Terry Burke looks at the development of the insurance sector in the Cayman Islands.
In the 20 years since the Cayman Islands passed its Insurance Law in 1979, the jurisdiction has seen the number of insurance captives more than double, to just under 500, at the end of September 1999. At that date, the number of registered banks had reached almost 600.
The total combined assets of all companies registered in the Cayman Islands have risen to more than US$500 billion, making Cayman the fifth-largest financial centre in the world.
The background to this growth includes a range of factors, among them: Cayman's status as a British overseas territory with a strong loyalty to the mother-country, political stability, a modern, evolving infrastructure, progressive legal developments, provision for the needs of changing international financial products and pressures while protecting the rights of individual investors, strengthened reputation worldwide, a lack of bureaucratic red tape in licensing procedures, evolving products, modern communications and a desirable geographical location.
The major competition for the captive industry in the Cayman Islands has traditionally been Bermuda, which had a 30 year start on Cayman. In a way, Cayman has benefited from being able to analyse the mistakes of jurisdictions which started earlier. Countries such as the Bahamas and Panama, as well as Bermuda, have experienced various problems over the last 40 years; mainly due to political and social changes.
Forty-eight of the 50 largest banks are represented here. Some of the Fortune 100 and many of the 500 also have ties in the Cayman Islands, including ownership in Cayman captives, either directly or via other subsidiaries. Indeed, the highly-touted XL Capital and ACE companies - although managed in Bermuda - are registered in the Cayman Islands.
The tax haven issue
Many people mistake the term “offshore financial centre” for “tax haven”, which generates ill-founded rumours of tax evasion. Care should be taken to differentiate the two. Some of the most respected companies and banks in the world have professionally run operations in the Cayman Islands.It is in the area of taxation that certain authorities have recently turned their attention to the Cayman Islands and other offshore jurisdictions. The most powerful of these is the United States which, as a member of the Organisation for Economic Co-operation and Development (OECD) has been the prime mover behind the OECD Report on Harmful Tax Competition. This initiative seeks, among other things, to determine a code of conduct on business taxation which may have a detrimental effect on the business of offshore financial centres.
The OECD process continues, despite the Cayman Islands having received a clean bill of health from a recent review by the US authorities. Cayman law has been changed, with the introduction of the Mutual Legal Assistance Treaty, Misuse of Drugs (International Cooperation) Law and the Proceeds of Criminal Conduct Law. Cooperation has been established between the Cayman Islands' police and US Drug Enforcement Agency (DEA) in tracing drug offenders and their money laundering associates. The Cayman Islands' Monetary Authority (CIMA) has taken appropriate action to close any bank where there is evidence of money-laundering operations. As a matter of context, it will be interesting to see the outcome of alleged onshore money laundering at the Bank of New York, which recently hit the headlines.
Despite the many obstacles in its path, the Cayman captive industry continues to grow. The basic reasons - controlling parent's insurance costs, investment of premium income, access to reinsurance markets, etc. - all contribute to the overall decision to form a captive. The location depends on the factors noted above.Twenty-five years ago, Bermuda rejected the Harvard Medical School's medical malpractice programme. The programme's subsequent formation in the Cayman Islands was an indication that the traditional insurance market was continuing to change. The rate of change, perhaps, was increasing. Many in Cayman attributed the islands' success to a favourable climate of regulation - one which insists on high standards, but without excessive bureaucracy.
The ability of the Caymans to implement new products over the years, such as rent-a-captives and segregated portfolios companies (SPC), has facilitated its commitment to controlled growth. SPCs are expected to account for 20% of new formations in 1999. As consolidation increases the size of the industry's largest firms, Cayman remains a friendly environment for the small, independent manager who can often cater more efficiently to an entrepreneur's needs. Continued growth in healthcare, medical malpractice and deferred variable life products may see the number of captives in Cayman hit 500 by the end of 1999.
Terry Burke is managing director of Britannia Insurance Management (Cayman) Ltd., an independently owned insurance management company which he formed in June 1997. He has spent almost 30 years in the insurance industry.