Captive owners could have spared the pain of an expensive legal battle as a result of failing to understand the consequences of reinsurance or fronting agreements if only they had an experienced independent director in place.

That is the view of Andrew Barile, president and CEO of Andrew Barile Consulting Corporation Inc., who was visiting Bermuda this week and said the captive industry as a whole was moving towards the appointment of independent directors to their boards, with regulators and ratings organisations coming out in favour of such a move.

Mr. Barile said they believed that independent directors added value by providing impartial, experienced guidance to captive owners that was both separate and distinct from a captive's other advisors, such as managers, lawyers and accountants.

But he warned of the consequences for captives of not having an independent director on board who had no conflict of interest and was able to offer a broad perspective on captive insurance which, when complemented with that of the other directors, is rarely surpassed.

"Independent directors, because of their very nature of having experience, may cause 'constructive friction' with the captive manager of even the front company," he said.

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

Mr. Barile said that often captive owners were more concerned about the fees independent directors charged when considering whether to take one on or not, however what they offered in return far outweighed the initial cost, helping in the selection of a reinsurance intermediary and advising on the captive's acquisition opportunities, such as buying a third-party administrator, a licensed admitted insurance company, or an investment in a new start-up retail brokerage firm.

Furthermore, they can provide help in evaluating a reinsurance program structure, attend and advise on the rating process with rating agencies, and sit in on meetings with insurance regulators, especially those of concern, while voting on issues such as whether to change fronts, making a large dividend payment to the parent company or returning the capital to the captive's owners, writing direct procurement policies for the parent and whether to litigate or arbitrate certain claims.

Other remits include decisions on whether to change asset investment managers, expansion into other lines of business and how to reduce the cost of a captive's reinsurance program.

"In the coming months, expect to see the 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," said Mr. Barile.