Experts call for global standards on composition of captives’ boards

A global standard or set of guidelines agreed on by the captive insurance industry would potentially enhance the governance of captive insurers, especially around the benefits and use of independent non-executive directors.

That was one of the key takeaways from a GCP Short podcast broadcast by Captive Intelligence in December, which featured Paul Wöhrmann, head of captives services at Zurich, along with Andrew Bradley, Malcolm Cutts-Watson and Francoise Carli, who all sit on captive boards. The panel highlighted the discrepancies and inconsistencies in the way domiciles approach this issue and agreed that an element of standardisation would be of benefit. You can read the Captive Intelligence writeup here.

The podcast, which also featured Xavier Groffils, manager of the Luxembourg captive owned by Belgian chemicals company Solvay, and Hans-Peter Wagenhöfer, director of insurance and reinsurance at German multinational BASF, examined the expectations captives should have of non-executive directors, the best way of selecting them and the lack of diversity of such directors.

Bradley said that, having extensively research the regulatory requirements of different domiciles, the only document he could find relating to the role of non-executive directors was the “Captive Governance Guide” published by UK risk management body Airmic in 2019. He noted that Airmic is due to update this guide in 2023.

He noted that very few captives will appoint independent non-executive directors unless it is required by a domicile. “If there is no requirement, they will rarely do it—unless they are very forward-looking companies,” he said.

Wöhrmann delved into the qualities he believes companies should seek in non-executive directors and cited the “fit and proper” requirements of directors more generally set out in Solvency II regulations. He noted that most regulators require a director to be a natural person and not a legal entity; some insist on residency and many also stipulate they cannot have worked for the company in question for at least two years.

He added: “Since the complexity of the captive business has increased significantly, I’m of the opinion that an international discussion of the risk management community regarding the definition of unified qualification criteria for captive board members could prove to be worthwhile for Europe,” he said.

Wöhrmann noted that, in Switzerland, the regulations state that one third of an insurance company board members must be independent, but the regulator is able to grant exceptions for captives. There is also a minimum requirement of three board members for a captive in Luxembourg, but no obligation to have outside or independent directors.

Of the major captive domiciles in Europe, only Guernsey, the Isle of Man and Malta require an independent non-executive director, while Bermuda, Cayman and Vermont, the three largest captive domiciles in the world, do not require them, Wöhrmann noted.

More diversity needed

Cutts-Watson said he too had researched the different requirements of regulators globally and concluded there was little consistency in terms of what was expected in the composition of boards. He said he believed the role of non-executive directors should be to offer independent oversight and constructive challenges.

He added that the recruitment process in place for finding suitable non-executive directors was also very important, yet often overlooked. He said the idea of using personal recommendation was flawed. He said it was increasingly important to justify an appointment if challenged. Using recruitment companies was one way of doing this and would also improve the diversity of candidates.

This theme was picked up by Carli. She said it was important to distinguish the role of a non-executive director from an executive director, especially in terms of the ability to execute on decisions. She said non-executives could and should support, influence, help and even inspire—but they should not be doing or executing on work or decisions.

She agreed that more diversity would be a good thing, noting that there are a lot of white men in the risk management industry. “We need a bigger footprint: more women, a bigger spread of ages, different nationalities and cultures, as we are seeing in large companies around the world. I am not in favour of quotas, but more diversity is key.”

Groffils said that, despite not being required to use independent directors under Luxembourg regulations, the company has a culture of doing so anyway to enhance the decision-making process. This has been extended to the board of its captive where two of six directors are external.

He highlighted some of the potential conflicts of interest that can arise if non-executive directors are not selected carefully. These directors are sometimes driven by remuneration, and conflicts of interest can occur around things such as a captive’s reserving strategy, its investment strategy and if a claim on a captive is made—and potentially disputed. Groffils said that in such instances it helps to have board members with no vested interests.