cayman islands, cayman captive, captive insight

CAYMAN ISLANDS – GOLDEN PAST, PRESENT & BRIGHTEST FUTURE

Today the Cayman Islands stands as the second largest domicile as regards to the number of captives and arguably higher still in perception of client service and approach to captive insurance regulation. This article seeks to provide clues from the past on how Cayman has arrived at its present position together with some insight as to Cayman’s prospects for the future.

Early indications of Cayman as an international business centre can be found in 1967, with William S. Walker being instrumental in the drafting of the first Trust Company and Exchange Control Legislation. The growth of Cayman’s client base was also helped during 1967 by the early signs under Lynden Pindling’s government of Bahamas independence from the United Kingdom and the corresponding migration of its thriving offshore business. When the government acquired a majority stake in Brac Airways (renamed Cayman Airways) from Costa Rican airline LACSA, in 1968, the Islands became more readily accessible, as well via the development of telex services by Cable and Wireless.

Two key legislative events helped consolidate Cayman’s early position. Firstly, the 1971 Currency Law and subsequent amendments leading to the creation of the Cayman dollar and then pegging it to the US dollar enhanced Cayman’s standing as an offshore centre and secondly, the 1972 Constitution which established the UK Privy Council as the final appellate body, strengthening the independence, yet solid grounding of the Cayman legal system in the eyes of clients.

Captives began arriving in the Cayman Islands in the mid 1970’s, mainly from the Bahamas where a new insurance premium tax was making captives uncompetitive. Fred Reiss, considered the “father of captives” formed Transnational Limited, the first captive management company, and other major players such as Johnson & Higgins soon followed. With the growth of captive business came the need for appropriate legislation and here is where the captive story really begins. While captives had begun setting up in the mid 1970’s under general companies law, this was largely unregulated until the enactment of the new Insurance Law in 1979 and enforced by Superintendent of Insurance, John Darwood, whose approach to insurance regulation was the forerunner of today’s Cayman regulatory best practice, combining robust regulation with accessibility to prospective clients and readiness to promote the domicile. This attracted high quality new captives as well as drove away several captives of lesser quality.

In 1976, the selection of Cayman over Bermuda by Harvard Medical School for its captive CRICO gave Cayman instant credibility and thus began Cayman’s reputation as the leading domicile for the healthcare sector including hospitals, health authorities and doctor’s groups. This might not have taken place were it not for Bermuda’s skepticism at Harvard Medical School wishing to use its captive for medical malpractice to external doctors credentialed to use Harvard’s facilities in addition to its own employed doctors. The growth of the captive market continued through the 1980’s via hardening rates in the US insurance market caused by the bankruptcy of several US property and casualty companies, and in turn this helped further develop the islands tourism and hospitality infrastructure with captive board meetings being held and the real estate market with many of the captive principals and vendors purchasing real estate property.

The Cayman regulatory framework developed further in 1993 with the formation of the Financial Services Supervision Department and then combined with the Cayman Islands Currency Board in 1997 to form the Cayman Islands Monetary Authority (CIMA), which included the regulation of banks, mutual funds and insurance companies each in its own division and head of supervision reporting to the Board of Directors of CIMA.

During the 2000’s Cayman’s regulatory structure was faced with scrutiny from international regulatory agencies such as the Financial Action Task Force arising from the Organisation for Economic Co-operation and Development’s report on harmful tax practices in 1998, and was listed in June 2000 as unco-operative as regards international money laundering, which took the passing of several pieces of emergency legislation for this label to be removed.

As part of this process CIMA became independent of the Cayman Government and thus acquired authority to approve new captive licence applications whereas previously, licence applications were heard by Cabinet.

Another key test of the domicile was caused by the passing of Hurricane Ivan in September 2004, a Category 4 storm which despite its fury did not seriously disrupt the captive industry as CIMA resumed approving new licence applications mere days after the storm.

The speed of recovery to Cayman’s business infrastructure compared with those of other Caribbean countries impacted such as Grenada, further enhanced the domicile as resilient and led to improved building codes to homes and office buildings going forward giving greater confidence to onshore clients as to the ability of Cayman to handle future catastrophic weather events.

