Science Research Management

Science Research Management ›› 2021, Vol. 42 ›› Issue (7): 171-178.

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The D&O liability insurance, property right and internal-control construction

Liu Bin, Fu Jingtao, Hu Guoliu   

  1. School of Management, Hainan University, Haikou 570228, Hainan, China
  • Received:2018-08-12 Revised:2019-01-03 Online:2021-07-20 Published:2021-07-19

Abstract:      The main functions of the directors′ and officers′ liability insurance (D&O liability insurance) and the internal-control system are risk control and management, which have the consistency of purpose and logic. However, in practice, the above logic is questionable due to similar functions, overlapping functions, lack of empirical evidence, and the regulatory role of property rights. On the basis of fully demonstrating the measurement methods of the D&O liability insurance and enterprise internal-control level, this paper used the annual data of China′s A-share main-board enterprises from 2011 to 2015, to test the intrinsic connection, moderating effect and mechanism between the D&O liability insurance and the level of the enterprise internal-control construction. 
    The test found that: First, the enterprises that insured the D&O liability insurance had higher internal-control level. The test results show that, regardless of internal-control effectiveness, audit results, or internal control of third-party agencies, the enterprises that insure the D&O liability insurance have higher internal-control level and better internal-control system. Therefore, enterprises should actively purchase the D&O liability insurance for directors and supervisors. Second, the state-owned enterprises purchased the D&O liability insurance, were more significant to improve the internal-control level. The test results show that the internal-control level of state-owned enterprises purchased the D&O liability insurance in the year and the second year was significantly enhanced compared with non-state-owned enterprises.
    According to the empirical evidence of this article: Firstly, the enterprises that insured the D&O liability insurance have higher internal-control level evaluation for internal-control effectiveness, comprehensive score and audit recognition degree. Therefore, for the construction of enterprise internal-control system, the provision insured the D&O liability insurance can be integrated into the important provisions of the internal control system and company evaluation. Secondly, based on the insurance attributes of the D&O liability insurance, through the settlement of claims or the introduction of insurance company supervision, the D&O liability insurance can be used as one of the effective means to resolve business risks. Therefore, the D&O liability insurance can be a useful supplement to comprehensive risk management of enterprises. Finally, the D&O liability insurance is a single type of insurance, and it cannot defend the overall risk of the enterprise. However, it can play the role of comprehensive risk management, become an integral part of the comprehensive risk management, and then be included in the internal-control evaluation system.
     The contribution of this paper lies in: First, this paper explains the theoretical connection between the D&O liability insurance and the internal-control system of enterprises from the perspective of comprehensive risk management. Second, it is confirmed that the D&O liability insurance will help enterprises improve their internal-control level. Third, this paper clarifies the regulatory effect of the nature of property rights, that is, state-owned enterprises purchase the D&O liability insurance, will significantly improve the internal-control level. Fourth, based on the similar functions of the risk management and internal-control system in enterprise risk management, it is explained that there is no endogenous between the two.
    At the same time, this article has the following enlightenment: (1) State-owned enterprises take out the D&O liability insurance, which does not require directors and senior executives to pay for themselves, but also can boldly carry out the construction of internal-control system. Therefore, state-owned enterprises should take advantage of the D&O liability insurance to improve their comprehensive risk management system, thereby improving internal control. (2) From the perspective of comprehensive risk management, the D&O liability insurance is a single tool to deal with the risk management of senior directors. It is recommended to set the D&O liability insurance as an important clause for the internal-control evaluation of state-owned enterprises, and play a hierarchical role.

Key words: D&O liability insurance, internal control, comprehensive risk management, property right