Over the past 20 years, insurance law and regulation in the Cayman Islands have seen many practical and innovative changes. This has been no accident, argues George Craig.

Over a period of years, regulators and legislators have attempted to make the Cayman Islands' insurance industry one of the most efficiently and practically regulated in the offshore market. As a result, this jurisdiction effects a system of partial legislative regulation and partial discretionary regulation to ensure that not only do insurance vehicles comply with the letter of the law and its strict requirements but also that the fluidity of their business situations are closely monitored and, where possible, enhanced and aided by a responsive regulator.

The Cayman Islands has, of course, many attractive qualities and strengths to make it the first choice for insurance vehicles in the offshore world. These include the depth and quality of the insurance managers, attorneys and auditors available on the island. The Cayman Islands Monetary Authority (CIMA) is an extremely rare commodity in either the onshore or offshore insurance business, in terms of its ability to meet at short notice with potential insurers and to deal with ongoing problems which they may encounter. Together with the innovative approach taken to legislate and to deal properly with issues which arise, this makes the Cayman Islands one of the most attractive jurisdictions for captive and reinsurance vehicles being established in the offshore market.

What then of the regulatory and legal system for insurance vehicles in the Cayman Islands? As already mentioned, this is a combination of practical and legal scrutiny. The main source of hard law in this area is the Insurance Law (1999 Revision) of the Cayman Islands, which has been much amended and improved over the years and is currently undergoing further scrutiny to identify areas for further improvement. The law delegates many discretionary powers and authorities to both the CIMA and the Governor of the Cayman Islands to ensure its smooth operation.

The law covers any “insurance business” conducted within the CaymanIslands. This is defined as: “the business of effecting and carrying out contracts (a) protecting persons against loss of liability to loss in respect of risk to which such persons may be exposed; or (b) to pay a sum of money or thing of value upon the happening of an event”.

The definition of insurance business in the Cayman Islands is extremely wide. It is split into two types of business. The first is “long term” insurance business (fundamentally human life risks, risks against persons by contracts over five years or other life contracts upon which premiums are paid and sums received). Everything else is classified as “general” insurance business in the Cayman Islands.

Any form of insurance business conducted in the Cayman Islands must be licensed. An insurer will be required to obtain one of the following licences, depending on the type of business it intends to conduct:
Class A licence – These are mainly obtained by local insurers or external insurers carrying out insurance business in the Cayman Islands. It is unlikely that many Class A licences will be granted in future years since this particular market is already well represented.

Unrestricted Class B licence – This is the preferred form of licence for any insurance vehicle being regulated in the Cayman Islands. It permits the vehicle to conduct any form of insurance business anywhere worldwide other than in the Cayman Islands.

Restricted Class B licence – This form of licence allows the conduct of insurance business outside of the Cayman Islands, only with members of an approved class or other approved persons. This has historically been used mainly by insurance institutions or other institutions who wish only to limit the membership or insurance activities of the Cayman Islands' vehicle to their own particular group.

The typical vehicle used for a Class B licence, restricted or unrestricted, is an “exempted company”, the preferred type of investment vehicle in the jurisdiction. Its main advantage is that an exempted company can apply for and receive a tax undertaking from the Governor of the Cayman Islands that, whatever changes in the legislation of the Cayman Islands to impose any capital gain or income taxes (of which there are currently none in the Cayman Islands) on such a vehicle, the company will be protected from any imposition of such taxation laws for 20 years (renewable to 30 years) from its incorporation.

Obviously, this is a major attraction to those institutions and businesses looking to establish a tax effective insurer which can roll up tax free capital gains prior to distribution toshareholders and investors.

As well as obtaining a licence, any insurance applicant will be required to meet both “minimum net worth” requirements (by law) and “ongoing net worth” requirements (imposed by the regulators). The minimum net worth requirements under the law are as follows:
• Insurers conducting general business only – CI$100,000 (approximately US$122,000);
• Insurers conducting long-term business only – CI$200,000 (approximately US$244,000);
• Insurers conducting general and long term business – CI$300,000 (approximately US$366,000).

Further, each insurer will need to discuss with the CIMA and establish, at the CIMA's discretion, the level of minimum net worth ratios to be imposed. Depending on the business of the insurer and the comprehensiveness of the disclosures, the premium to capital ratio usually set by the CIMA would be between 3:1 and 5:1.The Insurance Law does not in itself regulate the type of investments whichcan be made by insurance vehicles. However, the CIMA will impose (under discretions granted under the law), certain restrictions on investments to be made by Cayman Islands' insurers. Generally the insurance industry rule of not exposing more than 10% of the company's capital to individual risk should be observed, other than in exceptional circumstances. Investments should be as secure, liquid and readily realisable as possible. In negotiations with the CIMA, however, levels of equity, debt and government product investments can be discussed and set and thereafter maintained and scrutinised.

Continuing requirements
There are, of course, other continuing requirements for compliance by insurance vehicles. Specifically, the CIMA must be notified of any changes to the information lodged during the licensing process of the insurer, usually in advance of such changes taking place. An annual certificate of compliance which is usually executed by the insurance manager of thevehicle must be lodged with the CIMA, which makes the role of such managers particularly crucial to the regulatory process. Depending on the type of vehicle which has been licensed, there can also be requirements for segregated accounts, reserves, approved basis of custodianship, audited accounts, actuarial valuations of assets and liabilities and other information requested by the CIMA.

The inherent powers of the CIMA under the Insurance Law are supplemented by certain powers given to the Governor to cause an insurer to rectify any defects or improper acts which it has been conducting, to suspend its licence or otherwise to revoke its licence. The Governor has the ability to prescribe regulations to supplement the law and enhance it, and criminal sanctions (fines of up to CI$10,000 and possible two-year imprisonment) are applied for offences committed under the law. Thankfully, given the fluid regulation of vehicles in this jurisdiction, these powers will only very rarely have to be utilised and generally, the combination of insurance manager and CIMA scrutiny of vehicles will ensure that any potential difficulties are dealt with at an early stage.

One of the most important roles carried out in the regulatory process is that of the insurance manager. The quality and depth of insurance managersin the Cayman Islands is very high and, accordingly, the CIMA looks to the insurance manager of each vehicle to certify annually its compliance with the Insurance Law. By virtue of section 7 of the Insurance Law (1999 Revision), each insurer must appoint a Cayman Islands' insurance manager (subject to certain exceptions for insurers maintaining principal offices, etc., in the Cayman Islands).

Insurance managers must be corporate entities incorporated in the Cayman Islands, who must provide requisite depths of insurance expertise to insurers. Certain other requirements pertain to insurance managers, ensuring that they employ appropriately trained and qualified accountants or other approved persons to a sufficient standard for such expertise.

The role of insurance manager is fundamentally one of establishing the client relationship, liaising with the CIMA, conducting full diligence and understanding the business of the insurance vehicle, and, thereafter maintaining the business records of the insurer vehicle in the Cayman Islands, handling its appropriate administration and dealing with compliance issues under Cayman Islands' Insurance Law.

Other agents and bodies in the insurance industry are also regulated and must be licenced to certain standards, including insurance brokers, insurance agents, insurance sub-agents and principal representatives. Again, the CIMA will require full diligence on these bodies to make sure that they are of sufficient quality to meet the requirements of the jurisdiction.

George Craig is an associate with the insurance unit of Cayman law firm W.S. Walker & Company. He has been involved in the practice of insurance law for eight years and is qualified as an attorney in the Cayman Islands and the State of New York and as a solicitor in the United Kingdom.