This article is intended to serve as a practical explanation of banking in the Cayman Islands for captive insurance companies, which are only a small part of the offshore banking business.
Cayman is one of the leading offshore financial centres of the world and is home to more than 500 banks, including over 50 with a physical presence. Several international banks, such as UBS, Barclays Bank, RBC, HSBC and two Bermudian banks, Bank of Butterfield and Bank of Bermuda, offer banking services to captive insurance companies from Cayman. Cayman also has substantial trustee and investment business, and its offshore banking business is mainly divided between trust, investment and insurance. The Cayman subsidiaries of international banks offer a full range of services to the insurance industry through their offices in Cayman, as well as through their international offices around the world. These are supplemented by a worldwide network of correspondent banking and stockbroking relationships, enabling the banks to assist captives or captive management companies with operations in more than one jurisdiction.
The following is a brief summary of the specific services offered by Cayman banks:
The basic operating account of a Cayman captive is a checking account with one of the local banks, complemented by interest-bearing deposit accounts used for the management of cash assets. Sometimes captive owners prefer to establish a separate account for local expenses, operated under a different mandate and set of authorised signatures.
Typically, all premiums are routed through Cayman, and the local banks manage the short-term assets, the payments of claims and other international transfers. All incoming payments come through the basic operating account before being transferred to an interest-bearing deposit account, or being remitted abroad by wire transfer or bank draft.
Cheques drawn on foreign banks normally require special handling and, for US dollars and sterling, are accepted by the clearing systems in New York and London, respectively, and paid promptly. The usual banking statements and transaction reporting methods are, of course, available to all customers. Opening these operating accounts is the same process as it is in the US or elsewhere, with designated signatures, corporate undertakings, bank references, etc. The accounts work the same way, too, with monthly statements going to designated receivers.
Interest-bearing deposits are either on a fixed-term basis (similar to certificates of deposit) or on a call basis (demand deposits), and are widely used by Cayman captives, not only for short-term cash management but also for long-term investment needs.
Deposits are placed overnight or for periods ranging from one week to a year or two; they may be established in any of the world's major currencies. Interest rates paid on such deposits are competitive with those obtainable in major financial centres.
The placement of deposits and the management of these assets for captives and other international companies is a major service of the banks, handled either by assigned account administrators or directly within the banks' treasury departments. Acting as agents, Cayman banks can manage interest-bearing term deposits on a fiduciary basis, by placing the funds with other international banks.
It is estimated that 90% of Cayman captives have deposits or certificates of deposit with their Cayman bankers, representing their short-term (under one year) cash and investments, which account for perhaps 25% of the captives' total investable assets. While Cayman banks compete for management of the other 75%, which is usually held in longer-term investments, most captive owners employ outside investment managers or handle the investment management in-house.
Historically, the Cayman banks have had a relatively small percentage of long-term instruments under their management, but this is growing.
To put this into perspective, the Cayman Islands Monetary Authority reports that total insurance assets held by Cayman captives amounted to US$14.3 billion at 30 September , 2000. We estimate that Cayman banks have about 10% of this amount under short- or long-term management. We also estimate that as much as 90% of annual premium income - which in 1999 amounted to US$571 million - passes through Cayman banks. In other words, premiums flow into the Cayman banks, which retain some of it on short-term deposit, offering cash management services. The bulk is transferred abroad, mostly to the US and UK, to be managed by outside investment managers.
International money transfers
Through the international offices of the Cayman banks and their network of correspondent banks, funds can be received from or transmitted electronically to all parts of the world on a daily basis for same-day value for most major currencies.
Cayman banks have state-of-the-art money transfer systems and are capable of handling all major currencies. This service and interest-bearing deposits are the banking products most utilised by Cayman captives.
Treasury and foreign exchange facilities
Cayman banks have always handled business from around the globe. Banks are active traders in all major world currencies and offer full global currency capabilities in foreign exchange, including Eurocurrency deposits, swaps, options and other derivatives.
Deposit rates are usually based on Interbank Euro-market bid prices and Cayman banks bid daily on deposits ranging from overnight to one year. Larger Cayman banks can buy or sell (spot or forward) foreign exchange on behalf of customers 24 hours a day, using their international banking networks. Most Cayman banks offer interest rate instruments tailored to customers' specific requirements.
