Board effectiveness for captives: A key to success

Our Head of Capital Markets, Bermuda, Sherman Taylor recently delivered a TED-style presentation on board effectiveness for captives at the Bermuda Captive Conference. As Bermuda’s largest and longest-running industry event, the conference attracts captive insurance professionals from around the world, including Bermuda, North America, the Caribbean, Latin America, Europe, Asia, Africa, and the UK. 

We asked Sherman some questions on the importance of board effectiveness for captives.

Why is board effectiveness important for captives?

Board effectiveness for a captive insurance company is crucial for ensuring efficient operations, regulatory compliance, and fulfilment of strategic goals. The board represents the shareholder, who is also the insured party, and must ensure that the captive serves its intended purpose as a risk management tool for the parent company. This includes retaining an appropriate amount of risk and being able to pay insurance claims if they arise.

What changes were made to the Bermuda insurance code of conduct in 2022?

In 2022, the Bermuda insurance code of conduct was revised for the first time in almost 10 years, with new emphasis on board effectiveness. The revisions were meant to codify best practices around board effectiveness, with better documentation being a key takeaway. The Code of Conduct mandates that insurers maintain sound and effective corporate governance frameworks, with board effectiveness being a fundamental aspect of the Bermuda Monetary Authority’s risk-based approach to supervision.

How does the application of the code vary between captives?

The application of the code is proportional, meaning it considers the nature, scale, and complexity of the captive. Therefore, board effectiveness can vary between captives. For example, I serve on the board of an insurance entity with only two board members, both of whom are very active and engaged. In contrast, I also serve on the board of a captive with a large multinational PLC as its parent, which has a complex insurance program and an eight-member board. Both boards are effective, despite their differences in size and complexity.

What are some key features of an effective board?

An effective board should have access to external consultants and professionals for advice on matters that come before the board. Knowing when to seek external professional advice is a key feature of an effective board. Other features include regular meetings where board members exercise independent judgment, board renewal policies, constructive debate and challenges in meetings, attention to solvency and capital adequacy, stress testing for risk management, and avoiding conflicts of interest.

Are non-executive independent directors necessary for captives?

While the code of conduct suggests considering the appointment of non-executive independent directors, this may often deem unnecessary for captives due to their nature, scale, and complexity. It is important to note that independent directors are more relevant to commercial insurance companies.  

What services does Ocorian provide to the captive industry?

Our experienced teams based in Bermuda provide a full suite of administration, fiduciary and legal services which includes board support & company secretarial services. We provide board evaluations and board effectiveness reviews for insurance and non-insurance companies.