Understanding the Essentials of the CEO and Captive Board Relationship

The relationship between the CEO and the board of directors is crucial for the effective management of captive insurance companies. Many captives outsource their management to captive management companies, where the captive manager often fulfills the role of CEO, even if not formally titled as such.

This article examines the essential elements of a strong CEO/board relationship and how these can be adapted to the management model used by many captives.

A key aspect of a high-functioning CEO/board relationship is clearly defined roles and responsibilities. While many job descriptions exist for the board of directors, the following points are important to consider.

Creating a high-functioning relationship between the board and the CEO starts with a clear delineation of roles and responsibilities. The board of directors is tasked with several key functions:

1. Recruit, evaluate, and compensate the CEO or, in the case of captives, the general manager. This includes planning for succession, which is essential even for captive insurance companies using external managers. Captive managers can have differing opinions with the board, change personnel, be acquired, and close. Therefore, the board must always be prepared to act, with a plan in place to replace the captive manager.
2. Evaluate and determine the company's strategic direction. This responsibility should not be delegated to the captive manager. It is the board's fiduciary obligation to its policyholders and members to develop and monitor a common vision and mission for the captive.
3. Establish a governance system for the captive. This framework ensures the board speaks with one voice, understands its role, and knows how it interacts with the captive manager's delegated roles and functions. The board must also select a chairperson who acts in the interest of all board members and constituents.
4. Protect the captive insurance company's assets and members' investments. The board must ask tough questions and act decisively if management fails to meet its obligations to the captive.

The role of the CEO, or as is the case with many captives, the captive manager, includes the following duties.

1. Develop short-term and long-term strategies to implement the board's strategic direction for the company.
2. Communicate on behalf of the captive with members, regulators, vendors, and other stakeholders. The CEO must provide consistent and accurate information to all these entities.
3. Evaluate the competitive market landscape, industry developments, and other factors that could affect the captive.
4. Assess and discuss the risks to the captive, ensuring they are monitored and mitigated effectively.
5. Retain, evaluate, and negotiate with the necessary professional providers to operate the captive.

The roles and responsibilities listed above serve as guidelines. Each captive insurance company is different, and the allocation of duties between the board and CEO will vary. However, once these roles are set, both parties—the board and the CEO—should operate within them. Problems arise when either party deviates from their agreed-upon roles.

To prevent this, the board and the CEO need to build a strong relationship. Essential aspects of this process include the CEO developing credibility with the board. This involves creating a sound agenda to implement the board's vision and actively listening to and learning from the board. Both parties should commit to building a partnership based on effective communication and trust.

A potential issue for captive insurance companies is the dual role of the captive manager. Unlike traditional CEOs who answer only to the board, captive managers report to both the board and the management firm that employs them. This can create divided loyalties and tensions, especially if the manager does not get along well with the board. In such cases, if the management firm does not have another individual to fill the manager's role, the board may need to change its captive management firm.

This is why captive managers should be truly independent and not affiliated with other professional vendors employed by the captive. Conflicts of interest can arise when a brokerage firm also offers captive management services. While many large brokerages have excellent captive management arms, it is wise for the captive insurance company and the board to offer the firm only one role—either as broker or captive manager—to avoid future conflicts.

No single position, whether board member or CEO, is more important than another. Building a framework for communication and trust based on a clear understanding of roles and responsibilities will help foster a sound, well-run captive.