A soft insurance market has not dented captive sponsors' enthusiasm for the Cayman Islands, which has also benefited from the development of alternative forms of risk finance.
The Cayman Islands added a net total of 31 new captives to its register last year, including seven special purpose vehicles (SPVs) set up as part of risk securitisation deals. Although 19 licences were cancelled during 1997, more new licences were issued - 50 - than in any of the previous three years.
At 31 December, there were a total of 449 licensed insurance companies, of which 275 were pure captives, 86 associations, 41 group captives and 9 rent-a-captive. In 1997, the pure captives had total premium income of $1.328 billion and $5.563 billion in assets.
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William McCullough, head of insurance supervision for the Cayman Islands, says: "The only change last year was continuing growth. We have not found it to be the case at all that people are not setting up new captives because of the continuing soft market."
The Cayman Islands are known particularly as a domicile for captives insuring US related health care risks, but Mr McCullough says that the new companies which were licensed during 1997 are increasingly diverse. In addition, while the number of health care related captives is still increasing, new and existing companies are looking to write a wider range of business for their sponsors beyond medical malpractice, including property, casualty and general liability.
There were a number of new companies writing employee benefit and small life insurance companies. Another area of interest, says Mr McCullough, is marine liability where shipping companies have been setting up captives to insure their deductibles from their P&I club cover.
While risk securitisation is in its infancy, the Cayman Islands has so far been the main beneficiary of the deals that have been done, and according to Mr McCullough he already has applications for two more reinsurance SPVs in 1998. Bermuda, not surprisingly, and Jersey also hope to gain from this development.
Roy McTaggart, partner, KPMG, in the Cayman Islands has been involved in setting up a majority of the SPVs and is seeing continuing interest. "The first one took a long time to get off the ground, but after that the others have been quite easy." He sees risk securitisation as a potential growth area for the domicile, though he warns it is likely to remain niche market.
He also believes that there is still considerable potential for growth from more conventional captives. "The reasons for having a captive are still as valid today as they were three to five years ago." Although US owned captives still make up the lion's share of the Cayman Islands' list, there is a lot of interest from South and Central America as those markets become more liberal. "Business is great," says Mr McTaggart.
Another interesting development in the Cayman Islands is that Wellington Underwriting plc, a Lloyd's underwriting agency, has established a service company to access business in central and South America and the Caribbean. Initially licensed to write property business, Wellington Americas Ltd aims to attract up to $10 million new premium income to the group within the next two years. The company will write business through a binding authority for Wellington syndicates at Lloyd's.
The Cayman Islands Insurance Law, 1979 has been in effect since the beginning of 1980. The most recent development has been the formation in January 1997 of the Cayman Islands Monetary Authority to take over the supervisory roles previously performed by the government's Financial Services Department. The authority's head of insurance supervision is responsible for reviewing and processing all licence applications and supervising compliance with annual reporting requirements.
The government has been anxious to encourage the development of offshore insurance business at the same time as protecting the islands' reputation as an offshore financial centre. The head of insurance supervision has the discretion to demand higher net worth requirements than the legal minimum for companies writing third party business, to set premium to net asset ratios and to decide which assets and liabilities are allowable for net worth.
A company's licence may be suspended or revoked if the authorities decide that it is carrying on business in a way that is detrimental to the public interest or that of its creditors or policy holders, or if it is breaking the law. Directors or officers of companies found to have contravened the law can face fines up to $6,000 or a year's imprisonment or both. Making false representation under the law attracts a fine of up to $12,000 or two years' imprisonment or both.
The Cayman Islands have also been in the forefront of the fight against money laundering. They were the first finance centre in the Caribbean to introduce legislation which allows the proceeds of serious crime to be restrained. More recently, the country's Financial Secretary, George McCarthy, in a message on the Cayman Islands' web page, stated: "It is my responsibility not just to encourage growth in Cayman's financial sector but, as importantly, to insist upon the right kind of growth. Cayman welcomes all legitimate deposits and investments but has no interest in, and, in fact, will not tolerate questionable transactions."