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CREATING THE PERFECT CAPTIVE FRAMEWORK

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 structure. 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.

The purpose of a governance model for a captive is to create 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’s going to 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 – documentation of this model dates back to the 1700’s. 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 of the board. The board comes together and collectively has one voice that actually speaks as the board. The board has the ability to delegate items to different committees. Different committees you can expect to need if you pursue this model could include a new policy committee, a claims committee or even a corporate governance committee.

It is the responsibility of the committees to collaborate and come to the board with recommendations in areas as requested by the board or chairperson. At that point those recommendations can either 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 objectives of the captive – in other words, “What does the captive want to achieve?”

Once that question is established, the board then creates policies that will 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 for surplus to go back to shareholders. The board devise policies with the goals of the captive in mind.  

Often, the policies of the board end up creating a series of limitations – including what can the chairperson can do, what he or she can’t do, and what the captive is capable of doing in service of meeting the goals. It can also create more latitude for the chairperson in determining 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 side, the outcome model champions upfront definition the desired outcome that the captive wants for its shareholders, business and policyholders. The board sets standards, expectations and performance results according to what the vision, or desired outcome, of the captive is.

Clarifying the outcomes that the captive wants to achieve becomes the primary duty of the board, and this model can be extremely useful in assessing the performance and success of the chairperson and the board because they have a clearly defined outcome. The board, chairperson and all other stakeholders are accountable to those outcomes.

The “Competency” Model

The competency model is best suited for captive company boards that intend on developing the knowledge and skills of the director. The competency model works to foster communication, relationships and achieve a higher level of performance for the board.

One drawback of the competency model is that does not tell the board how to set policies or strategy and it does not monitor all the functions of the board. The model just serves to get people to work better together, but this does not necessarily to the most streamlined or well-thought solutions.

The “Consensus” Model

The consensus model is one of the most oft-used captive company governance models.

As name implies, the consensus model assumes that all board members are equal and therefore equitably share in the responsibilities and work together to develop policies and solutions based on consensus. This strategy works especially well when boards have 5 people or less because this environment is ideal for making sure everyone is heard.

One very strong key to the success of this model is to leverage “Robert’s Rules of Order,” which leverages terms like “motions” and “second” and “all in favor” are used to make sure everyone is heard and everyone is afforded equal time to express their position in an orderly way.

Importantly, all of those motions and decisions get recorded so there’s a history or all things discussed – when dividends we requested and why, as well as record keeping for policies or claims issues.  Because everything gets recorded, we have a clear roadmap from where we started and what the objectives were. If the business ever changes, there is that history that any new stakeholder would be able to review of everything that went on with the captive insurance model.

Which to Choose?

In determining your options for governance in your captive company, the governance models you can consider include the:

If you are feeling a bit overwhelmed right now with all the choices, there is no need. It is important to know that there is no one governance method that is better than another, and it is perfectly normal for different captive companies leverage certain aspects of one governance structure and incorporate into their own.

Think it over, decide what resonates with you, and construct a governance system that suits your captive company best.

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