The most recent agency to report on the state of the financial regulatory systems of the offshore financial community is the financial services firm of KPMG. At the behest of the British Government, and the expense of the territories concerned, KPMG reported at the end of October on the six British dependencies with the largest financial services sectors, among them the Cayman Islands.

KPMG looked at every aspect of financial regulation in Cayman. In its opening paragraphs, the report states that “the Cayman Islands is one of the world's largest banking centres. At present the banking sector in the Cayman Islands comprises over 450 banks from 65 countries which hold assets of US$671bn. Forty-three of the world's top 50 banks have a branch or locally incorporated subsidiary in the Cayman Islands. There are 430 Category B banks, of which 51 have established a physical presence in the jurisdiction.

“The Cayman Islands has also grown as a centre for insurance and is now the second largest captive insurance centre in the world with 502 captive insurance companies, largely from the US market.

“The Cayman Islands is also a significantly large centre for the establishment and administration of mutual funds. There were 2,298 regulated mutual funds as at 7 March 2000, being 603 administered, 1,654 registered and 41 licensed schemes.

“As at 31 December 1999, the Cayman Islands had 3,614 resident companies, 11,342 non-resident companies and 34,500 exempt companies. The Cayman Islands also has significant numbers of trusts and limited partnerships.”

The report's initial overall findings were: “In general, the Cayman Islands is one of the more mature of the jurisdictions we have reviewed in terms of regulatory structure and culture.”

Section 5 of the KPMG report related to insurance in the Cayman Islands. That section began with a brief analysis of the Cayman insurance sector. A review of relevant legislation followed, which read as follows:

“The Insurance Law (1999 Revision) (the IL) governs the insurance regulatory regime in the Cayman Islands. CIMA (Cayman Islands Monetary Authority) undertake the supervision of insurance business. Under the IL, certain powers are preserved by the Governor in Council and, in these cases, CIMA provides recommendations for the Governor in Council to endorse or refuse. The Law provides for licensing of insurance companies, managers, brokers and agents.

“Other notable provisions within the IL include the following:

  • minimum net worth margins of: US$120,000 must be maintained for general insurance business; US$240,000 for long-term business; (and) US$360,000 for composite companies writing both general and long-term business. In practice, the level of capital stipulated by CIMA on granting a licence may be higher according to the risks assessed in the company's business plan;

  • changes in business plans plus any other changes from application require the prior approval of CIMA;

  • all insurers must appoint an independent auditor and life insurers must appoint an actuary;

  • captives must appoint a licensed insurance manager (unless they maintain a local office in a manner acceptable to CIMA);

  • a licensee is required to file an audited statement of accounts to CIMA within six months of the year-end;

  • separation of long-term (life) business and general business accounts.

    “(Legislation introduced this summer) deals with the overall mandate and functions of CIMA. It is also the legislation that ascribes statutory immunity to CIMA and its employees, subject to the usual “in good faith” test. (The new legislation) allows information sharing with overseas regulators.”

    The report then discusses rules, regulations and guidance notes, as follows:

    “The relevant regulations are the Insurance (Forms) Regulations 1980 (IFR). They prescribe the application form and contents for obtaining a company licence or other types of licence, for example agents or managers.

    “Items specifically required include a business plan, financial and loss projections, latest annual report and audited accounts, curricula vitae and three references, including one from a bank. Applicants must also provide background information on their shareholders, directors and officers. A full vetting check is extended to non-executive directors and shareholders.

    “The Regulations also include annual reporting forms and procedures, including certificates of compliance, and actuarial reports where required.

    “There have been no guidance notes developed and issued to the insurance industry. However we are informed that regular communication with managers and licence holders takes place in which CIMA imparts guidance.

    “Companies wishing to carry on insurance business in or from within the islands must apply for and receive a licence from the Governor in Council. The Law provides a distinction between Class “A” or domestic insurance companies and Class “B” for non-Cayman companies. In most respects the regulatory regime is the same for both classes of licence. There is a statutory requirement for Class “A” companies to hold funds locally to match their insurance liabilities under the direction of CIMA.

    “Financial returns are analysed in depth, often resulting in requests for additional information. New companies are required to make a return after the first six months' operations. Quarterly returns are called for in problem cases and also where CIMA has reason to monitor performance closely. The review of proposed business plan changes also provides an opportunity to assess performance.

    “The manager of a captive company has a statutory duty to inform the authority of any event which will affect the operations of the company.

    “To date, CIMA have carried out seven Class “A” and two management Company inspections since its programme commenced in 1998. The scope of these inspections is wide and includes a review of the investment policy, underwriting and claims policies and procedures, reinsurance programmes, internal controls and proper record keeping.

    “Given the market profile of insurance companies in the Cayman Islands, CIMA has taken positive action by the introduction of on-site visits. (Legislation introduced this summer) amended existing law to require that CIMA monitor compliance with the Money Laundering Regulations 2000.

    “The time scale before CIMA receive audited annual financial statements is currently six months after the year end. “Jurisdictions worldwide have moved to require new applicants to set-up separate companies for life and general business. IAIS has recommended that the two types of insurance business should be written in separate companies as the nature of the risks is very different.

    “To mix the two within one entity can lead to the interests of either type of policyholder being unfairly subjugated to the interests of the others. There are no composite insurers in the Cayman Islands and we are informed that no such companies will be licensed, in accordance with IAIS principles.

    “CIMA's enforcement powers are the suspension or revocation of a licence, and ultimately a fine and imprisonment. In addition, the Governor in Council has the power to require a licensee to take such steps to rectify the matter, pending a full enquiry into the licensee's affairs, where it is believed that the licensee is carrying on business in a manner likely to be detrimental to the public interest, or to the interest of its creditors or policyholders, or in contravention of the IL.

    No policyholder protection scheme exists for the Cayman Islands. CIMA inform us that any such scheme would only apply to the domestic insurance market which, in premium terms, only comprises 3% of the Cayman Islands insurance industry.”

    The report then concludes with a section entitled “Issues and recommendations”, which reads as follows:

    “In view of the prominent position that the Cayman Islands plays within the captive sector of the offshore insurance market, it is necessary that the legislation in place is of an acceptable international standard.

    “The enforcement powers of the CIMA are restricted concerning the suspension or revocation of a licence.

    “We understand that proposed legislative changes will eliminate deficiencies in enforcement powers and we recommend that this legislation be implemented before the end of 2000. The revision should include the power for CIMA to issue licence limitations and conditions, fines and sanctions, the power to issue direction, cease and desist orders, and to take control of assets or the company itself and to appoint actuaries or auditors.

    “Presently insurance managers are required to advise the authority of any event which could affect the satisfactory operation and solvency of the company. We recommend that the statutory requirement should be extended to include auditors.

    “Whilst regular communication takes place on matters of policy, prudential guidance notes should be issued following consultation with the industry. We recommend that guidelines are issued to cover the following areas: actuarial practice, confidence levels and discount rates, related party policy and liquidity.”

    In the dry language in which KPMG issued its report, this short list of recommendations amounts to an endorsement of the way in which Cayman regulates its insurance sector. Recommendations for other jurisdictions were considerably more far-reaching; Bermuda, for example, will be required to overhaul its insurance regulatory system.

    While no one in Cayman will comment specifically on the insurance recommendations made by KPMG, a degree of satisfaction may well have been the outcome when KPMG's report, long overdue, was finally published.

    The regulation of the insurance sector in Cayman basically meets international standards, and now that is official.