Understanding the Essentials of the CEO and Captive Board Relationship

Essential on a puzzle piece

August 26, 2020 |

Essential on a puzzle piece

Earlier this month, I wrote about why it's critical for your captive insurance company board to conduct self-assessments of their performance. Equally important is the relationship that exists between the CEO and the board of directors.

For many captive insurance companies, this dynamic may be different but even more critical. This difference is the result of captives outsourcing the management of the insurer to a captive management company. In many instances, the captive manager fulfills the role of CEO, although that title may not be used.

The purpose of this article is to look at what constitutes the essential elements of a good CEO/board relationship and how these elements can be adapted to fit the management model employed by a large number of captives.

One of the key aspects of creating a high-functioning relationship between the board and the CEO is a clear delineation of roles and responsibilities. While a multitude of job descriptions exists for the board of directors, in my view, here are the salient points.

  1. Recruit, evaluate, and compensate the CEO or, in the case of captives, the general manager, of the organization. This includes the need to plan for succession, and yes, this is true even for captive insurance companies that use external captive managers. Captive managers can have a difference in opinion with the board, change personnel, be acquired, and close. So, a board always needs to be prepared to act, with a plan already in place, to replace the captive manager.
  2. Evaluate and determine the strategic direction for the company. This is not a task to be delegated to the captive manager. It is the board's fiduciary obligation to its policyholders and members to develop and monitor a common vision and mission for the captive.
  3. Establish a governance system for the captive. This framework is necessary to ensure the board speaks with one voice, understands its role, and understands how that role interacts with the roles and functions delegated to the captive manager. This includes the need for the board to select a chair that will act in the interest of all the board and constituents.
  4. Protect the captive insurance company's assets and members' investment. This means the board must be willing to ask the tough questions and act decisively when it believes the management is not fulfilling its obligation to the captive.

The role of the CEO, or as is the case with many captives, the captive manager, includes the following.

  1. Build out the short-term and long-term strategies for implementing the board's strategic direction for the company.
  2. Communicate, on behalf of the captive, with members, regulators, vendors, and other vested parties. Like the board, it's imperative that the CEO speak consistently and impart the same information to all these various entities.
  3. Evaluate the competitive market landscape, industry developments, and other factors that could affect the captive.
  4. Assess and discuss the risks to the captive, and ensure they are monitored and mitigated as effectively as possible.
  5. Retain, evaluate, and negotiate with the required professional providers needed to run the captive.

The roles and responsibilities listed above are intended as guidelines. Each captive insurance company is different, and how these duties are allocated between the board and CEO will vary. However, the key point is once these are set, then both parties—the board and the CEO—should operate within the roles that have been defined. Trouble begins when one or both parties decide to deviate from the jobs they have agreed to.

In order to forestall this from occurring, the board and the CEO need to build a relationship. Again, there are some essential aspects of this process that need to be in place for the relationship to work properly. The CEO needs to develop a level of credibility with the board. This requires building a sound agenda to build out the vision the board has communicated and to actively listen to and learn from the board. As the manager works to develop this credibility, both parties should be committed to building a partnership around effective and sound communication and creating a level of trust between the two.

One potential problem for captive insurance companies is the dual relationship between the captive manager and the board. Unlike the traditional role where the CEO is answerable only to the board, in the captive management relationship, the individual serving in this capacity has two masters. The first is the captive's board, but the second is the captive management firm that employs this person. This can create the potential for divided loyalties that both parties should guard against. It can also create tensions when the manager in the role does not get along well with the captive's board. The captive management firm may not have another individual to slot into this capacity, which may require the board to change the captive manager.

That is one reason, from my perspective, why the captive manager should be truly independent and not be affiliated in any way with other professional vendors that the captive employs. This is most likely to happen when the broker for the captive works for a large firm that can also offer captive management services. Many of the large brokerages have excellent captive management arms, but the captive insurance company and the board would be wise to offer the organization only one of the two roles, acting either as broker or as the captive manager. This eliminates possible conflicts down the road.

No one position, be it as a member of the board or the CEO, is more important than another in any organization. Building a sound framework for communication and trust between the parties based on a clear understanding of roles and responsibilities will help foster a sound, well-run captive.

August 26, 2020