Considerable investment management expertise exists within the Cayman banks, which is brought to bear in their extensive personal and corporate trustee businesses. This expertise extends to meeting investment management requirements for insurance companies in both fixed-income and equity investments. In Cayman and elsewhere, a number of unit trusts and mutual funds are available for captives, and Cayman banks are experienced in dealing with them. For larger captives, Cayman banks also offer discretionary portfolio management.
Captive insurance companies tend to maintain a conservative risk profile. Cayman banks have broad experience of investments in very liquid fixed income funds, money management funds and US Government securities, as well as portfolios containing a high quality diversified equity component, ranging from 10% to as high as 45% of the total portfolio.
Global custodial service
Cayman banks can act in the capacity of custodian for international securities of all kinds. They provide full dividend and corporate action monitoring, as well as full cash management facilities. Investment in all types of securities is possible, including deposits, certificates of deposit, bonds (both US domestic and Euro), stock exchange securities on all major securities markets, commodities and futures contracts. Associate companies of the larger banks provide complete investment management services to complement this custodianship.
Many captive companies avail themselves of this custody service while utilising their own investment advisors. Global custody is part of the service Cayman banks provide, not only to the captive insurance industry but also to investment institutions that use Cayman for the operation of unit trusts, mutual funds, pension funds and personal trusts. The fee structure and daily reporting for custody service is competitive with that of US and European institutions.
Lines of credit are becoming increasingly important to assist captives in managing their short-term cash needs against their longer-term investment strategies, particularly for those captives writing long-tail business. While the Cayman offshore banks are not significant lenders and have extremely liquid balance sheets, they do grant term loans, advances, overdrafts and revolving lines of credit to captive insurance companies. All lending is generally on a secured basis at competitive interest rates based on Libor or Prime, with aggressive collateral values assigned to the securing assets.
Letters of credit
One of the most common requirements of the captive insurance industry is for letters of credit, which are often required by US fronting insurers to enable them to take statutory credit for offshore reinsurance to captive insurers. Cayman banks see a substantial volume of this business. Cayman subsidiaries of international banks arrange to have their parent banks' branches in the US, which are approved by the National Association of Insurance Commissioners (NAIC), issue the letters of credit on a secured basis.
In contrast, Bermudian bank letters of credit are confirmed by FDIC member banks in the US. This also works in reverse for letters of credit used as standby capital for start-up captive insurance financing.
Group captives, in particular, have increasingly been using incoming letters of credit posted by captive members, issued by US banks with Cayman banks as the beneficiaries, as a component of the collateral needed to support outgoing letters of credit arranged by Cayman banks to fronting insurers. Cayman banks require credit approval for the US banks issuing incoming letters of credit ascertaining their creditworthiness, prior to accepting the letters of credit as collateral. In certain circumstances, insurance regulators in Cayman allow the same incoming letters of credit posted by captive members to form part of a captive's capitalisation.
Cayman banks offer a number of other services, ranging from safe deposit boxes to nominee facilities, standing orders, registrar and transfer agency, proxies and notices, portfolio valuation, dividend and interest collection, stock brokerage, bond dealing and escrow arrangements. In co-operation with US banks, lock box facilities are available, as is the creation of Section 114 trusts, also known as reinsurance trusts.
Cayman banks operate under the supervision of the Department of Financial Services of the Cayman Islands Monetary Authority. This is part of the same office through which captive insurance applications are processed. One reason Cayman has such a good reputation is that its bankers and other professionals have been very careful about the nature of the business accepted. Cayman banks actively and routinely check the background and references of all those who propose to do business in Cayman and will decline to serve where the results of their investigations do not meet standards.
Role of Cayman banks in the growth of the captive insurance industry
Cayman banks have always been in the forefront of developing and moulding Cayman as a location for the insurance industry and have been influential in promoting and aiding the development of Cayman as domicile for captive insurance companies.
The banks' senior managers travel extensively with Cayman business delegations to discuss captives with potential captive owners, and attending and speaking at conferences. The interest and involvement continues with an active role by Cayman banking representatives in all the major international captive conferences, including the annual RIMS conference.
In general, the Cayman banking industry, with its global reach, highly skilled staff, strong ratings and broad range of competitively-priced banking, credit and investment products, plays a significant role in making Cayman a domicile of choice for captive insurance companies.
Saad Hafiz is a director of, and head of institutional banking for, UBS (Cayman Islands) Ltd. and has 22 years of international banking experience.