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Upping Your Governance Game Plan

Governance Game Plan
February 27, 2019

We recently reviewed the report from the Strategic Risk Solutions (SRS) corporate governance survey. While the overall results are encouraging, it is clear the captive community still lags behind our commercial competitors when it comes to good corporate governance. Part of this probably stems from the fact that there is less regulatory oversight of governance at the captive level. And captive owners may feel an emphasis on policies could be detrimental to the dynamics of operating the captive where its owners are also the policyholders. We'd like to see captives up their governance game plan. In that spirit, we offer the following suggestions for how to go about this process.

Where To Begin

A solid governance foundation relies on the creation of a policy manual for the captive. Bizfluent, in a September 26, 2017, article titled "What Are Policy Manuals?" by Marci Reynolds, defines "policy manual" as follows: "A policy manual is a collection of documents that define an organization's rules, policies and procedures, and helps staff and management run the business. Policy manuals may be offline, paper documents and/or virtual documents, which are stored electronically."

We like the fact that the definition includes "virtual documents" since there has been some research that suggests the traditional policy manual is not truly effective. A December 10, 2014, Inc. article by David Finkel titled "Why Policies and Procedures Manuals are Dead (and What You Should Replace Them With)" discusses adopting an "ultimate business system" that can be easily accessed and continually updated. No matter what you decide to call this collection of materials or how you decide to store them for access, codification of the culture, ethics, and best practices that you want to instill in your organization is important.

In deciding what to include in your policy manual, a review of a checklist we published in 2016 can help get you started (see "Governance Standards Checklist for RRGs and Captives"). Item 11 of this checklist asks about a code of ethics policy, which according to the SRS survey 30 percent of captives still lack. An ethics policy is a mandatory standard for all licensed insurance companies in the United States. In fact, almost every domicile requires the board of directors of these companies to annually attest to the fact that they have read the ethics policy and have complied with its requirements.

For the companies I serve, this takes the form of an annual questionnaire, which I am required to answer and sign. The two documents discussed below are then retained by the company to provide to regulators if requested or in the unlikely event that a director is found to have not followed the policy in question.

The first questionnaire is a conflict of interest disclosure, and the second is a statement regarding the handling of proprietary and confidential information. While not all the questions in the conflict of interest disclosure may be germane to captive insurers, we list a number of them below for consideration to include as part of an ethics policy.

  • Have you or your affiliates (defined as spouse, relative, in-law, significant other residing in your home, or parent or child residing outside of the home) entered into any contract or engaged in any business transactions with Our Captive Insurer, other than the purchase of insurance offered by the captive during the past year? If "yes," state the nature of the transaction and the amount involved.
  • Are you or your affiliates an officer, director, employee, or more than a 5 percent shareholder of any insurer, insurance holding company, or any insurance agent or broker? If "yes," state the name of the entity and the nature of your relationship.
  • Are you or your affiliates an officer, director, employee, or more than a 5 percent shareholder of any company that has any interests that are in conflict with the interests of Our Captive Insurer? If so, state the nature of the company's business.
  • Have you or your affiliates received or been promised money or anything of value (other than gifts of nominal value) from any lawyer, claimant, insured, investigator, appraiser, contractor, or vendor having business relations with Our Captive Insurer? If so, explain in detail.
  • Are you a party to any lawsuit? If so, please list the parties to these lawsuits and describe the underlying facts of the lawsuits.
  • Have you or your affiliates disclosed any confidential information regarding Our Captive Insurer to any person other than persons retained by Our Captive Insurer who are required to know such information for the proper discharge of their duties? Please describe.
  • Have you or your affiliates used any confidential information regarding Our Captive Insurer for profit or other benefit of any other party other than Our Captive Insurer? Please describe.
  • Are you or your affiliates aware of any violation, or facts or circumstances that would lead to a violation, of Our Captive Insurer's code of ethics? If so, please describe.

Hopefully, this article provides a useful template to begin the process of upping your governance game plan. In future articles, we'll explore other topics for potential inclusion in a policy manual.

Copyright © 2019, International Risk Management Institute, Inc.

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