The current climate is gravitating toward pushing captives—including single-parent captives, association captives and agent-owned captives—to appointing experienced, independent directors to their boards.

Regulators (including the National Association of Insurance Commissioners and Bermuda Monetary Authority) and ratings organizations (A.M. Best, Standard & Poor's) have come out in favor of the movement toward the appointment of independent directors. They believe independent directors add value by providing experienced guidance to captive owners that is separate and distinct from a captive's other advisors, such as managers, lawyers and accountants.

Independents do not have conflicts of interest; they often present a wealth of experience different from others on the captive's board; and they typically possess a broad captive-insurance perspective that is rarely matched. When working with other directors that have complementary expertise, an independent director can present a valuable perspective from which most captives would benefit.

However, captive owners too often focus on the fees that an independent director may require. In addition, captive owners often believe they get all the advice they need from their current advisors.

An experienced independent director can assist in two key areas:

1. Help in selecting the reinsurance interme­diary. Here, independents can provide per­spective separate from the reinsurance broker or risk manager.

2. Advise on the captive's acquisition opportunities, if any, such as a third-party administrator or a licensed admitted insur­ance company, or even making an investment in a new start-up retail brokerage firm.

These sophis­ticated ideas are an expansion of most cap­tives' business plans and need to be consid­ered carefully given the risks they present. The captive landscape is littered with the carcasses of captives that ventured ill-advisedly into such businesses, often on the encouragement of their advisors.

Independent directors also can aid in evaluating a reinsurance program structure; attend and advise on the rating process with outside rating agencies, such as A.M. Best; and attend meetings with insurance regulators, especially if there is a regulatory concern.

Independents are often asked to offer answers to such critical questions as:

• Should the captive make a large dividend payment to the parent corporation, or should the captive return capital to its owners?
• Should the captive write direct-procure­ment policies for the parent corporation?
• Should the captive expand into other lines of business, such as writing third-party reinsurance business?
• Should the captive move from an offshore-tax-haven domicile to a domestic domicile?

The inexperi­ence of captive owners often shows through when they have executed reinsurance agreements or fronting agreements and do not under­stand the consequences of these agreements until litigation occurs.

Finally, captive owners need to be familiar with providing compensation for independent directors. Al­location of time and hourly rates varies with each individual directorship, all of which is spelled out in retainer agreements.

In the coming months, expect to see more captive owners reaching out to secure independent directors—both because of their value-added consulting expertise and because regulators and possibly ratings agencies will require it.