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Key Information for Captive Board Members

Captive insurance is a whole different ballgame from other insurance fields. Although all insurance firms essentially protect the interests of policyholders, some unique roles and functions make captive insurance a distinct area of specialization within the insurance sector. Even if you are an experienced insurance professional, working in the unfamiliar realm of captive insurance will likely entail a significant learning curve.

Things can get even more complicated if you’re asked to become a board member of a captive insurance firm or risk retention group (RRG). Apart from familiarity with the intricacies of captive insurance, you will have to fulfill the roles expected of a board member.

Primary responsibilities of captive insurance board members

As a board member, you will be expected to employ fiduciary responsibility to secure the financial stability of the firm you are working for‒the captive. This entails solid grounding in the fundamental concepts of captive insurance and the responsibilities of being a company director.

Essential knowledge for captive insurance board members

You also need to be familiar with some financial aspects to steer company policy, some of which are outlined below.

Financial statements

All captives will have to generate the following financial statements periodically:

  1. Balance sheets
  2. Statement of revenue and expenses (income statement)
  3. Statement of cash flows
  4. Statement of members’ (stockholders’) equity

These statements are “backward-looking” or “historical”, in that they are only accurate during the dates or periods specified in the reports. Of these four, the statement of cash flows is considered the most significant by experienced financial professionals, although it tends to get overlooked in most regular board meetings.

Captive insurers generally employ accrual accounting when creating financial reports. This particular accounting method displays income that may not have been collected yet and expenses that have yet to be paid.

Cash flow statements typically group the information into three sections:

  1. Operating activities. This is where income is converted from “accrued” to “cash”.
  2. Investing activities. This details the sale and purchase of company property, equipment, securities, and other long-term investments.
  3. Financing activities. This details the retirement or issuance of the captive insurer’s equity, debt, and dividend payments.

The operating activities section in the cash flow statement will subsequently be compared against the net income recorded in the income statement. If the recorded cash flow exceeds the net income, the company is “cash flow positive”. A consistently positive cash flow means that the company can generate sufficient cash to expand its investment portfolio and ensure equity while managing the costs associated with operating a business.

Conversely, consistently negative cash flow signifies the company’s inability to function profitably. This could lead to higher interest and difficulty in managing capital ratios.

Statement of actuarial opinion

Captive insurers will also have to release a statement of actuarial opinion at least once a year. The company usually enlists an independent accredited actuary to prepare this report, which typically coincides with the closing of the financial statements at the end of the year. This schedule makes it possible to include the necessary reserves on the balance sheet.

Apart from having a thorough understanding of the four financial statements mentioned previously, board members are expected to read actuarial opinions and know how to interpret them. This is generally required of most captive insurance board members.

Actuarial opinions should contain the following:

  1. Qualifications of the appointed actuary. Appointed actuaries have to be individuals rather than companies. Directors should determine how long the actuary and actuarial firm have been preparing actuarial opinions for the captive.
  2. The actuarial opinion’s scope. The statement should indicate an examination of the methods and assumptions utilized in determining reserves. It should also mention the source of the data used in preparing the opinion.
  3. An estimate of the range of reserve. This indicates the range surrounding the central estimate of the reserves. Some variance is expected in reserve estimates, even when utilizing the same methodologies.
  4. A discussion and analysis of deficient/redundant reserves. This is an assessment of the risk of material adverse deviation from the range specified in the actuarial statement.

Growing into your role as a captive insurance board member

As important as learning all these aspects is, they are only starting points for future growth and development as a captive insurance board member. It is vital to continue learning and growing into your role to become a valuable contributor to the company.

As with all companies, thorough knowledge and consistent engagement are crucial for board directors at captive insurance firms. Continuous learning and constant growth will enable you to better fulfill the functions expected of your role and serve the company’s needs. Gaining as much knowledge as possible in the different aspects of a captive’s operations will help you become a more effective board member.

About Caitlin Morgan Captive Services

Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (855) 975-4949