5 Top Tips for Building a Captive Insurer Board of Directors

When forming a new captive insurer, assembling the first board of directors is a crucial step. This article provides top tips for building an effective board of directors, essential for both new and established captive insurance companies.

Common issues with boards include rubber-stamping management decisions, lack of consensus leading to deadlock, power struggles among members, and excessive focus on historical information. This guide aims to help create an ideal board of directors, addressing these challenges and ensuring effective oversight and governance. 

1. Develop and Articulate a Clear Vision/Mission 

Before recruiting potential board members, establish a clear vision or mission for the captive. This vision should be an integral part of the recruitment pitch, detailing what the captive stands for, believes in, and aims to achieve. Prospective board members should align with this vision, demonstrating their commitment and character. The goal is to assemble a dream team, and by investing time in crafting and communicating a clear vision, the likelihood of creating a cohesive and effective board increases. 

2. Recruit and Interview for Skill Sets 

Building a board for group captives can be challenging compared to traditional insurance companies. Group captives often aim to be inclusive of all members, sometimes resulting in each member having a seat on the board. This approach can lead to two major issues: (1) a lack of necessary skill sets among board members and (2) an overly large board that hinders decision-making and consensus. 

To avoid these pitfalls, captives should strive to create a board with diverse key skill sets, such as finance, investments, and risk management. This ensures comprehensive oversight of the captive insurer's operations. Interviewing prospective board members helps identify their motivations for serving and the unique skills they can contribute, increasing the board's effectiveness. 

3. Build a Right-Sized Board 

Board size matters, and smaller boards are often more effective. A study by GMI Ratings, commissioned by The Wall Street Journal, found that smaller boards at major corporations foster deeper debates and more agile decision-making ("Smaller Boards Get Bigger Returns"). This principle can also apply to captive insurers. 

An ideal board size typically ranges from 8 to 10 members. According to Investopedia's "Evaluating the Board of Directors," a study by the Corporate Library found that the average board size is 9.2 members. 

Another consideration is whether the board should have an even or odd number of members. An odd number can prevent tied votes, but even-numbered boards can function effectively if the chairman typically abstains from voting, maintaining an odd number in practice. Regardless of size, it is crucial for the board to establish clear governance rules and responsibilities. 

4. Develop Board Roles and Responsibilities 

Effective governance requires clear roles, responsibilities, and rules. Companies known for their governance excellence invariably have these elements well-defined. 

Key roles to determine include the number of officers on the board and their specific responsibilities. The chair is particularly crucial, acting as the conduit between the board and the management team. Similar to a conductor of an orchestra, the chair ensures the board operates in harmony. The chair's primary responsibility is setting the agenda, but they should also facilitate inclusive discussions among board members. 

Boards must also decide on the role and structure of committees. Some boards delegate specific matters to committees, with the full board ratifying decisions, while others handle all decision-making at the board level. Both approaches have their advantages and drawbacks, and it's important to choose the method that best suits your board's needs. 

Lastly, adopting a set of governance rules, such as Robert's Rules of Order, at the board's formation is essential. This will prevent many future conflicts and ensure smooth operations. 

5. Build a Culture That Invites Debate 

A board that discourages debate is detrimental to effective governance. When boards prioritize congeniality over healthy debate, governance issues often arise. In today's society, debate can be sensitive, but fostering a culture of healthy discussion is crucial. 

Scott Berkun, in his article "How Do You Build a Culture of Healthy Debate?", highlights that heated debates often involve individuals who struggle to separate their opinions from their identity. Recognizing this can be valuable when interviewing prospective board candidates. It's essential to select individuals who are secure in their identities and open to having their ideas challenged without perceiving it as a personal attack. A board must thoroughly examine all sides of an issue to avoid significant monetary and legal consequences. 

These tips may not be groundbreaking, but building an effective board of directors often relies on common sense. Sometimes, we just need a reminder of the basics.