In the over 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 514 at the end of September, 2000. At that date, the number of registered banks had reached almost 600.

The total combined assets of all companies registered in the Cayman Islands is estimated to have risen to more than US$600bn, 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 Crown Colony with a strong loyalty to the mother country; political stability; a modern, evolving infrastucture; progressive legal developments, catering to the needs of changing international financial products and pressures whilst protecting the rights of individual investors; strengthening the islands' reputation worldwide; a lack of bureaucratic red tape in licensing procedures; evolving products such as segregated portfolio companies (SPCs); 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. Bermuda lost a Governor in the early 1970s and the Bahamas and Panama have witnessed radical events which led many financial institutions to look elsewhere - towards Cayman, for example.

Many people mistake the term “offshore financial centre” for “tax haven”, which generates ill-founded rumours of illicit tax evasion. Care should be taken to differentiate the two: some of the most respected and largest companies and banks in the world have professionally-run operations in the Cayman Islands.

Forty-five 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.

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 US which, as a member of the OECD, has been the prime mover behind the OECD Report on Harmful Tax Competition. This initiative seeks, inter alia, 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 in tracing drug offenders and their money-laundering associates.

Four new amendments to laws relating to anti-money laundering, international access and co-operation were introduced in 2000. This was done to ensure the Cayman Islands would meet the criteria of OECD and FATF for jurisdictions which would not be on their blacklists. It was noted by many at the time that other countries, which had not been on these lists earlier due to their laws making disclosure of suspicious transactions mandatory as opposed to discretionary, had not actually complied with their laws, despite some serious bad press.

The Cayman Islands' Monetary Authority 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-six 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. Indeed, the actions of various organisations, as noted above, are often considered to be a compliment from envious competitors who indirectly are assisting in making the Cayman Islands an even better and more envied jurisdiction in which to be doing business.

The ability of the Cayman Islands to implement new products over the years, such as rent-a-captives and SPCs, has facilitated its commitment to controlled growth. SPCs are expected to account for 20% of new formations in the current year.

As consolidation increases the size of the industry's largest companies, Cayman remains a friendly environment for the small, independent manager who can often cater more efficiently to an entrepreneur's needs than the large cancerous giants with weighty overheads. Continued growth in healthcare, medical malpractice and deferred variable life products may very well see the number of captives in Cayman hit 550 by the end of 2000.

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 30 years in the insurance industry.