The Cayman Islands have established a financial platform from which the insurance sector is diving into uncharted waters, says Roger Crombie.

When the world thinks of the Cayman Islands, it thinks of banking. The Caymans, after all, are the world's fifth-largest financial centre. But alongside the banking industry in Cayman has grown the second largest captive insurance industry in the world, which, some time before this year is out, will number 500 companies.The term captive is a little misleading in this case. The “Cayman 500” may be organised and enumerated as captives, but the term loses its meaning when the mix of lines is considered. The business that Cayman insurance companies are conducting has changed and developed as the numbers have grown beyond the point where the reference is informative.

The Cayman insurance sector moved into the securitisation of risk rather faster than anyone else in the world. Its segregated cell legislation has proved to be a winner, with other jurisdictions playing catch-up. It is a market leader in healthcare. Physical presence reinsurance is beginning to spring up, seeded with hundreds of millions of dollars in capital. Cayman's life business, particularly variable life and annuities is thriving, even though the gains it achieves are mostly taxed in the United States.

Tax is not levied on profits made during the life of the risk, however, which affords managers the opportunity to take advantage of compound interest on a year-on-year basis which, simply put, achieves better results.

Professional infrastructure
One key development, as Cayman has grown its insurance industry, has been a gathering of professionals - in insurance, accounting, the law and corporate management as well as on the regulatory side - who, cumulatively, have learned the knack of innovation. In a world of copy-cat offshore jurisdictions, the real ones are those who affect the model, as opposed to those who simply adopt it.

In financial services, as in almost any other sector, a jurisdiction which takes the lead in a particular line of business more often than not will hold on to it. As its professional cadre accumulates experience in the administration of the product and continues to refine it, the requirements of new capital direct it to what is recognised as the best location from which to carry out that business.

The development of securitisation in the Cayman Islands, by itself, would be evidence that the jurisdiction is a serious player in the offshore world. Beyond the banking and insurance statistics, a simpler measure tells the tale: between 1970 and 1999, the population of the Caymans grew from 10,249 to something approaching 40,000; estimates suggest that the number of Caymanians and expatriates is now roughly equal.

Many credit the placing in Cayman of Harvard Medical School's medical malpractice programme in the mid-1970s as the start of the islands' insurance sector. A decade later, the move into offshore insurance had achieved little physical expression in Grand Cayman; a single Holiday Inn was just about the only commercial structure on Seven Mile Beach. The business sector, as best I recall from a visit in the early 1980s, mostly conducted its affairs from three buildings across the road from each other.

Today, George Town fairly bustles. When the giant cruise ships are moored off the shoreline, tourists jam the shopping centre, spilling over into the business district which sits behind it. Cayman's business people are mostly in the buildings, rather than on the streets, making the business district seem spread out to one used to Bermuda's close quarters, although all of George Town is permeated by the busy, cloistered feel of boom towns anywhere.

Among the business community is a generation of mostly British expatriates who have spent their lives in the insurance sector in all four corners of the world. To the Caymans, they have brought their experience and the ability to grow wealth in the welcoming climate of a community where government works in an informal partnership with, rather than against, its corporate citizens.

This system, referred to as the “public/private partnership”, lies at the heart of a successfully managed financial services sector, as Bermuda has shown. In the insurance industry, among the most staid of all businesses, the partnership presupposes that all parties are interested in a stable environment in which to carry out their often long term plans. It is in the interests of the private sector, every bit as much as the public sector, that matters proceed in a controlled and utterly legitimate manner.

The partnership relies for its structural integrity on the professionals - in insurance, accounting, the law and corporate management - who are the point of introduction for potential new clients. They remain the closest to those accepted as clients. Self-regulation works only if it is in everyone's best interests that it work.

At century's end, the onshore community is seen by those offshore as the only real threat on the horizon. The inept inability of the Organisation for Economic Co-operation and Development (OECD), to discern between tax evasion and tax avoidance temporarily threw off those who implicitly know the difference and spend their time ensuring that their activities are on this side of the difference, but for the Caymans and the other serious centres, there may be light at the end of that tunnel.

The model which has produced the Cayman insurance industry suggests that it will go from strength to strength. Another three years like the last three, and when people think of the Cayman Islands, they will think of banking and insurance.

Roger Crombie is the editor of this edition of Global Reinsurance and the publication's Bermuda correspondent. He is also a fellow of the Institute of Chartered Accountants of England and Wales.