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Captive Insurance Can Be a Reputation Risk Solution

Reputation Risk
February 18, 2016

Reputation-linked captive insurance products can help foster better corporate governance and protect directors at the same time is a central theme of "Why Having the Backs of Good Directors Is Better Than Clawbacks," an article by Paul Liebman and Nir Kossovsky that appears in the January/February 2016 issue of NACD Directorship, published by the National Association of Corporate Directors (NACD).

"Clawbacks are the top reason [corporate] compensation committee directors feel they are in the crosshairs" of activist investor campaigns, Mr. Liebman and Mr. Kossovsky state in the article.

For readers who want to explore how a captive can be a possible reputation risk solution, the authors specifically note the reputational risk-based indemnification instruments of Steel City Re as an example. Its instruments are structured like a performance bond or warranty with indexed triggers. They suggest the coverage demonstrates the quality of governance and helps absolve board members of damaging insinuations by activists.  The Steel City Re captive insurance product is only available to companies meeting specific index-driven reputational controls.

Here is an example of how the reputation risk instrument works. An executive's bonus capitalizes a captive insurance instrument. If an adverse event occurs and the company's reputation is impaired by wrongdoing—whether or not the chief executive officer or chief financial officer was aware—the captive insurance would drain the executive's bonus to indemnify the company. The article suggests this solution meets both the intent of the Sarbanes-Oxley Act and the disclosure intent of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, the instrument also preserves the board’s authority as the originator of the solution and determinant of the trigger thresholds and costs.

The full article by Mr. Liebman and Mr. Kossovsky is available on the Steel City Re website.

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