A Primer on Governance Models for Captive Insurers

I've written extensively on governance for captive insurers, but a recent question from a reader prompted me to revisit my previous work. The reader asked about the different forms of governance and which one might be best for a captive insurer. Upon reviewing my writings, I realized I hadn't covered this topic at all. To address this gap, I've put together this primer on governance models specifically tailored for captives.

A governance model serves as a blueprint for integrating a captive insurer's policies, systems, structures, and procedures into a cohesive framework. Additionally, it outlines how the board and CEO collaborate to achieve the organization's mission.

A key consideration early on is whether the captive insurer operates more like a nonprofit or a for-profit entity. While there's some common ground between these models, their primary goals differ significantly. For-profit captives aim to generate income for the company, its shareholders, and employees. In contrast, nonprofits focus on meeting the needs of their members or constituents, often with less emphasis on profitability. For the scope of this article, we'll concentrate on governance models relevant to for-profit captives. We'll explore nonprofit models in a future article.

Before diving into various corporate governance models, readers might find the Principles of Corporate Governance―2016 white paper by the Business Roundtable interesting. The paper offers guiding principles without endorsing any specific approach, emphasizing the importance of adapting governance structures to individual company needs.

Models for Consideration

There are numerous papers discussing corporate governance models. One example, from Banff Executive Leadership, though somewhat dated, offers a solid starting point for captive boards. It outlines five governance models for consideration.

1. Traditional Model

Considered the oldest corporate model, dating back to the 1700s, it assigns legal responsibility to the collective board. The board speaks with a unified voice on all company matters. However, this model lacks clear guidelines for accountability and reporting when responsibilities are delegated.

2. Carver (Policy) Model

Full disclosure: this is a model I'm well acquainted with, having worked under it in several captive insurers. The Carver model is based on two key ideas:

• Boards define the "ends" or goals of the captive.
• The board creates policies guiding the captive toward its goals.

This model allows the CEO significant freedom in determining how to achieve the ends set by the board. However, there's a risk of the board focusing solely on policies at the expense of strategic issues.

3. Outcome Model

This model focuses on defining the value and outcomes the captive aims to deliver. The board sets standards, expectations, and performance metrics aligned with the captive's vision. Clear outcomes and accountability make this model effective, but it can falter if the board lacks business understanding.

4. Consensus Model

Suitable for both for-profit and nonprofit captives, this model assumes equal responsibility among board members. Decision-making is collaborative, which can be time consuming, especially in rapidly changing environments. It may employ Robert's Rules of Order to navigate situations where consensus is elusive.

5. Competency Model

Ideal for boards aiming to enhance directors' knowledge and skills. This model emphasizes communication, trust, and relationship-building to boost board performance. However, it may lack guidance on policy setting, strategy formulation, and oversight of crucial board functions.

Ultimately, there's no one-size-fits-all approach to governance. Many boards opt to combine elements from multiple models to create a tailored governance structure. The key is to establish a framework that suits the captive insurer's unique needs and circumstances.