So - you’re officially in motion with your captive insurance company. Everything is set - you’ve done the feasibility study, you’ve completed the actuarial study, you’ve submitted everything to the Department of Insurance, gotten approval, set up the initial funding, and paid the premiums.
Now what?
Well, one thing is for sure—you are not finished with the process. It is officially time to set up the governance structure that will serve your captive insurance company. Defining your governance structure is a crucial turning point for your business. It is not about how you set up a captive company—it is about how you run it.
Understanding Captive Governance
A governance model for a captive company creates a framework for how the company’s policies, systems, structures, and procedures work together to create a cohesive whole. A sound governance structure also helps to determine and establish leadership dynamics and how the board and the CEO will operate together to achieve the organization's overall mission.
Every captive is different based on the policies and procedures – you’ll have to work to figure out what will be most appropriate for your captive company. Below, you will find more information about the different ways to run and govern a captive company.
The “Traditional” Model
The traditional model is the oldest corporate model in use today. Its documentation dates back to the 1700s. It is a time-tested and very effective model for running a corporation.
In the traditional model, there is a corporate board and a chairperson. The board comes together and collectively has one voice that actually speaks as the board. The board can delegate items to different committees. Pursuing this model may require a new policy committee, a claims committee, or even a corporate governance committee.
It is the committees' responsibility to collaborate and present the board with recommendations in areas requested by the board or chairperson. At that point, those recommendations can be adopted, amended, or rejected.
The “Policy” Model
The policy model is based on the idea that the board and chairperson’s primary first objective is to define the strategic goals of the captive – in other words, “What does the captive want to achieve?”
Once that question is established, the board devises policies to help propel the captive toward achieving the stated goal. Typical goals for a captive could be to lower premiums by a certain amount or to have a certain amount of capital in the captive by the end of the year so that the surplus can be returned to shareholders.
Often, the board's policies create a series of limitations—including what the chairperson can do, what he or she can’t do, and what the captive is capable of doing to meet the goals. However, these policies can also give the chairperson more latitude in determining the course of action.
In short, the policy model supports upfront goal setting and charges the board with developing policies and procedures to help the company meet or exceed its goals.
The “Outcome” Model
On the other hand, the outcome model champions an upfront definition of the desired outcome that the captive wants for its shareholders, business, and policyholders. The board sets standards, expectations, and performance results according to the captive's vision or desired outcome.
The board's primary duty is to clarify the outcomes the captive wants to achieve. This model can be extremely useful in assessing the chairperson's and board's performance and success because it clearly defines the outcomes. The board, chairperson, and all other stakeholders are accountable for those outcomes.
The “Competency” Model
The competency model best suits captive company boards that intend to develop the director's knowledge and skills. It fosters communication and relationships and achieves a higher level of board performance.
One drawback of the competency model is that it does not tell the board how to set policies or strategies, and it does not monitor all the functions of the board. The model just gets people to work better together, but this does not necessarily lead to the most streamlined or well-thought-out solutions.
The “Consensus” Model
The consensus model is one of the most oft-used captive company governance models.
As the name implies, the consensus model assumes that all board members are equal and, therefore, equally share responsibilities and work together to develop consensus-based policies and solutions. This strategy works especially well when boards have five people or fewer because this environment is ideal for ensuring everyone is heard.
One powerful key to the success of this model is to follow Robert’s Rules of Order, which uses terms like “motions,” “second,” and “all in favor” to ensure everyone is heard and afforded equal time to express their position in an orderly way.
Notably, all those motions and decisions are recorded, so there’s a history of all discussions—when dividends were requested and why- and record keeping for policies or claims issues. Because everything gets recorded, we have a clear roadmap from where we started and the objectives. If the business ever changes, there is that history that any new stakeholder could review of everything that went on with the captive insurance model.
Making Your Selection
In determining your options for governance in your captive company, the governance models you can consider include the:
- Traditional Model
- Policy Model
- Outcome Model
- Competence Model
- Consensus Model
If you are feeling overwhelmed by all the choices right now, there is no need to feel overwhelmed. It is essential to know that no one governance method is better than another, and it is perfectly normal for different captive companies to incorporate certain aspects of one governance structure into their own.
Think it over, decide what resonates with you, and construct a governance system that best suits your captive company.
Discover if a captive insurance company is right for your business.
Click the link to start the assessment:
https://www.riskmgmtadvisors.com/captive-insurance-fit-assessment
