Saturday, June 15, 2024

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“International discussion” requested for captive board criteria

The requirements of captive boards and independent directors varies from domicile to domicile but a global standard may be useful to enhance governance of captive insurance.

Speaking on a recent GCP Short, Paul Wöhrmann, head of captives services at Zurich, was joined by Andrew Bradley, Malcolm Cutts-Watson and Francoise Carli, who have all had careers packed full with captive experience, and sit on captive boards today.

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, also shared their views.

The speakers, who addressed the topic at the European Captive Forum, in Luxembourg, in November, recognised the varied approach to outside directors across captive domiciles, referencing Airmic’s Captive Governance Guide published in May 2019.

“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,” Wöhrmann said.

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.

Whether directors need to be resident in the relevant domicile also varies by jurisdiction.

Cutts-Watson, previously chairman of the Willis global captive practice and now an independent consultant, suggested that by going through and translating the various domiciles’ regulations, guidance notes and codes of conduct concerning captive boards into the Institute of Directors’ definition of a board, a comprehensive list of requirements emerge.

“You’ve got technical requirements such as risk management, insurance, accounting, legal, you’ve got the need for strategic thinking,” he said.

“You’ve got the need to demonstrate corporate governance and compliance, and you’ve got the need to show judgment, an ability to build trust and to understand the parent company business.”

He believes outside or independent directors are well suited, or even required, to deliver those range of perspectives and judgement.

“You’re effectively looking for someone or something to provide independent oversight and constructive challenge to the executive directors,” he added.

“And by implication, I think that that’s saying you do need an outside director on the captive board.”

When asked what makes a good outside board member of a captive, Francoise Carli, formerly vice president of insurance at Sanofi, said it is critical that they behave as a non-executive.

“You are not there to give orders, to do things, to realise different parts of the activity,” she said.

“You are there as a non-executive, which means you do not execute. And this is very important because if you don’t have that kind of position, you’re going to make more tension in the board than anything else.”

Carli added that it is a “plus, not a must” that an outside board member has a specialist background in risk, insurance, actuarial or even in the industry sector of the captive parent.

“Because if you have the right position in the board, you’re going to bring what is important, which is a contribution to the discussion and of course a good assessment of the situation,” she explained.

Andrew Bradley, formerly head of group risk services at Nestle and now an outside board member of a captive, said he does not believe the true value of outside board members is currently being realised.

“Outside captive board members aren’t necessarily taken up and included in a board unless it’s required by the local captive domicile,” he said.

“I found a few cases where forward thinking companies have expressly gone out to have not only one, but sometimes two outside board members to challenge what they do and have that extra experience in managing the company.

“So I think this is still very much work in progress and an important part of captive governance, but I think people somehow need to see the value of outside board members because I’m not sure whether that’s coming through just at the moment.”

The panel also debated the need for greater diversity on captive boards, not just with regard to gender, age and ethnicity, but also from different industries and backgrounds.

“This is exactly what is happening in the largest companies around the world,” Carli added.

“Why shouldn’t we have that in the captive business? It is critical that people understand that these broad sets of experiences is giving another way to assess what’s happening in the board and to support and help the executives that are part of the board team.”

Finally, in terms of board member recruitment, Cutts-Watson recognised there is starting to be a move away from the “old boys network” perception, with regards captive board appointments, that is based on a historical reality.

“It’s hard to avoid the accusations of male, pale and stale,” he said.

“What I’m seeing now is a move to a more professional way of recruiting outside directors and I would say it’s a transparent and objective process that is defensible so that if you are challenged you can demonstrate why you have appointed a particular candidate.”