Three tenets of corporate governance your captive board needs to practice – and why

A captive insurer's board of directors must fulfill its duty of care to policyholders, but going above and beyond compliance can help it achieve its key business objectives.

Author: Ian Davis

The board of directors for any corporation owes a duty of care to its shareholders.

While state laws dictate the exact threshold of that duty, in the most general terms fulfilling duty of care means “understanding the company and supports its goals,” said Derick White, Managing Director, Governance & Risk Compliance Practice Leader at Strategic Risk Solutions – and a former auditor, regulator and captive manager in Vermont.

“Board members have to ask questions, and if they rely on outside expertise, they must be able to justify that. Otherwise, directors can be held personally responsible if something goes wrong,” he said. And if recent trends in SEC filings are any evidence, shareholders are increasingly holding boards accountable for missteps.

Captive insurance companies are not immune to such actions. Whether a single-parent captive or member of a group captive or risk retention group, these companies likewise ensure the board adheres to state regulatory standards.

“After all, the board is responsible for running the company,” White said.

Practicing good corporate governance ensures that the board not only stays in compliance but actually exceeds expectations outlined by the duty of care. In addition to delivering good financial results, good corporate governance fosters better relationships with domicile regulators, underwriters, reinsurers, and other experts that make up a captive’s critical infrastructure.

White detailed three key tenets of strong corporate governance that captive boards should be addressing at every meeting:

  1. A Clear Framework Outlines How the Captive is Run

A framework establishes basic guidelines for the way the board is run, including how many directors should sit on the board, how often they should meet, what committees will report to the board, and what topics they’ll review at every meeting.

“Usually a framework is set by the bylaws when the company is first formed, but they’re often written by an outside attorney and the board members don’t always read them. Understanding your framework is an important foundation for everything else the board does.”

An ideal size for most boards is about four to seven directors. Too small, and the board won’t have enough diversity of thought. But too large, and “group think” can take over, leading to myopia. State laws often require at least three directors to sit on a captive’s board, which should include representatives from risk management, treasury, and corporate counsel.

“Within a group captive, you also want a good representation of your shareholders. A larger risk retention group may have as many as 15 to 20 people on the board, just so they can bring in as many policyholders as possible,” White said. “But that comes with challenges.”

One way to incorporate the expertise and opinions of shareholders without overcrowding the board is through the assembly of committees. A captive’s board should rely on the specialized expertise of an underwriting committee, claims committee, and audit committee to keep it informed of the company’s core functions. Committees should be staffed by individuals with direct experience in those domains.

Take for example a risk retention group for physicians providing medical malpractice coverage. Who better to include on the claims committee than the physicians themselves, who can understand the nuance of each claim and determine whether it’s wiser to settle or defend?

“Those groups can discuss these topics in detail separately and educate the board on the high-level points during the board meeting. This makes the most efficient use of the board’s time and tells them what they need to know without getting in the weeds,” White said.

Putting every minute of a board meeting to good use is important because, in accordance with state law, most frameworks for pure captives only require the board to meet once per year, with quarterly phone calls in between. Group captive boards may meet up to three times a year.

“The number of policies the captive writes and the complexity of the parent company’s business will dictate how often the board needs to meet, but they must stay in touch and stay up to date on the needs of the parent organizations,” White said.

  1. Policies and Procedures Identify Strategic Objectives and Mitigate Key Risks

A board practicing good corporate governance will also have a comprehensive and up-to-date set of policies and procedures, including the business plan, continuity and succession plan, an ethics policy and an internal control policy.

“The policies and procedures document the strategic objectives of the captive, lay out a road map to achieve those objectives, and install the guardrails to keep the company on track,” White said.

The business plan should take into account the various risks that could affect the exposure the captive is underwriting, whether that’s workers’ comp, professional liability, cyber, etc. “Things like interest rate risk and regulatory risk could impact underwriting, no matter the line, and the business plan should establish how to make adjustments,” White said. Board members should review this plan at every meeting to ensure it continues to meet the needs of the organization as risks evolve.

Succession planning is also critical especially for smaller boards. Contingencies must be established to keep the board in compliance and keep the company running smoothly in the event one director leaves.

  1. A High Degree of Accountability Keeps the Board on Target

Perhaps the most difficult component of corporate governance to enforce is accountability. Having checks and balances in place to hold the board accountable ensures that directors are continually working for the benefit of the company.

“If you’ve ever attended a strategic planning retreat, you know that lots of good things happen— everyone puts their heads together for 10 hours a day and great ideas emerge. But when everyone gets home, there’s often little follow-up. How do you ensure that plans are being followed?” White said.

Risk retention groups’ corporate governance policies often require an annual evaluation of the CEO, each individual board member, vendors, and a review of the policies and procedures.

Accountability also means ensuring that the board members are fully prepared for each meeting. Have they brushed up on the latest ventures of the parent company; any emerging risks that could affect the business; and the captive’s progress on its stated goals for the year? Third party captive management companies can conduct these evaluations to help busy board members stay on track.

Vermont’s Reputation Protects Your Reputation

One key benefit of good corporate governance is that it builds trust with domicile regulators. Captive regulators aren’t just there to enforce the rules; they are key partners in helping companies solve problems and develop innovative solutions.

“In many states you would never meet your regulator. In Vermont, they are willing to meet with you on their own time, even when there are no issues to address. They want to know your business and build trust,” White said.

Vermont in particular has a reputation as a business-friendly domicile that actively supports its captive companies through the experience and expertise of its infrastructure. “The regulators, captive managers, investment professionals, attorneys, and actuaries in Vermont all understand captives and have experience in the industry. They provide expertise that boards can rely on,” White said.

One reason Vermont attracts these experts is because it upholds high standard for corporate governance. The domicile demands a clear framework, established policies and procedures, and a system of accountability. As a result, shareholders in Vermont captives can rest assured that the board is acting in their best interests.

Being in a domicile with high standards also has benefits when captives talk to underwriters or approach reinsurers in London. “Underwriters and even rating agencies know that being licensed in Vermont comes with a certain level of credibility,” White said. “Vermont’s reputation protects your reputation.”


return to top