Kevin Lloyd surveys the Cayman Islands' growing insurance market and continues to find much that is positive.
Much has been written about the development of the captive insurance market in the Cayman Islands over the past 25 years. This article intends to provide an update on the continued growth being experienced in Cayman's insurance market since last year and comments on current developments in the industry.
A record year? Healthcare captives still continue to contribute significantly to the growth of the insurance industry in the Cayman islands and the Cayman insurance industry appears to be well on its way to another record number of new licences issued. As of 31 October 2002, the insurance department of the Cayman Islands Monetary Authority (CIMA) reported 69 new licence applications approved for the 2002 calendar year. There are a further additional 25 new applications awaiting approval and still two months to go.
Where is this all coming from? Insurance managers are reporting that approximately half the 69 new captives are healthcare-related. This is a substantial change from 2001, where only one-third of the 47 new licence applications for 2001 were healthcare-related.
Why healthcare? To put things into simple terms, it is a very hard market for traditional healthcare products. Many healthcare providers and physician groups cannot continue to pay soaring premium rates and at the same time accept increased retentions being imposed by their insurance providers.
Why Cayman? It all started 25 years ago, when the Cayman Islands welcomed two very prominent healthcare providers that were rejected by other domiciles. Since then, over 200 other healthcare providers have followed. With more than 25 years of healthcare experience, the Cayman Islands and its regulators and service providers can clearly demonstrate that the knowledge and experience gained over the years is a demonstrable advantage for the domicile.
As much as we like to talk about the fact that 50% of all new captives are healthcare related, there is still the other 50% that is also driving the growth.
In 1998, the Cayman Islands introduced legislation allowing for the formation of segregated portfolio companies (SPCs). Prime uses of the SPC concept include the typical rent-a-captive business, deferred variable annuity/variable life products, association captives, life reinsurers and single parent captives looking to expand their offerings to include third party business.
What is an SPC? An SPC is an exempted company with protected segregated portfolios. Each of the portfolios in an SPC can issue shares, if desired, and the capital contributed, premiums paid and losses incurred by each organisation holding title to a particular portfolio are protected from the creditors of any of the other portfolios, should the other portfolios be unable to meet their obligations.
Since the launch of SPCs in 1998, they have been able to attract participants from all lines of business that have been interested in a captive, but were unable to commit to one because their premium levels were too low to fully fund the cost of operating a captive offshore subsidiary, they did not have an interest in running an offshore company, or they were unable or unwilling to provide the initial US $120,000 in capital.
The fact that one insurance licence will cover the core and any number of segregated portfolios is one advantage to bear in mind when considering a segregated portfolio. The sharing of capital and the cost of operating an SPC with other participants while at the same time protecting a participant's contributed assets from other cells is another of many advantages. Such advantages, when compared to the current hardening of the insurance market, have helped turn an interest in considering a self-insurance vehicle into a reality.
As of 31 October 2002, 51 SPCs with 277 segregated portfolios have been established in Cayman. This is a significant increase since 30 September 2000, when there were only 25 SPCs with 60 segregated portfolios in existence.
One of the significant differentiating features of Cayman as a jurisdiction is its regulatory environment. Throughout the growth of the industry, its regulators have been successful at effectively supervising the industry while remaining accessible and willing to listen to the industry.
We continue to note clients who are favourably impressed - and pleasantly surprised - with their dealings with CIMA. This bodes well for future growth and demonstrates that as a jurisdiction, Cayman is not about to lose sight of the reasons for its success to date. It is also important to note that the industry works in partnership with CIMA, and all the service providers, including the insurance managers, audit firms and attorneys, have contributed greatly to both the reputation and success of the insurance industry.
This year will close as another record year for new formations. New products and existing stalwarts both appear primed for future growth. Regulatory supervision remains effective, accessible and flexible. As a result, the ingredients for continued growth in Cayman's captive industry are all intact. Next year looks as if it has the makings of another strong year.
By Kevin Lloyd
Kevin Lloyd CA has been the insurance practice partner of KPMG in the Cayman Islands since 1999. He has worked with the captive insurance industry for 11 years.