15 May 2023ArticleAnalysis

Why independent NEDs matter to captives

Every captive requires a board of directors, who must meet at least once a year, typically in the domicile where the captive is based. However, what makes a good non-executive director (NED)? Should they be independent of the company that set up the captive? And what skillsets should they have?

These were just some of the themes debated in a webinar organised by Zurich and hosted by Captive International. A panel of captive experts and serving NEDs, agreed that the directors on the board of any captive play a crucial part in running of it—and might make the difference between success and failure. But the backgrounds and skillsets can vary hugely, with little requirements in most domiciles.

Moderated by Wyn Jenkins, managing editor of Captive International, the panel comprised: Paul Wöhrmann, senior ART manager/customer and distribution management, commercial insurance at Zurich Insurance Group; Andrew Bradley, the former head of group risk services at Nestlé and now an independent director to a captive; Xavier Groffils, captive manager at Solvay; Hans-Peter Wagenhoefer, director of insurance and reinsurance at German multinational BASF; Malcolm Cutts-Watson, chairman of RISCS CWC; and Françoise Carli, the co-founder of ZAKUBO Consulting.

Bradley stressed that any NED of a captive needs a deep knowledge of captives, how they work and, ideally, expertise in the wider insurance industry. They have a key role in ensuring a captive is well managed and fully compliant with local legislation.

He highlighted the importance of the basic attributes that a director needs to fulfil, such as turning up for meetings well-prepared and on time.

“We have to work with honesty and integrity,” said Bradley. “And we must be prepared to challenge some of the discussions and the decisions that are made in the captive board to ensure that the company is well run.”

Bradley stressed that directors need to learn about the business of the parent company to better understand how the captive fits in strategically. Is it risk-averse, does it invest in loss prevention, what’s its culture? And is it a company that’s prepared to take a long-term view on captives, or is it just there for a quick fix when the market’s hard?

Carli agreed with Bradley and added three more elements directors should consider. She urged directors to grasp the culture of the parent company and understand its risk appetite. She added that it is vital that directors are resilient to the stresses that every company undergoes and the way that those stresses are transmitted into its captive.

Carli offered the example of being involved in a pharmaceutical company where it was important to understand the risks involved in manufacturing life-saving drugs. She stressed these risks were very different from those a car manufacturer might face.

“You need to resist to pressure from your boss to deliver results, budgets, or assumptions,” she said. “As an independent board member, you can support and help the people who are more operational to resist this kind of pressure, so they can deliver a better job.”

Trust was an issue specifically highlighted by Cutts-Watson, who said that building trust between fellow directors, the chair and the management team is important. This can allow an open conversation between board members that lets people be honest with each other and gives them the opportunity to challenge decisions and properly manage any conflict.

“Inevitably, there are going to be issues where there’s a split board decision, and it’s important that a NED can help and come up with a resolution that everyone is comfortable with,” he said.

Wöhrmann focused on the word “independent” and what is meant by that. Does it mean a person who is not in touch with a legal entity or the parent company, in which case can a former employee who is appointed be independent?

He said that this very much depends on the definition of “independent” in the regulations that govern the captive, as in some countries a regulator requires independent captive board members and actually defines the role. This is not a standard rule, but in Wöhrmann’s view there’s room for interpretation.

In his personal interpretation, an independent captive director is a person who is not connected with the legal entities involved, including the parent company of the captive.

“I have learned that a second opinion from outside is sometimes very helpful to drive some initiatives and to get a second opinion in a discussion,” said Wöhrmann. “Therefore, independent board members can bring in fresh expertise, a different view, which needs to be discussed with a captive founder.”

Groffils agreed, stressing that a captive director who is external to the parent company can bring in additional values that benefit the captive, such as local knowledge of the domicile that the captive is based in, or contacts with local regulators and other authorities.

Wagenhoefer pointed out that appointing a captive director who has experience in the insurance industry has its advantages, as if an existing captive starts to look at new markets or new coverages, it will need to assess the situation as much as possible.

Carli added the caveat that the longer a director sits on the board of a captive insurance company, the less independent they become, as the more familiar they become with the company the more tied to it they are.

“It is the duty of every board member, if there is a possibility of conflict, to flag it up immediately,” she stressed, underlining that the independent viewpoint is central to that.

Bradley agreed on this point, saying that there needs to be a balanced view of what’s going on within the captive, with any conflict being properly managed at a board level.

The panel concurred that the job of being an independent board member is not static: board members must be willing to train, to keep up with changing rules in the domicile and be willing to adjust to the demands of the job.

“It is not an easy job to be an independent board member,” Carli said. “I think that should be clear in the mind of everybody. It requires work. You cannot be a good independent board member in a captive if you don’t take the time to read the documents, to understand what’s going on, and to stay up to date with legislation and regulation.”

Wöhrmann concluded that the world of risk management has become much more complex in recent years, requiring captive owners to draw on more extensive expertise in managing their captives and, of course, in managing the associated economic environment of those firms. As a consequence, he thinks, independent captive board members will play a more important role by making their expertise available for their captive.

The full debate, which took place via video link,  can be viewed here.