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The old saying that "Independent Directors are like parsley on a fish: technically they are there, but they are largely decorative" is now very much defunct in the context of the Cayman Islands (re)insurance industry. So only the courageous need apply....
Despite Cayman Islands law not prescribing the appointment of Independent Non-Executive Directors (IINEDs) for any Class of licensed insurer, for domestic and commercial carriers such a requirement has now become boilerplate in the Cayman Islands Monetary Authority (CIMA) licensing conditions prescribed by CIMA. Even where not prescribed, CIMA's Rule on Corporate Governance for Regulated Entities has strongly increased the focus on independent oversight and robust governance, which often manifests in the appointment of INEDs in practice.
On the one hand this policy development can be viewed as a natural evolution of corporate governance standards in Cayman's growing and more sophisticated (re)insurance industry, while on the other it raises concerns as to expense and proportionality, in particular for less sophisticated and lower-risk insurers and indeed affiliated reinsurers.
Independence Criteria
A hot topic Conyers has seen with respect to prospective IINED appointments is CIMA's interpretation of an IINEDs perceived independence or lack thereof. While CIMA does not prescribe a single, exhaustive definition of "independent director" applicable to all situations, the general criteria emphasise a lack of material relationship or involvement in day-to-day management that could interfere with independent judgment. Independence criteria can generally be gleaned from the below characteristics:
- Not Part of Executive Management: INEDs must not be part of the insurer's executive team or involved in its day-to-day operations or similar functions in related entities;
- Objectivity and Lack of Undue Influence: The INED should be free from any business-related constraints or relationships that could compromise their ability to act in the insurer's best interests, ensuring the governing body is not subject to undue influence from senior management or other parties;
- Ability to Exercise Independent Judgment: The core principle is the ability to act objectively and constructively in the interest of the company, free from conflicts of interest;
- Fit and Proper: Like all directors of CIMA-regulated entities, INEDs must be deemed "fit and proper" persons, which involves an assessment of their honesty, integrity, reputation, competence, and capability; and
- Appropriate Skills and Experience: The board collectively must have sufficient knowledge, skills, experience, and independence to oversee the insurer effectively, considering the size, nature, and complexity of the business.
Conyers has seen CIMA licence condition letters provide that an INED should have relevant knowledge and experience, with no previous business affiliations to the group or related entities, its shareholders or other senior officers or director. The latter part of this independence criteria has provided angst for certain clients. Recently we have seen CIMA reject INED candidates on the basis that they hold directorships at holding company or group company levels, notwithstanding arguments that such persons are sufficiently independent on the basis that they have no material business or financial ties to such entities beyond their director role and are not involved in day-to-day operations.
CIMA may well be taking its approach from its Regulatory Policy for Licencing for Class D Insurers which provides that an "Independent Director" means a person with no previous business affiliations with the applicant including but not limited to any affiliation with the ultimate shareholders and other principals and officers of the Applicant. This is generally viewed as being potentially disproportionate for certain reinsurers.
The approach differs from that taken Bermuda Monetary Authority ("BMA") to INEDs that are board members on holdings companies or affiliates. The BMA permits INEDs from the Board of the parent company or its other subsidiaries to also sit as independent non-executive directors on the board of an insurer provided they have no material business or financial ties to group company beyond their director role and are not involved in day-to-day operations. A commensurate proportionate approach in the Cayman Islands is hopefully not too far away.
Evolution of the INED Requirement
It is hoped the recent trend by CIMA to require effectively all insurer licensees other than pure captives and some affiliated carriers to appoint INEDs will evolve in line with industry concerns. For instance, we may see a relaxing of the requirement to appoint an INED in cases where insurer / reinsurers have: (i) a board of directors already populated with professionals that already have industry expertise; and (ii) lower risk fully fronted insurance and/or affiliated programmes.
Conyers INED Database
Conyers maintains an extensive list of INED professionals who are willing and capable of fulfilling an INED role for licensees and is regularly requested to provide a list of suitable candidates to our clients. If you consider yourself to be an INED that would not treat your role like parsley on a fish, and you would like your CV included on the Conyers database, please reach out!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
