A Captive Insurer Template for Corporate Governance Standards

Corporate governance, as defined by the NAIC, encompasses an insurance company's rules, practices, and processes governing its structure, culture, strategies, and governing documents. It establishes roles, responsibilities, and accountability at all levels, defining management hierarchy and decision-making chains. Corporate governance ensures transparency, proper controls, and power allocation to protect stakeholder interests and prevent the concentration of authority¹.

The NAIC Corporate Governance Annual Disclosure Model Act and Regulation (#305/#306) require detailed disclosure of governance practices for regulated insurance companies. Effective January 1, 2020, this Model Act became an NAIC accreditation requirement, meaning US insurers must annually submit a Corporate Governance Annual Disclosure (CGAD) to their domiciliary state regulator. The CGAD covers board policies, meeting frequencies, oversight procedures for critical risk areas, and senior management guidance, aiding regulators in ongoing solvency monitoring.

Given that these standards don't strictly apply to insurers organized under a state's captive insurance statutes (risk retention groups already comply with corporate governance standards), captive boards may question whether the benefits justify the effort needed to draft and monitor such practices. Crafting and maintaining a robust corporate governance framework undoubtedly demands both time and effort.

Size may be a factor; publicly traded companies, including those in the Fortune 100, face more rigorous regulatory scrutiny. However, many captive insurers still recognize the importance of prioritizing corporate governance. For those who consider it a fundamental aspect of a captive board's focus, we offer the following template for consideration.

Statement of Corporate Governance Practices Template

Introductory Paragraph

This statement provides an overview of corporate governance practices, highlighting the board's role in establishing and overseeing policies and procedures. It often mentions specialized committees like the audit, risk management, or executive compensation committees that support these efforts. Additionally, the statement explains how management contributes to the governance process, particularly through oversight functions such as audit, compliance, finance, and risk management. It may include insights into internal controls and reporting requirements and reference the relevant regulatory authority.

Board of Directors

This section outlines the roles and responsibilities of the Board of Directors in meeting corporate governance requirements. The board operates within applicable laws, the captive's bylaws, its own mandate, the chairman's mandate, captive-specific governance practices, and internal policies and ethical guidelines.

Key responsibilities include the following.

• Reviewing and approving objectives, strategies, and operating plans
• Promoting ethical behavior and integrity
• Ensuring compliance with relevant laws and regulations
• Effective risk management
• Overseeing management
• Planning management succession
• Transparent financial disclosure
• Utilizing external consultants as needed

Chairperson

The role and responsibilities of the chair include the following.

• Ensuring the board fulfills its duties and responsibilities.
• Overseeing the board's committees to ensure they carry out their assigned duties and report back to the full board.
• Assigning duties and responsibilities to individual board members
• Providing the board with the necessary resources and information to carry out its mandate.
• Facilitating executive sessions for the board
• Ensuring board members possess the requisite qualifications and expertise and maintain independence where required.

Board-Formed Committees

The committees established by the board will define their roles, responsibilities, and mandates. Each committee will regularly review and approve its mandate annually to ensure it accurately reflects its function, activities, and responsibilities.

Board Composition

This section will address the following aspects.

• Core competencies expected of board members
• Board size and composition
• Requirements for independence among board members
• Expected standards of integrity and ethics
• Policies on conflicts of interest
• Attendance expectations
• Outside service commitments
• Succession planning for the board
• Board self-assessment practices
• Director tenure and procedures for board vacancies
• Continuing education opportunities for board members
• Orientation for new board members

It should be noted that meaningful self-assessments often challenge boards. This critical task is sometimes overlooked or delegated to management to create a checklist for board review. Effective governance demands accountability, necessitating a thorough evaluation of both individual and collective board performance, even though it demands effort and time, especially from the chairperson. However, it is essential to identify and address internal shortcomings well before they become critical issues during a crisis.

Critical Issue Reporting (Enterprise Risk Management)

This section outlines how and when the board is updated on critical issues impacting the captive insurer, covering the following.

• Risk management decision-making processes
• Actuarial loss reserve analysis
• Investment decision-making processes
• Pricing decision-making processes
• Reinsurance decision-making processes
• Business strategy decision-making processes
• Compliance status

If your captive can consolidate answers to these questions into a single document, excellent! Otherwise, consider consolidating them. Lacking written documentation for any of these items means your governance doesn't meet NAIC model law requirements.

Footnotes

1. NAIC Corporate Governance