Key Facets of Captive Insurance Company Board Assessments

White key on orange 3-d diamond

John M. Foehl | August 19, 2020 |

White key on orange 3-d diamond

As a board member for several insurers, one area of corporate governance I'm passionate about is board assessments. Recently, PwC, in conjunction with Spencer Stuart, produced monographs on this subject.

Getting Real Value from Board Assessments: Beyond "Check the Box" and Conducting Effective Board Assessments are geared toward Fortune 500 entities. However, a lot of the suggestions are easily transferable to captive insurance company boards. We will explore some key facets contained within the two papers and how they relate to captive insurers.

Before looking at how to utilize these concepts, some of the statistics are extremely informative. PwC asked why would boards not conduct an assessment of their individual efforts. Here are the top five responses, according to Conducting Effective Board Assessments, citing a PwC October 2019 Annual Corporate Directors Survey.

  • Sufficient existing process
  • Potential impact on board collegiality
  • Not appropriate to evaluate individuals' performance
  • Members' reluctance to be evaluated
  • Too time intensive

I struggle with the third and fourth bullet points. Does that indicate the board then believes it doesn't need to evaluate its CEO, and/or there is no need to do individual evaluations of any of the management or staff? And, let's be honest, how many of us in our careers look forward to evaluation time? But evaluations conducted correctly and impartially are extremely valuable in making your good performers great performers and helping to improve your mediocre performers. So, from my viewpoint, don't allow any of these excuses to dissuade your captive board from doing assessments.

Just as surprising was this statistic from Conducting Effective Board Assessments, citing a PwC October 2019 Annual Corporate Directors Survey: some 49 percent of directors believe at least 1 member of their board needs to be replaced. We wrote about this issue in 2018. More startling was the fact that 23 percent believe 2 or more directors should be replaced, according to Getting Real Value from Board Assessments: Beyond "Check the Box," citing a PwC October 2019 Annual Corporate Directors Survey. Reasons given for replacing a director, according to Getting Real Value from Board Assessments: Beyond "Check the Box," included directors that overstepped the boundaries of their oversight role, were reluctant to challenge management, have a style that negatively impacts the dynamics of the board, and are advanced in age so that their performance is diminished.

So, I will pose the question again: Given these numbers, how can you then decide not to conduct an individual assessment of the board? Boards abdicate their fiduciary responsibility in neglecting this component of their duty.

Assuming you've decided there is a need to conduct a board assessment, what are some of the keys to doing it successfully? PwC/Spencer Stuart offers the following advice.

  • Leadership is critical—the board chair needs to be fully vested in the process. Change will only occur if the chair champions it and works to ensure the board buys into the process.
  • It is not a one-and-done process—assessment needs to become an ongoing exercise with the goal of continuous improvement delivering better results. A one-time assessment is frankly useless, and time would be better spent on other issues.
  • Be fearless—boards need to be willing to have frank discussions around what's holding back their performance and how to address it. This includes the need to have an effective way to address individual board member performance.
  • Be accountable—once areas for improvement are identified, create an action plan for implementing the necessary changes, review the plan at each board meeting, and grade performance against the goals identified.

Captive boards need to take a hard look at whether they are ready and able to assess their performance. Possible impediments include a weak chair, sporadic board meetings with not enough time dedicated to things that really matter, boards that are too large, boards run by the captive manager and not by the owners, and the attendance of outside vendors at meetings.

Finally, what are the options for conducting the assessment?

PwC lists three in Conducting Effective Board Assessments, including their pros and cons.

  • Questionnaires and surveys—these are cost effective, convenient, and can be used annually to track changes since questions shouldn't change much on a year-over-year basis. The downsides include they can be viewed as a check-the-box exercise and there is limited ability to dig deeper on certain issues.
  • Facilitated discussions—allow for more information and context to surface; if the facilitator is skilled, he or she can get feedback from all the participants. But it takes time to set up and conduct such discussions, and they can require additional effort on behalf of the board chair.
  • One-on-one interviews—allow for individuals to be open and candid, especially if a third party conducts the interview. Like group discussions, interviews allow for more information to be forthcoming. One-on-one interviews do require time and effort to stitch the individual responses together into a cohesive whole and can be expensive.

For a captive insurance company board, a simple survey may be sufficient to get the process rolling. It could be supplemented on a 3- to 5-year basis with a facilitated session to flesh out issues. Regardless, as PwC suggests in Conducting Effective Board Assessments, "an effective assessment process contributes to strong board oversight, good corporate governance, and continuous improvement for directors and boards."

What's holding you back from conducting one?

John M. Foehl | August 19, 2020