The current climate is gravitating toward pushingcaptives—including single-parent captives, association captives andagent-owned captives—to appointing experienced, independentdirectors to their boards.

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

Independents do not have conflicts of interest; they oftenpresent a wealth of experience different from others on thecaptive's board; and they typically possess a broadcaptive-insurance perspective that is rarely matched. When workingwith other directors that have complementary expertise, anindependent director can present a valuable perspective from whichmost captives would benefit.

However, captive owners too often focus on the fees that anindependent director may require. In addition, captive owners oftenbelieve they get all the advice they need from their currentadvisors.

An experienced independent director can assist in two keyareas:

1. Help in selecting the reinsuranceinterme­diary. Here, independents can provide per­spective separatefrom the reinsurance broker or risk manager.

2. Advise on the captive's acquisitionopportunities, if any, such as a third-party administrator or alicensed admitted insur­ance company, or even making an investmentin 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 risksthey present. The captive landscape is littered with the carcassesof captives that ventured ill-advisedly into such businesses, oftenon the encouragement of their advisors.

Independent directors also can aid in evaluating a reinsuranceprogram structure; attend and advise on the rating process withoutside rating agencies, such as A.M. Best; and attend meetingswith insurance regulators, especially if there is a regulatoryconcern.

Independents are often asked to offer answers to such criticalquestions as:

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

The inexperi­ence of captive owners often shows through whenthey have executed reinsurance agreements or fronting agreementsand do not under­stand the consequences of these agreements untillitigation occurs.

Finally, captive owners need to be familiar with providingcompensation for independent directors. Al­location of time andhourly rates varies with each individual directorship, all of whichis spelled out in retainer agreements.

In the coming months, expect to see more captive owners reachingout to secure independent directors—both because of theirvalue-added consulting expertise and because regulators andpossibly ratings agencies will require it.