine that some of those relationships had grown quite comfortable during the good times of rapid growth. One of the dangers when this happens is that a director who wants to ask hard questions, challenging the strategy and management’s assumptions, can feel increasingly uncomfortable and isolated if he (at AMI they’re all ‘he’) starts to ‘rock the boat.’ This is why it’s so important that a healthy board culture doesn’t just accept, but insists on dissenting views being aired.
I’d also guess that, as the business grew rapidly, the board’s priorities reflected its experience in growing businesses and satisfying customers, and didn’t focus adequately on changes to its risk exposures or concentration of its portfolio.
The lack of board turnover, combined with the directors' industry backgrounds, seems to have resulted in a failure to grasp the increasing significance of such agenda items, in line with AMI's changing position in a rapidly changing world. As Charles Darwin observed (see my earlier post on his anniversary a couple of years ago):
- It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.
A failure to recognize this at AMI’s board table over many years may well cost you and me up to a billion dollars. Let’s hope Mr Pritchard can make enough of a difference to prevent this from happening.
