Airmic Captives Long Read: Importance of iNEDs rising as captives become more complex

Importance of iNEDs rising as captives become more complex

• Guernsey, Isle of Man only domiciles with mandatory iNED requirements
• Some companies reticent about hiring outside board members
• iNEDs should not have too many boards to fulfil their function correctly
• Diversity of iNEDs should be considered during selection, including their education

As the popularity, complexity and sophistication of captives continues to increase, the importance of independent non-executive directors (iNEDs) is further emphasised.

Traditionally, the role of a captive was optimising risk management and centralising insurance procurenment.

Today, captive owners want more from their captives and are utilising them for an expanding range of lines, such as third-party business, cyber and international employee benefits, while often building more mature reinsurance structures.

In this environment, it is important for iNEDs to be carefully selected to be a good fit for each captive they serve.

An iNED should not be present on too many boards concurrently so they can support the captive board to the best of their ability.

Despite their importance increasing, Guernsey and the Isle of Man are the only major captive domiciles that currently have mandatory iNED requirements.

Guernsey’s Licensed Insurers Corporate Governance code requires a captive’s board of directors has at least one iNED, which is someone with no relation to the captive manager or shareholder.

In Switzerland there is a requirement for all insurers to have an iNED, but captive reinsurers with a C3 licence can request an exemption from the Swiss Financial Market Supervisory Authority (FINMA) and it is almost always approved.

When someone applies to be an independent board member on a Swiss captive, they must submit an application to the Swiss Financial Market Supervisory Authority (FINMA) for approval.

Independent captive board member Andrew Bradley said this includes a declaration on what other mandates or positions they hold, to ensure that they have not only the knowledge but also the time to undertake the role in a professional manner.

“Consequently, I do not believe it is possible for someone to accumulate multiple board positions,” Bradley told Captive Intelligence.

Other jurisdictions such as Singapore do not require outside board members, but the authorities are actively encouraging captives to incorporate them.

Sandy Bigglestone, deputy commissioner for captive insurance at the Vermont Department of Financial Regulation, told Captive Intelligence the State had not yet considered mandatory iNED legislation.

“I find the concept very interesting and have been following the discussions,” Bigglestone said.

Vermont’s regulatory requirements allow for independent directors, so companies do have the option.

Bigglestone said there are requirements in the State for collecting biographical affidavits of captive directors and officers, and for disclosing conflicts of interest, in addition to other regulatory activities designed to help Vermont determine the suitability of the captive board and leadership.

“During examinations we conduct a full assessment of governance of each captive insurance company, and as a result, make recommendations if needed,” she told Captive Intelligence.

“Further, certain group captives [risk retention groups] are required to follow prescriptive governance standards, which are designed to place the governance of the group captive in the hands of its member-owners and focuses on independence and other aspects of good governance.”

Bigglestone estimates that the exact number of captives in Vermont that have iNEDs is around 10% or less. 

Gary Osborne, vice president at Risk Partners, said that in the US market, he only sees the need for iNEDs for group captives and RRGs where the members could need independent advice from their manager who could be seen as having conflict.

He told Captive Intelligence that he is aware of at least a dozen RRGs utilising iNEDs in South Carolina.

Luxembourg is another large domicile where it is not mandatory to have iNEDs sitting on a captive board.

Valerie Scheepers, head of the non-life and reinsurance department at the Commissariat aux Assurances, said that the mandatory introduction of iNEDs has not been discussed in the domicile “considering the specific environment and risk profile of a captive”.

“We more often see a mix between representatives of groups and of the captive management company,” Scheepers told Captive Intelligence.

“This mix ensures an alignment between the interests of the group and the strategy developed for the captive and ensures also a good level of understanding of the local regulatory requirements.”

Francoise Carli, founder and CEO at Zakubo Consulting, said that although it is not compulsory, the regulator in Luxembourg has sometimes been approving captive licences after asking for an independent board member to be added to the board.

“Most of the time, it’s for having the necessary competencies and skills on board,” she said.

Bradley added that outside the world of captives it is commonplace to have independent non-executive directors on company boards.

“So why should we be making exceptions in insurance, especially if we want to raise the level of professionalism and understanding in the industry?”

Increasing importants

The importance of independent captive boards will continue to proliferate over the next few years as a result of certain market pressures.

“When we look back at captives from 30 years ago, they were generally writing primary layers for a property programme,” said the recently retired Paul Wöhrmann, former head of captive services at Zurich.

He added that over time additional lines of business have been added with capitalisation increasing “and the captive owners are telling the fronters that they would like more exposure”.

“We also have some new risks like cyber and employee benefits which have made the business more complex, and the expertise needed is different today,” Wöhrmann said.

