IAN KILPATRICK – A MAINSTAY OF CAYMAN’S INSURANCE INDUSTRY

Ian Kilpatrick has been a bastion for Cayman’s insurance industry breaking new ground in what might have often seemed formidable circumstances. From his captive career beginnings in 1976, building one of the first specialist captive management companies, Insurance Management Consultants (Cayman) Ltd., sold later to Johnson & Higgins (now Marsh Inc.) in 1984, to the founding of the Crusader International Group (now called Advantage International Management) in 1993, Ian has proved himself as a leader and innovator in this dynamic and ever expanding industry.

Taking a step back from the day to day running of the company in 2006, he currently serves as Vice Chairman and consultant to the board of directors of Advantage, and is a director of the Captive Insurance Companies Association in the US. Mr. Kilpatrick was also the founding Chairman of the Insurance Managers Association of Cayman (IMAC) and upon his retirement made a sizable donation to the IMAC Scholarship Fund. Captive Insight caught up with Ian to talk about his experiences in Cayman’s captive industry over the last 40 years.

What have you been up to since your retirement from the captive business in 2006?

I have been involved in the oversight of activity in our US-based operations of a captive management company with offices in Charleston, South Carolina; Scottsdale, Arizona; and Washington DC, although I’d say my primary focus has been on the development of our life insurance company. I think it’s fair to say that I have always viewed captive management as an entrée into life insurance, which is our primary business. I’ve also been focused on restructuring Advantage and bringing additional capital into the company so that it may move forward with plans for future expansion.

Was it a natural transition when you decided to move operations to the US?

Not really. I opened up in the US in 2001 after a rather frank discussion with the then head of the Cayman Islands Monetary Authority (CIMA), who advised me that there was no room in Cayman for privately owned small businesses in the financial industry, and that I should start to think about what I wanted to do. As it happened, that person didn’t retain his position for very long. That, coupled with the concerns of the newly released Organisation for Economic Co-operation and Development’s (OECD) “black list”, I thought it would be prudent to add another arrow to my quiver.

Would it therefore be correct to say you were into diversification?

I believed that I needed to expand and that certain types of captives would increasingly choose to domicile in the US. This turned out to be true. It was still a big decision to open in the US mainly because of the huge expense and the prospect of competing with much larger management companies, but there were considerable opportunities and that big commitment turned out very well for us.

What was the rationale for the change of ownership for the Crusader Group?

It can be challenging for a small independent manager to compete with the major brokerage houses. To expand today you need a lot more capital than a small privately owned group can probably muster. Particularly, we have a life insurance company and we have a segregated cell company in Cayman, and in order to insure the risk transfer and risk distribution, a great deal of capital is required to take the needed positions on risks. We’re talking much more than a million dollars – substantial capital is needed to take a line on particular business. We feel that for us, moving to a ‘risk taking entity’ is the direction we must move towards. On the life side, we have the capability to issue what I would call ‘jumbo life insurance policies’, at one time we had a reinsurance line of 40 million dollars, but over the years we’ve scaled back as life reinsurers cut their lines. We can, however, still issue a 30 million dollar face value per policy, the majority of which is reinsured by RGA, one of the top three life reinsuring companies in the US.

But we wanted to take more risk, and when marketing those mega-risks, we are targeting a very select group, and the sort of person who wants that type of policy really and truly needs to see a company with substantial capital. In reality the capital isn’t all that important because it depends on the net retention within the life company. The segregated cell legislation here is a real bonus from the life point of view, and this coupled with RGA as a reinsurer means more comfort overall for the policyholder. But the capital is important from the perspective of the insured as they want the security and comfort of knowing it is there. So, now we are in the midst of raising this capital, which hopefully should be complete by the time this goes to print, and then we can put it to work.

You mentioned earlier about some personal restructuring and that you are backing away from the business?

