The current climate for captive insurers is gravitating toward encouraging captives—including single-parent, association and agent-owned—to appoint experienced, independent directors to their boards. Regulators (National Association of Insurance Commissioners and Bermuda Monetary Authority) and rating organizations (A.M. Best and Standard & Poor’s) have all come out in favor of the appointment of independent directors. They believe that independent directors add value by providing independent, experienced guidance to captive owners that is separate and distinct from a captive’s other advisers, including as managers, lawyers and accountants.
Their appointment could also help a company avoid a lawsuit. Independent directors do not have conflicts of interest, can provide experience that is different from others on the board and usually have a broad captive insurance perspective.
Another point worth considering is that some captive managers may have other interests, such as brokerages, reinsurance brokerages, actuarial, claims, asset investments. Some may even provide leads for a possible fee for premium financing. Furthermore, captive owners can mistakenly believe they get all the advice they need from their current advisers.
Independents on the Horizon
In the coming months, expect to see captive owners reaching out to independent directors, both because of their value-added consulting expertise and because regulators and possibly rating agencies will require it. This practice already exists in some overseas jurisdictions, and with Solvency II, it could become more important as it may ultimately apply here in the U.S.
What is often overlooked is the value-added experience independents offer. Here is a partial list of services normally expected of experienced independent directors:
- Help in selecting the reinsurance intermediary. They provide an independent perspective separate from the reinsurance broker or risk manager.
- Advise on acquisition opportunities of the captive, if any, such as buying a third-party administrator, a licensed admitted insurance company, or an investment in a new start-up retail brokerage firm. These sophisticated ideas are an expansion of most captives’ business plans and need to be considered carefully given the risks they present. Keep in mind, however, that the captive landscape from the 1970s is littered with the carcasses of captives that ventured ill-advised into such businesses.
- Help in evaluating a reinsurance program’s structure and economics.
- Attend and advise on the rating process with outside rating agencies, such as A.M. Best.
- Attend meetings with insurance regulators, especially if there is a regulatory concern.
Independent directors are also asked to vote on many issues, including:
- Should the captive change fronting companies?
- Should the captive make a large dividend payment to the parent corporation, or should it return capital to its owners?
- Should the captive write direct procurement policies for the parent corporation?
- What law firm should handle uncollectible reinsurance?
- Should the captive litigate or arbitrate certain claims?
- Should it change asset investment managers?
- Should the captive expand into other lines of business, such as writing third-party reinsurance business?
- Should it move from an offshore domicile to a domestic domicile?
- How can the captive reduce the cost of its reinsurance program?
- How does a captive evaluate its various service providers?
- What are the consequences of executing reinsurance or fronting agreements?