Board Ethnic Diversity and Risk in Insurance Companies

How does board ethnic diversity influence insurers’ optimal risk-taking? Using a sample of property/casualty (P/C) companies, we document that boards with greater ethnic diversity make better decisions about risk: they implement less risky strategies without negatively affecting firm performance, effectively reducing the cost of risk to the organization. What board members’ personal characteristics inherited from their ethnic background are associated with these effects? We find that the diversity of directors’ levels of uncertainty avoidance linked with their ancestral country is the key driver of our results. Our findings align with theories proposing that diversity fosters moderation, leads to less idiosyncratic decisions, improves internal governance, and optimizes risk-taking.