Yes, physically this has been a challenging couple of years for me after having five hip replacement operations. I will still be Vice-Chairman, and therefore involved in oversight of the company, but not involved in the day-today operations. I don’t want to see the inside of another plane to be honest. But, I do feel that I am handing over the company at a high point. Once the additional capital has been raised it will be good not only for our company but also for the Cayman Islands. We will be able to capitalise a nice reinsurance company, and one of the things we would like to do is to acquire or licence a life insurance company in the US – a company that we’d hopefully build up to a policy issuing company in the future, largely for property and casualty work, and for smaller captives. There is no one out there providing policy issuance to smaller captives, which we see as a gap in market. I have found it hard to understand why so many of the larger companies have set the bar so high at the premium level, as it excludes so many. Start up captive insurance companies have found it almost impossible to get a foothold. Within the year we hope to meet those market needs and solve some of those problems.

How do you find balance between your personal life and career?

These days it’s quite easy. I’ve reached an age where I want to slow down. I’m 66. My wife and I are blessed to live in two delightful places: one in the cliffs of the Carolinas and the other of course in Cayman. In the US I play plenty of golf, enjoy the gorgeous scenery and take marvellous walks, and here we live on the beach, which is wonderful. With modern communications, I can have an office in our US home and an office in our Cayman home. This means I can see to emails in the morning and then spend the rest of the day on more enjoyable pursuits. My life now is pretty balanced, but it hasn’t always been that way. When I first started Crusader in 1993 I think I spent three weeks a month on a plane to somewhere chasing business. After we’d been around for a few years business came in much more easily, because our longevity generated confidence in the market and our existing clients became introducers of new business, but the first three or four years were very difficult. I had to add mortgages to our house on more than one occasion to pay salaries.

Would you do it all again?

Yes, I’d do it all again. It’s been both an interesting and rewarding journey and I’ve met and done business with some great people. The only thing that might prevent me from doing it again is the constant increase in global regulation. The OECD is now targeting captives, accusing them of being used as a transfer pricing mechanism. Governments need to get their hands on every possible penny due to their own wasteful spending, and there is a mind-set of sensationalism, feeding populist mentality, which overall, will make it increasingly difficult to conduct reasonable business. So, if you wanted to start up again in this environment, I think you’d have to be a much younger man. I was heartened however, to see the UK Prime Minister, David Cameron come out and formally declare that the overseas territories can no longer be considered tax havens.

As an industry, do you think we’re too heavily regulated?

No, I don’t think we are. I think there is a reasonable balance within the captive insurance industry, particularly in domiciles like Cayman and for example Vermont. These domiciles have regulators that have the specialist expertise and knowledge of captives that allows for captive-friendly regulation that is not burdensome on the industry. Some of the other domiciles that have just opened up have regulators that have come from the commercial markets and therefore do not have such a good understanding of the nuances involved in the management and regulation of captives. In general, what we have is good. What is being proposed by Solvency II is overboard, but as long as we as an industry, including regulators, continue to use a common sense approach, I don’t think we have anything to fear.

What do you see as the main challenges for Cayman as a captive domicile?

I think that the OECD’s latest issue regarding transfer pricing and their blinkered approach to offshore financial centres could create further problems if they determine that captives are being used purely and simply for tax purposes. This could ultimately lead to offshore financial centres suffering at the hands of domestic ones. One would hope that they could be convinced by the industry that this is not the case and there are some very sensible insurance reasons for captive formation. I am not concerned about the proliferation of domiciles in the US. I do not see them as major competition to Cayman. I am perhaps slightly jaundiced about the proliferation that has taken place particularly in the last year or eighteen months, because the fees that these domiciles will collect will not nearly cover the costs of the infrastructure required to set them up, but I imagine that it is a matter of control. Regardless, there will always be reasons for certain types of captives to be established onshore and for others to suit an offshore domicile.

Captives choose the Cayman Islands because of the professionalism of the Monetary Authority and the service providers here and it is difficult for other domiciles to match this, so I think that people will always turn to Cayman, but we do need to be mindful of maintaining competitive pricing.

During your time as an insurance manager what is the greatest challenge you faced and also what would you describe as your career defining moment?

I think both a challenging and defining moment prior to me setting up Crusader would probably be in 1978 when I was fired by Fred Reiss, who could be considered the grandfather of the captive industry – which is another story altogether. After that, I did a number of things: I went back into the trust company business, and then I set up the Island’s first credit card company “Signature”, which was too successful having 3,000 subscribers very quickly and required a lot of financing. The local banks weren’t interested in doing that so we raised a junk bond and raised 13 million dollars locally. Eventually, local banks became more interested and British American Bank, which is now Fidelity, bought me out. We also owned shops and even a spa back then.

