Despite its grand ambitions, the Cayman Islands is not yet a serious rival to Bermuda’s reinsurance crown. But it is the world’s second-largest captive jurisdiction. Ana Paula Nacif reports.
With its zero tax, history as a captive domicile, respected legal and regulatory structure and plethora of service providers, Cayman has become a natural captive insurance centre. It has even managed to shed its John Grisham money laundering stereotype and is increasingly bagging business from Bermuda.
But the world’s second-largest captive jurisdiction is not resting on its laurels. Despite a tough market and increasing competition, Cayman has had an average net increase in licensed captives of 6% per year over the past five years. According to figures released in December 2007 by the Cayman Islands Monetary Authority (CIMA), it has 765 captives, writing a gross premium of $7.5bn, shareholder funds of $8.4bn and total assets of $32.9bn.
William Dalziel, executive director, Captives Practice, London & Capital, says that Cayman is “in a really interesting position at the moment in that it is showing year-on-year net growth, whereas some two jurisdictions, such as Bermuda, are not showing any net growth”.
In 2007, the jurisdiction licensed 46 new captive insurers, but Dean Wickens, deputy head of insurance supervision at CIMA, points out that last year the growth in premiums and assets was greater than anything that could be explained by growth in captive numbers. “Rather,” he says, “it is due to captives recognising the increasing opportunities for their captives and writing additional risks.” He adds that Cayman is likely to be licensing its 1,500th captive this year or early next year.
Cayman’s reputation as a jurisdiction willing to embrace new ideas is well known. Its expertise as a healthcare domicile started after Bermuda turned its back on the medical malpractice captive in the 1970s, a challenge Cayman was prepared to embrace. In 1997, Cayman and Guernsey kick-started the development of segregated portfolio company or protected cell legislation, which since then has been adopted by many other jurisdictions. And in the late 1990s, it started to develop the area of catastrophe bonds, bringing capacity to the catastrophe property market by combining excess reinsurance and capital markets.
“Cayman introduced its SPC legislation in 1998,” Wickens explains, “to facilitate rent-a-captives and as an incubator vehicle for those wishing to dip their toes in the captive waters, without committing to a standalone captive. In the last few years, there has been a convergence between the capital and insurance markets, which Cayman’s captives have facilitated by issuing catastrophe bonds.”
In 2007, Moody’s raised Cayman’s ceiling for foreign bonds and notes from Aa3 or high grade, to Aaa or exceptional, placing it alongside the US, Canada and Bermuda. The country ceiling is the highest rating obtainable for an issuer of long-term foreign currency dominated bonds.
About 36% of Cayman captives write healthcare business and the jurisdiction continues to license a number of captives writing this business each year. But there is also growth in other areas.
Linda Haddleton, assistant director, HSBC, explains: “In addition to the traditional healthcare captive, providing professional liability insurance to hospitals and health systems and their employees, some offer programmes for non-employed physicians and specialists, some have extended lines of coverage, for example to workers compensation, and there are new entrants to the market, such as captives serving the long-term care industry, and captives assuming newer risks from, for example, telemedicine and cyber risks.”
And, while the insurance industry has been grappling with issues around keeping the right level of skills and expertise, it seems that, so far, Cayman has managed to keep its head above the water. “As with any island, labour and staff issues are bound to come up, but Cayman hasn’t reached crisis point like other islands such as Bermuda have,” Dalziel points out. “Cayman has a depth of choice and expertise. There is a range of insurance managers focusing on different areas of the marketplace, who are used to dealing with both small companies as well as large corporations.”
“Caymanâ€™s reputation as a jurisdiction willing to embrace new ideas is well known
Putting regulation first
Cayman’s style of regulation also seems to be a winner with both prospective and existing captives. “Failing captives have not been a feature of Cayman’s history,” says Haddleton. “This speaks to the efficacy of the law and its application, and also to the style of regulation which, in addition to more typical statutory filings, calls for continuous dialogue between regulator, insurance manager and licensee, and fosters transparency and disclosure. This approach continues to impress captive boards and consultants that are used to less open relationships with regulators in other places.”
Alissa Matthews, vice president, Captive Solutions, Marsh Management Services Cayman, agrees: “The Cayman regulators are approachable and encourage face-to-face meetings with captive owners on a regular basis. They combine the core principles of the International Association of Insurance Supervisors with a pragmatic business approach.” But competition is fierce and, while the Cayman Islands continue to be the domicile of choice among many US companies, the pressure is not likely to ease off.
According to Martin Emkes, managing director of global business solutions, Heath Lambert, companies going down the captives route for financial retention of risks in the US have a number of options, including Bermuda, Cayman Islands, Vermont and the British Virgin Islands. “In Canada, they also look at Barbados, which has a particular tax treaty which can be advantageous.”
Emkes explains that while Bermuda is a big insurance domicile which has a lot of expertise, it is also a very expensive place in which to operate. “People tend to use Vermont for areas such as primary general liability and workers’ compensation because of licensing issues, and also because there is a trend these days for onshore captives.”
He adds: “There are a lot of companies, especially those specialising in the medical side, such as medical malpractice risks, which go to Cayman partially because it is geographically handy, being so close to the US. It also doesn’t have the same level of expenses and costs associated with Bermuda. Although the British Virgin Islands is growing as a domicile, US companies in general seem to favour Cayman, perhaps because it feels ‘more US’.”
In the last few years there has been an enormous growth in terms of onshore captive domiciles and a large number of US states have now passed captive legislation. However, onshore competition is not an issue for Cayman, according to Wickens. “Cayman does not compete with the onshore jurisdictions and if there is a strong rationale for a captive to form onshore, Cayman is unlikely to have been considered anyway,” he says. “With respect to competition amongst offshore jurisdictions, Cayman’s advantages as a captive jurisdiction are well known. For various reasons, Cayman has, over the years, seen some captives migrate both to and from other domiciles.”
Onshore competition may well not be a threat to Cayman but over the next few years domicile choice is bound to continue to be a hot topic. Particularly as the environment gets tougher for both new and existing jurisdictions. So the next step for Cayman, according to Matthews, will be to expand further into the reinsurance market. This would benefit captive owners by providing a one-stop-shop for their insurance needs as well as further elevate Cayman’s status in both the insurance and financial market.
The first Cayman-based global property and casualty reinsurance company, Greenlight Re was formed in 2006 (see our company analysis on page 31). Matthews says that the Cayman Islands government is reviewing current legislation for any changes that may be needed to attract more open market reinsurers.
“Cayman has the infrastructure and an existing insurance industry to support a trend in forming reinsurance companies,” she concludes. “The Cayman Islands are well poised for growth with unused land available for development. When you combine the potential for growth with the excellent infrastructure and warm sunny weather, Cayman will continue to be an oasis for captives for many years to come.”
Ana Paula Nacif is a freelance journalist.