Captive Insurer Boards and Blockchain Technology

Members at a board of directors meeting

February 07, 2018 |

Members at a board of directors meeting

The corporate governance demands on captive insurers' boards of directors continue to escalate. Nowhere is this more evident than with the recent announcement from Strategic Risk Solutions (SRS) regarding its formation of a new business unit—Governance, Risk, and Compliance. One area captive insurer boards need to understand better is blockchain technology—the new distributed ledger that is rapidly gaining acceptance.

Last month, we published an article providing a summary of the National Association of Corporate Directors (NACD) 2018 Governance Outlook. As part of the conclusion, we urged captive boards to consider joining this organization simply to access some of the useful educational material it produces. NACD just released a new article titled "NACD Boardroom Guide to Blockchain," which does an excellent job of arguing for why boards need to become conversant with this new technology. For those of you still trying to determine whether membership in this organization is worthwhile, this is one more reason why. 

The monograph is comprised of two parts, and the first section deals with a high-level description of what blockchain technology is all about. The author, Jesse Rhodes, notes in the opening paragraph, as follows.

Blockchain—perhaps the most well-known form of distributed ledger technology—has been a recurring news item over the course of 2017. In July, Delaware became the first state to allow businesses incorporated there to use blockchain for record-keeping purposes—including maintaining lists of shareholders and issuing stock. This development is significant because at least 60 percent of U.S.-based corporations are incorporated in Delaware.

This means that many single-parent captive owners already have approval to utilize this new ledger system, at least for other corporate purposes. 

The intent of this article is not to focus on what blockchain technology is. For those readers seeking a basic education, there are several articles available within that provide this information. Our particular interest in the NACD article is really the second section of the piece dealing with "Why Blockchain Belongs in the Boardroom." It involves an interview with Stuart R. Levine, chairman and CEO of Stuart Levine & Associates and a current director for Broadridge Financial Solutions. His comments help to reinforce our own thinking about the critical need for boards to focus on, as he terms it, "forward-thinking strategic conversations."

We'll provide a synopsis of Mr. Levine's comments and add our own additional thoughts and analysis.

Why Blockchain Is a Board-Level Concern

Mr. Levine suggests the following reasons:

  1. A director has a primary responsibility to the shareholders of the corporation to participate in strategic discussions in an engaged manner. For captive boards, you can easily substitute the term "policyholder/member" for shareholder. While captive insurers may not have shareholders in the sense of the word used here, a captive board member owes the same level of responsibility to the members doing business with the captive.
  2. A director should be knowledgeable enough to help develop a strategic road map for allocating capital to begin implementing a blockchain system. For most captives, capital is probably one of the most finite resources. Therefore, it's incumbent on the board of directors to ensure that dollars are allocated properly for the long-term benefit of the members. If you don't understand the concept and the technology, how can you then make a rational decision regarding the allocation of capital?
  3. A director needs to understand what digital skills and capabilities are necessary for the senior management team to possess in order to harness this new digital ledger system. A critical role for directors is in assessing the abilities of their internal leaders and/or external service providers. If you, as a director, don't have at least a rudimentary understanding of the concept, how can you expect to fulfill this fundamental task?

How Boards Can Effectively Initiate a Conversation on Blockchain

Mr. Levine states, "I'm a great believer in ongoing education for the full board." We concur completely with his comment and suggest that boards should spend more time on education and generative thinking than they currently do. Too many boards get bogged down in reviewing historical financial reports and concluded transactions. While captive insurer board members certainly have a fiduciary responsibility to understand the financial condition of the captive, this can be accomplished effectively without a lot of time. In doing so, this then allows more time in the agenda for the board to focus on its own education needs. 

In terms of blockchain technology, boards should begin the conversation with the CEO or their outside captive manager. Ask them to prepare a presentation on blockchain.  Doing so will allow the board the ability to gauge how well its CEO and/or captive manager understands the process. Like many technical things, the ability to communicate the essence of the concept in terms that nonpractitioners can grasp is key. If your CEO or captive manager suggests they would like to bring in an outside expert to talk with the board, by all means accept the offer. However, remember your responsibility outlined in item number 3 above. At some point, you’ll need to assess the digital skills of your own management team. If they are lacking, you should ask questions about how your CEO or captive manager is going about becoming educated.

The time for a conversation on blockchain within your captive's board is now. As the author of the NACD article says, "Blockchain could turn out to be the most disruptive technology since the Internet."

February 07, 2018