When I started Crusader a reporter from Business Insurance came down to do a report on Cayman. In the article, the reporter described me as a “pinball” bouncing from one thing to another, going on to say that he hoped that I would have enough “dexterity to keep the ball up in this new venture rather than slipping into the black hole of oblivion”. I read this article, thinking “that isn’t very nice”, as I walked into the RIMS conference exhibit hall, and if you have ever been to this conference, you know that the exhibition booths are like apartment complexes. I did ask myself ‘why am I doing this and how am I ever going to compete with these powerhouses’, but I swallowed hard and thought, ‘well, let’s go and see what happens’. The challenge in the early years was to become established. I sometimes think we survived initially off the crumbs of the big brokers, but fortunately for me, they are messy eaters. As they get bigger they become exclusive in the type of captive they want and that gives an opportunity for an independent manager to find niches and be able to exploit them.

But I’m happy to say 20 years on, the ball is still in the air and some of those powerhouses from back then are no longer in business. I’m not sure there is one career defining moment, I take a great deal of satisfaction knowing we are still here after 20 years and I am pleased to see us moving on to the next phase. That in itself will be a very nice way to walk away.

Do you see a future for small independent insurance managers or is the market better served by broker-owned managers?

I think it is becoming more and more difficult for small independent managers to function in the increasingly complicated world that we live in – complicated by regulation, and the cost and resources involved in the monitoring of regulatory and compliance obligations. In today’s dramatic and fluid business environment, it is much more of a challenge for an independent manager to have all the information at hand regarding the many diverse needs of today’s business coverage than a larger brokerage with specialised departments and many more resources available to them. Gone are the days of a captive being set up simply for worker’s compensation – there is now so much that people are insuring – supply chain interruption and these sort of things. I think however, that the role of independent managers is important, although they
might be doing more plain vanilla policies, they will remain an attractive option for small businesses that are building their insurance needs into their overall business strategy and want more of a tailored solution. The independent manager is likely to be versatile and innovative, but will also need to have an array of specialised staff that understand not only the insurance business, but the compliance world. We live on the doorstep of a country which has built itself from small businesses. I think that those businesses will realise that providing insurance is something that they have to do and that it is a part of their overall business strategy – so why wouldn’t they want to control that as they do any other aspect of their business? I see the smaller business operations utilising captives especially if there is a means for them to do so,
and the bigger insurance brokers seem to be chasing the bigger companies, leaving lots of business for the small
independent manager.

What excited you more during your career: a new captive deal or a new life deal?

That’s difficult to answer, but I suppose it was the life side once we started to get high net worth clients writing large policies and we became accepted by investment management firms that were household names, which is very satisfying. Although, I also remember the great satisfaction gained from putting our first captive together complete with feasibility study, and winning out against our competitors. So, it’s difficult to really choose. Each aspect of my business has brought a number of exciting and satisfying moments.

What does the future look like for Cayman’s Captive industry?

The attack by the OECD is a major concern for our industry and has to be fought – not just by Cayman, but by all domiciles including the US. We need to partner together to convince the OECD that without a shadow of a doubt the vast majority of captives are formed for insurance purposes and that they are not price transfer vehicles. With domestic and offshore domiciles united against such damaging documentation as the White Paper on Transfer Pricing, I think that the future could be rosy for us all. Domestic insurance markets never seem to learn exactly what their clients want and that’s why captives are still being formed today, particularly by smaller companies that want to be in control of their own destinies. As long as the CIMA continues to provide a common sense approach to regulation I don’t see why Cayman shouldn’t continue to do very well in the captive market. We should also continue to develop Cayman as a viable alternative to Bermuda for setting up reinsurance companies which would benefit us considerably. Overall, we should remain positive.

Describe the perfect day

A Grey Goose on the rocks with a slice of orange, overlooking a sunset on Seven Mile Beach, after coming off the golf course having played a career round.