Why Captives Need To Focus on Culture When Considering Governance

Most corporations have a culture, ranging from healthy to toxic, which extends to their captive insurers as subsidiaries. Corporate culture often comes more naturally to single-parent captives than to association, cell, or group captives. Group captives, however, start without a coherent culture since participants come from diverse backgrounds. This clean slate means culture must be actively nurtured, requiring time and effort. With boards meeting only a few times a year, developing a true corporate culture can be challenging. Without a solid cultural foundation, good governance may struggle to take root. 

This issue is compounded in group captives where all owners also sit on the board. Large boards often struggle to reach consensus and direct management effectively, a difficulty intensified without an agreed-upon culture. An enlightening exercise for any group captive is to have each board member individually describe and define their captive insurance company's culture. 

So why should captive insurers invest in developing a strong corporate culture? For one, regulators and legislators may drive this need. Furthermore, the NAIC Corporate Governance Annual Disclosure Model Act is an accreditation standard for all state insurance departments, requiring all insurers to submit a confidential corporate governance annual disclosure to their domiciliary state regulator. While not strictly subject to this, captive insurers will face similar expectations.  Of note, risk retention groups are already subject to corporate governance standards. 

However, developing a strong culture is not just about meeting regulatory demands; it's about creating an environment where good governance can thrive, ensuring the long-term success and stability of the captive insurer. 

Perspectives for Consideration

While not insurer-specific, the United Kingdom Corporate Governance Code includes the following provision. 

"The board should assess and monitor culture and how the desired culture has been embedded. Where it is not satisfied that policy, practices, or behavior throughout the business are aligned with the company's purpose, values, and strategy, it should seek assurance that management has taken corrective action." 

This means that boards must regularly evaluate and ensure that the company's culture aligns with its purpose, values, and strategy. If there are discrepancies, the board should confirm that management has implemented necessary corrective measures. 

"Culture" is one of those nebulous concepts that many people struggle to define. While it sounds good in theory, figuring out how to monitor and implement it within your captive insurance company can be challenging. In a white paper titled Governance and Culture—The Conversation Boards Are Having Now from the Program on Corporate Compliance and Enforcement at New York University School of Law, authors Ben Morgan and Holly Insley argue that defining a company's culture requires using a risk management framework. For those in the insurance industry, especially captive insurance, this concept is intuitively understood. Their framework has four key attributes.

• A strong "speak up" or "see and say" culture, empowering employees to raise concerns without fear of retaliation
• Consideration of conflicts, ensuring decision-making power is given to the right people and clarifying when individuals should abstain from the process
• Appropriate accountability, with someone in the organization having final responsibility for a process and ensuring everyone reporting to that person understands their role and contribution
• Clear lines of communication where leadership sets the tone and communicates it effectively throughout the company

While the initial attributes are a good starting point, additional considerations to include are as follows. 

• Expectations of Outside Vendors. Does the organization expect its outside consultants and vendors to uphold the same ideals and ethics as the captive? If a captive claims to have one culture but its service providers practice a significantly different one, employees, especially younger ones, may quickly perceive the hypocrisy. 
• Continuous Evolution. Creating a lasting corporate culture is an ongoing process. Like a strategic plan, it shouldn't just be written up, placed in a binder, and checked off the "to-do" list. The board and management should periodically revisit and assess how the culture is functioning and whether changes are warranted due to economic or technological forces. 

Culture, like good governance, should withstand any trial by fire. While it is easy to claim a strong corporate culture and sound governance, their true strength is only revealed when tested.