In a discussion recorded for the Global Captive Podcast, Guernsey iNED Nick Wild said a lot has changed when it comes to roles of directors and for the broader governance of captives over the past 30 years.

“Certainly, the element of corporate governance and regulatory oversight has increased massively over that period and that’s a good thing overall,” Wild said.

“It has meant that the role of the independent non-executive director has become much more focused than it used to be.

“They’re [the regulator] expecting that director to raise with them problems if they arise and are not properly resolved. Now that happens extremely rarely, of course, but it’s an extra onus on the iNED.

“The iNEDs are, in my view, much more engaged and involved than they used to be. They actually want to not just participate in the board meeting but participate in the business.

Wöhrmann noted the importance of the global issues concerning natural catastrophe risk, which are resulting in higher prices on property programmes.

“This could also lead to a shortage of capacity, and captive boards could probably help to get new contacts in the markets,” he said.

Wöhrmann added that iNEDs could aid discussions on what reinsurance structures are “fit for purpose” for the respective captive owners.

“There could be interesting advice from independent captive boards who have seen in their former jobs a lot of structures and can provide some advice,” he said.

Carli said most captive iNEDs are over 50 if not over 60, and they have piled up a certain amount of experience that is very useful for captives.

“Most of the young people, the captive manager, the insurers, have only been in a soft mark,” she said.

“This is what an independent board member can do for a captive, they can have a different angle on assessing risk because they have the experience accumulated and different ways of seeing things.”

Concerns

Despite the benefits, some companies are still reticent about having iNEDs participating on their captive boards.

Bradley sad there is a perception in some companies that having an outside board member is going to complicate the functioning of the board as well as incurring additional cost.

“They cannot necessarily see the value of having a truly independent member of the board,” he added.

Bradley said this is not something that is going to change “overnight”.

“But hopefully we can build up over the coming years and encourage companies that even if they do not need an outside board member in their domicile, it might be a good thing to have.”

Carli said that a lot of the things that happen within the captive are, one way or another, going to reveal some of the “know-how, some of the issues, part of the strategy, and the people in the company”.

“Most of the time, the CFO or the chief legal officer are afraid how somebody from outside could use this information,” she added.

“It is not easy because they know nothing about insurance, but they are able to stop the process of hiring an independent board member.”

It is important that independent board members are carefully selected to ensure they have the necessary knowledge, skills and experience to complement the board.

Bradley said we should look closely at what we consider as “independent” in terms of a captive board position.

“In many companies a retired employee, perhaps the ex-captive manager or risk manager, for example, is added to the captive board directly after retirement,” he said.

“While not questioning the competence of the individuals involved, can we really consider them truly independent and able to challenge decisions?”

It should also be considered that an iNED cannot sit on the board of too many captives if they want to do their job properly.

“There should be a limited number of boards where you are involved,” Carli said.

“If someone is on 22 boards, the only thing they do is somehow tick the box.

“They cannot be involved if they are on too many boards because they take place at the same time in the year.”

Julia Graham, Airmic CEO, said in the recent iNED GCP discussion that directors need to be aware of the number of appointments they take on, but she did not think a prescribed number would be the correct way forward.

“There’s no blueprint for this and I think the answer is driven by the nature, scale and complexity of the boards that you sit on,” she added.

“I’ve got one board, which is a material investment of my time, there’s no doubt about that. 

“I’ve got another board which is not, and I cannot say that one plus one is two, it is more like one is five, plus one is six, so I think to some degree it’s always going to be an extension of what you’re doing and what is demanded of you.”

Talent

With captive numbers growing across the world and some captives appointing more than one iNED, there is an ever-greater demand for qualified professionals to fill the positions, but not necessarily the talent.

Carli said it is important that we consider diversity when it comes to appointing iNEDs.

“I would love to clarify what we mean by diversity, and what we mean by independence in certain areas,” she said.

“Let me just point out, for me, diversity is not only women or men, it’s not only young or more senior, but diversity is also linked to education.”

Carli said that when considering education, somebody who did their studies in the United States or in England, or in Germany “does not see the same things”.

“If we look at all the boards that I’ve been on, it is difficult to find people from a different continent, for example.”

Carli noted that for the last few years, generally speaking, board members have started to be recruited by head-hunters, but there are no recruiters specialised in hiring for captive boards.

“This could change tomorrow because they see the potential and they would have their list of potential candidates,” she said.

“But for me, the only real candidate is not the one that is on the list but is the one that fits the needs, and for that, we need to have a clear assessment.”

Carli said we need to find a sufficient self-assessment process so that boards can figure out whether the person that is going to hired as the independent board member is the right person.

“This is not only a question of skills and knowledge, there’s also a question of mindset, of culture, performance, of understanding, and positioning,” she said.