INNOVATIVE USES OF CAPTIVES AND HOW MANAGERS ALONG WITH THE REGULATORS NEED TO MOVE WITH THE TIMES

Captive insurance companies and insurance management firms have been around since the 1960’s and began life offshore primarily because of the onshore regulatory burden and the cost of operating domestically in the US.

Cayman’s entry into the market occurred in the 1970’s after identifying a gap in the market and taking the innovative step of permitting medical malpractice captives to be established, the rest as they say is history as Cayman continues to be the pre-eminent health care domicile and has since expanded to include many other types of captives including single parent captives, groups, cell companies and also 3rd party writers.

Captive regulations did not exist at the outset of the industry and therefore regulations have had to play catch up to the growing captive market as they sought to introduce best practices while trying to ensure their domicile remained competitive. Onshore captives started with Vermont who established laws allowing insurance captives from the early 1980’s, but it was not until the late 1990’s that the state began promoting itself as an alternative to traditional offshore insurance arrangements and there are now close to 30 US states with some type of captive legislation.

During the growth of the captive market regulators have attempted to recognise differences in the types of captives as they have moved to a risk based form of regulation, so for example single parent captives are regulated with a lighter touch in many domiciles than those writing true 3rd party business. In many cases regulators around the world in seeking to maintain their competitive advantage have been forced to become innovators, for example Guernsey was the first domicile to introduce cell legislation in 1997 and this concept was quickly imitated by many other competing domiciles. The emergence of Catastrophe Bonds during the 1990’s has also resulted in regulatory innovation, as given these structures are fully collateralised they are seen as being less risky, therefore capital requirements and license fees have been lowered in recognition of the risk based approach, while even audit waivers are permitted in some domiciles.

Looking back over the years it is clear that captives have been at the forefront of the ART (Alternative Risk Transfer) market and there is no reason that going forward this will change as new technologies and the use of social media develop there will be new risks that need to be covered. Captives have traditionally filled the gap in the market as traditional insurers have been reluctant or slow to react. Captives will therefore continue to flourish as their uses develop, so for many it’s an exciting time for the industry, as insurance finally awakens to the new dawn of innovation which could result in a boom time for captives who remain ready and willing to fill any lack of capacity from the traditional market. With the increasing purchasing power of millennials more insurance is being purchased directly online. In addition capital is flooding into hundreds of new insurtech start-ups around the world. Technology has the potential of transforming the entire insurance value chain including product development, customer acquisition, underwriting and claims management.

Recent examples of captive innovation include HyreCar who have formed a captive for on demand Uber and Lyft drivers, while a New Zealand based peer-to-peer cryptocurrency exchange platform is participating in a cell arrangement. At Artex we have been working on new formations covering online e-commerce retailers who are providing insurance solutions to their customers along with those working in the renewable energy field. In addition, a pent up demand exists in the US cannabis industry that is looking for captive solutions however this is being frustrated by the Federal Government’s treatment of marijuana as a Schedule 1 substance under the US Controlled Substance Act (CSA) and therefore no domicile wants to be the first to form a US parented captive, although captives have been formed for risks located outside of the US.

Innovation and creativity is what captives do well, however captives are reliant on both cooperative regulators and insurance managers who understand the business and risks of their clients. It is therefore essential that regulators and managers continue to cooperate in partnership if they are to continue to flourish. Cayman is fortunate that such cooperation has existed over a period of many years so regulators, government and industry continue to work towards the same goal to make Cayman the clear domicile of choice.