As the first decade of the 21st century proceeded, Cayman saw more positive changes cementing itself as a captive market leader, namely the new Insurance Law of 2010, which took the existing legislation and enhanced the application of a risk-based approach towards regulation of different types of captives depending on the degree of third party risk with the creation of four new categories of the B licence to replace the Class B restricted and unrestricted licence, and also recognising the unique Special Purpose Vehicles, whose prodigious growth sustained the number of captives during the world wide recession and soft market since 2008, via the creation of the class C licence and the creation of a class D licence, to attract new reinsurers following the arrival and success of Greenlight Re in 2004. The first reinsurer to take advantage of the new Insurance Law was Southport Re in 2013, and it is anticipated many more will follow.

Cayman took a unique position to the Solvency II proposals in that CIMA has not automatically elected to adopt Solvency II equivalency, rather the approach of “wait and see”, not wanting to add regulatory burden without assessing beforehand the implications for Cayman licenced insurers. Warranting a significant mention is the willingness of Cayman to accept its obligations in the international community via its having executed 31 Tax Information Exchange Agreements (“TIEA’s”) with sovereign nations. This transparency was acknowledged by the Organisation for Economic Co-operation and Development’s (OECD’s) latest Global Forum Peer Review report in April 2013, in which Cayman was lauded for its “robust and transparent” legal and regulatory regime, and for Cayman’s financial industry’s “clear and efficient system” for releasing information and noted the quality of its co-operation and speedy responses to exchange of information requests, and finding Cayman’s exchange of information process to be “well organised, well-resourced and adequately staffed with knowledgeable personnel.”

In March 2013 the Insurance (Amendment) Law was enacted to allow Segregated Portfolio Company insurers (“SPC insurers”) to incorporate their cells for the first time as Portfolio Insurance Companies (“PICs”). This enactment gives greater clarity of governance, with the creation of PIC-specific boards of directors under the overall auspices of the board of the “parent” Segregated Portfolio Company and also increase flexibility regarding PICs being able to transact in their own right and with other PICs, and will be brought into force once necessary amendments have been made to the Insurance Regulations.

The present depicts the domicile in a very strong position and new application licences showing signs of returning to pre 2008 levels. In the first nine months of 2013, CIMA reported 28 approved new applications. Another key indicator of expected growth is the 1,289 registrants attending the Cayman Captive Forum in late 2012 exceeding the previous record set in 2011. Another sign of belief in Cayman as a domicile is the retention of a growing cadre of highly skilled professionals, several having left Cayman only to subsequently return due to the quality of work and lifestyle. A growing number of these professionals have now attained their permanent residency and have decided to spend their key professional working years in the Cayman captive industry. In particular delegates at the Cayman Captive Forum have commented on the strong sense of support and pride in the Cayman captive industry shared by insurance managers, service providers, government officials and insurance regulators alike.

As to the future of the Cayman captive insurance industry – Cayman is well placed to take advantage of the worldwide economic recovery, and the new markets that are opening up. The 2011 signing of the Canadian TIEA now gives Canadian companies the same taxation incentives for setting up their captives in Cayman as currently enjoyed by Barbados. The uncertainty regarding Solvency II implementation in Europe is causing groups of insurers to consider relocating their operations and Cayman is well-placed to provide certainty, not only for captives but reinsurers as well. Other future areas of growth can be seen is the Latin American market especially Argentina and Brazil as their governments open up their domestic insurance markets and assisted by Cayman entering into TIEA’s with these countries in 2012 and 2013 respectively.

Cayman’s importance as a domicile is already well established, in particular via its niche in alternative risk to Medical Malpractice, however such are the opportunities emerging elsewhere that Cayman must not solely rely on its past reputation. A key to Cayman’s future growth is learning the lessons from its illustrious captive domicile competitors, especially with their well-drilled publicity arms sending dedicated sectional industry teams and government representatives to speak to key industry heads in Canada, the US, Latin America and Europe. For the future growth of Cayman as a captive domicile, it is poised to pioneer its own path under the astute partnership between Government and private sector industry heads, in a manner which underlines Cayman’s uniqueness. The Insurance Managers Association of Cayman has taken more of a pro-active role in this area evidenced in an initiative in 2013 with KPMG to emphasise Cayman as a place for “Clearly Better Business”. As we enter 2014 early signs of this are encouraging.