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AIRMIC Report on Independent Directors for Captives

Chairs at conference Table 600x300
June 17, 2019

A recent report published by the Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC) (formerly known as the Association of Insurance and Risk Managers) titled Captive Governance is a joint effort with AON and is intended to provide, in their words, "a practical guide for independent non-executive directors on captive boards."

US-based captive professionals may not be familiar with AIRMIC, which is largely comprised of Financial Times Stock Exchange 100 companies and multinational businesses. Therefore, the target audience for this report would seem to be single-parent captives owned and operated by these companies. Below is a review of the report relative to insights that would be germane to group captives in the United States, including some of our own commentary.

The AIRMIC introduction begins by defining what it calls an "iNED" or independent nonexecutive director. We are strongly in favor of the definition they chose to use, which is drawn from the UK Corporate Governance Code. The code suggests a director's independence may be compromised if they meet any of the following characterizations.

  • Are, or have been, an employee of the company or group within the last 5 years
  • Have, or have had within the last 3 years, a material business relationship with the company or group
  • Have received or receive additional remuneration from the company or group apart from a director's fee
  • Have close family ties with any of the company's or group's advisers, directors, or senior management
  • Hold cross-directorships or have significant links with other directors or senior management
  • Represent a significant stakeholder or shareholder
  • Have served on the board for more than 9 years from the date of their first appointment

They go on to point out that an iNED functioning as a true independent can help the captive demonstrate to the local regulators that it takes its captive governance requirements seriously. However, the paper then points out that for most European captive domiciles, independent directors are not compulsory.

This issue also exists in the United States, where many captive domiciles do not require independent directors, particularly those that would meet the definition as outlined above. This is coupled with the fact that many domiciles do require a resident director, who the regulators then assume fulfills the functions of an independent director but again may not meet the requirements as stated in the AIRMIC document.

The problem, as we all realize, in adopting a corporate governance model with truly independent directors is twofold. First, any regulatory authority that adopts a true independent director requirement puts itself at a competitive disadvantage against all of the other domiciles that do not require one. Second, captive owners would need to add the cost of an independent director to their expense load, which is something most captive insurers would rather avoid.

If this were to change, the AIRMIC paper offers some qualifications for how to judge an independent director. These are as follows.

  • Bring relevant skills and experience currently missing from the board
  • Offer insight into the parent company's business (or in the instance of a group captive, in the business the members are in). Editor's note: As a further aside, this is the problem with domiciliary requirements for a resident director. In many instances, these individuals are attorneys, retired regulators, or captive managers that may not have the requisite expertise as indicated above.
  • A proven record of behaving with integrity and providing sound advice in other board positions
  • The capability to understand and comply with the law
  • Relevant professional qualifications
  • Confidence, intuition, and a proactive nature to challenge assumed wisdom and answer difficult and informed questions
  • Potential finance and technology acumen
  • The time available to actively carry out the responsibilities required by the board of directors

The list above provides a good starting point for captives seeking to identify and recruit independent directors. From our perspective, captives would be well served by doing so. It is apparent that the complexities of the risk management and insurance captive insurers are tasked with undertaking continue to grow more challenging. Therefore, captive insurance companies should upgrade their boards as well.

However, realistically, the recommendations and reasons for independent captive directors continue to grow, and it is going to take a sea change in the industry for captive insurers to adopt this best practice. Those that have are to be commended.

Copyright © 2019, International Risk Management Institute, Inc.

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