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First Impressions—SRS Governance Survey

Board Room Meeting
February 20, 2019

Last fall, Strategic Risk Solutions (SRS) and IRMI organized a survey to determine what kind of corporate governance some captive insurers, risk retention groups (RRGs), and risk pools have in place. Derick White, who is managing director of corporate governance and regulation for SRS, developed the survey. Preliminary results were published in the February 2019 issue of Captive Insurance Company Reports. We have written extensively about governance and captives and thought we'd provide our own commentary on the initial results. (Editor's note: This article is based solely on the opinion of the editor and in no way reflects the views or opinions of SRS and its management team. Please email the editor, John Foehl, with any questions you may have about this article. )

The genesis of the SRS report is the increased scrutiny of the governance practices of corporations given the issues that have surfaced over the last 2 decades. As we have noted in previous corporate governance articles for captive insurers, while most of the regulatory oversight enacted does not have a direct impact on captives, best practices have a way of seeping into exams and audits conducted by external auditors and regulators. We have therefore argued that captives should hold themselves to the same high standards to which public corporations are held. It seems preferable to be ahead of the curve instead of trying to play catch-up. What follows are our thoughts on the survey results highlights. We intend to do a follow-up of some of the more detailed results.

The overall sample size of the survey results was encouraging with 195 individuals providing responses. The distribution was weighted toward single-parent (pure) captives, which represented more than 50 percent of the survey respondents. Other participants included group captives, RRGs, and public entity risk pools. The large number of responses from single-parent captives may have skewed the results slightly, but our experience would suggest the responses would not differ substantially if a larger number of the latter three groups had been more highly represented.

In the "Highlights" section of the report, SRS noted that 44 percent of the captive respondents only meet annually. While we are not surprised by this finding, it is somewhat troubling. Back in 2017, we wrote an article titled "5 Key Pillars of Captive Insurer Corporate Governance." Two of those pillars are accountability and responsibility. We describe accountability as follows: "Accountability means having ownership of the strategies and tactics required to attain organizational goals." Responsibility is closely related, the article explains, because "managers and board members are vested with the authority (accountability) for acting on behalf of the captive insurer, they should therefore accept full responsibility for exercising those powers. In the captive, the expression of ideas and implementation of those ideas need to be tempered by preparation so that the actions taken are informed."

It is also difficult for us to reconcile boards only meeting annually with a board exercising its authority and responsibility for the captive insurer. While we certainly understand the reliance on external managers, we don't believe boards can fulfill their fiduciary obligations to the captive in a single annual board meeting. Most public corporate boards meet four to six times per year and also use standing committees to help monitor the company's governance. The highlights also point out that the majority of captives from the survey do not have any standing committees.

One area where we do give high marks to captive boards that were surveyed is in the size of their board. A full 71 percent of the survey participants reported their boards were comprised of 7 or fewer board members. In our opinion, a smaller board, defined as nine or fewer board members, is more likely to engage in thoughtful high-level discussions on governance that do not devolve into debating sessions. It is also easier to reach a consensus with a smaller group. 

The remaining highlights suggest captive insurers still have a lot of work to do before they are considered to be following corporate governance best practices.

A majority of respondents (68 percent) report that they have a code of ethics or conduct in place; however, for public corporations the number would ostensibly be close to 100 percent. A well-written code of ethics is important because it clearly lays out the captive's mission, values, and principles and links them with expected standards of professional conduct. Written correctly, the code of ethics can be used as a benchmark to measure both individual board member and overall organizational performance. Having a code of ethics encourages the board to engage in discussions concerning ethics and compliance, a responsibility that regulators deem to be necessary.

Less than 20 percent of captives from the survey have formal succession plans in place, either for the board itself or for the management team. In our view, succession planning is one of the key responsibilities with which a board is tasked. We highlight this in an article titled "Strategy and Risk: 5 Key Questions for Captive Insurers," where we said, "Integrate succession-planning activities with long-term strategy oversight. (In other words, always be planning for the unforeseen—your current captive manager is acquired, etc.)." Given how tight today's labor market has become, the lack of succession planning is indeed troubling. High-performing candidates are normally not easy to find and become even scarcer when they are being pursued by multiple organizations.

Almost 60 percent of captives surveyed lack a formal onboarding and educational process for directors. Making sure new directors are brought up to speed on the strategies and critical issues facing the captive eliminates wasting time in board meetings providing answers to questions board members should already be familiar with. This is especially true when a board only meets annually and where time is the most precious commodity.

It is clear from the SRS survey highlights that captive insurers have a way to go before we are on the same plane as our larger commercial cousins. This might have been acceptable back in the early days of the industry when we were the scrappy upstarts challenging the status quo. However, today the captive industry has matured and captive insurers seek to be considered equal to traditional insurers.

At your next board meeting, spend some time discussing how you can up your governance game plan.

Copyright © 2019, International Risk Management Institute, Inc.

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