In the more than 20 years since the Cayman Islands passed its Insurance Law in 1979, the jurisdiction has seen the number of insurance captives more than double to 537 at the end of October 2001, with assets totalling almost $15bn. At that date, the number of registered banks had reached almost 580 with assets of approximately $750bn.
The background to this growth includes a range of factors, among them: Cayman's status as a British Overseas Territory with a strong loyalty to the mother country; political stability; a modern, evolving infrastructure; progressive legal developments that cater to the needs of changing international financial products and pressures, whilst protecting the rights of individual investors; the strengthening of the islands' reputation worldwide; a lack of bureaucratic red tape in licensing procedures; evolving products such as segregated portfolio companies (SPCs); modern communications; and a desirable geographical location.
The major competition for the captive industry in the Cayman Islands has traditionally been Bermuda, which had a 30-year start on Cayman. In a way, Cayman has benefited from being able to analyse the mistakes of jurisdictions that started earlier. Countries such as the Bahamas and Panama, as well as Bermuda, have experienced various problems over the last 40 years, mainly due to political and social changes.
Many people mistake the term ‘offshore financial centre' for ‘tax haven', which generates ill-founded rumours. Care should be taken to differentiate the two: some of the most respected and largest companies and banks in the world have professionally-run operations in the Cayman Islands. Forty-eight of the 50 largest banks are represented here.
Some of the Fortune 100 and many of the 500 also have ties in the Cayman Islands, including ownership in Cayman captives, either directly or via other subsidiaries. Indeed, the highly-touted XL Capital and ACE companies – although managed in Bermuda – are registered in the Cayman Islands.
In recent years, the OECD initiative on harmful tax competition and the FATF initiatives caused some concern to the ‘offshore' jurisdictions. The Cayman Islands has led the way in the area of compliance and has received a clean bill of health from both the OECD and FATF, and has been removed from their lists. Some have criticised the Cayman Government and some banking institutions for having gone too far in the compliance procedure, making it among the most demanding in the world.
Cayman law has been changed, with the introduction of the Mutual Legal Assistance Treaty, Misuse of Drugs (International Co-operation) Law and the Proceeds of Criminal Conduct Law. Co-operation has been established between the Cayman Islands' Police and the US Drug Enforcement Agency in tracing drug offenders and their money-laundering associates. The Cayman authorities have also assisted in the search for terrorist-related assets and owners; none were found in the jurisdiction.
Despite the many obstacles placed in its path, the Cayman insurance industry continues to grow. The basic reasons – controlling the parent's insurance costs and minimising the effects of fluctuating rates experienced in the conventional market (particularly those promised for 2002), investment of premium income, access to reinsurance markets, etc. – all contribute to the overall decision to form a captive, as does location.
Twenty-six years ago, Bermuda rejected the Harvard Medical School's medical malpractice programme. The programme's subsequent formation in the Cayman Islands was an indication that the traditional insurance market was continuing to change. The rate of change, perhaps, was increasing.
Many in Cayman attributed the islands' success to a favourable climate of regulation – one which insists on high standards, but without excessive bureaucracy. Indeed, the actions of various organisations, as noted above, are often considered to be a compliment from envious competitors who indirectly are assisting in making the Cayman Islands an even better and more envied jurisdiction in which to be doing business. I am pleased to say, however, that Cayman and Bermuda often work hand-in-hand with independent companies, such as my own, responding to varied requests from the international insurance and reinsurance markets, using their expertise in both domiciles. From feasibility studies to excess reinsurance placements, we feel we can service the increasingly demanding marketplace.
New product implementation
The ability of Cayman to implement new products over the years, such as rent-a-captives and Segregated Portfolio Companies (SPCs), has facilitated its commitment to controlled growth. SPCs are expected to grow significantly in the current year and already account for 38 of the 537 licensed captives. Continued growth in healthcare, medical malpractice and deferred variable life products may very well see the number of captives in Cayman hit 550 by the end of the current year. Within the 38 SPCs are 169 cells. They enjoy the benefits of a quasi-rent-a-captive, with protection offered by recently-implemented SPC law.
As consolidation increases the size of the industry's largest firms, Cayman remains a friendly environment for the independent manager, who can often cater more efficiently to an entrepreneur's needs than the giants with their weighty overheads.