Much has been written about the development of the captive insurance market in the Cayman Islands over the past 25 years. This article intends to provide a summary of the growth in Cayman's insurance market over the past year and comments on current developments in the industry and items of interest from a regulatory perspective.
It is well documented that healthcare captives have contributed significantly to the growth of the industry and of Cayman as an insurance domicile. As of 30 September, 2000, healthcare captives comprise one-third of the total captives in Cayman and, along with those captives focusing on workers' compensation and property risks, combine to account for nearly 70% of the total number of captives.
During 2000, interest in these areas has continued to contribute to the growth in Cayman's captive insurance market and is expected to continue into the future. Growth from these classes of business is being generated both in terms of new captives being formed and the extension of programmes to other coverages.
As an example of the former, smaller healthcare systems are now establishing captives, self-insurance trusts continue to be converted into captives, and redomiciliations to Cayman from other jurisdictions continue to occur. As an example of the latter, a number of healthcare captives have extended their coverage beyond professional and general liability to include workers' compensation, D&O, E&O and umbrella excess.
While new healthcare captives continue to be formed, we have also seen a number of licence cancellations as a result of mergers and acquisitions at the parent level in the US healthcare industry. This is expected to continue over the next few years, as acquisitions are digested and risk management programmes are consolidated, and represents a natural tendency in the captive lifecycle.
Other factors also continue to influence the healthcare market. These include Medicare rollbacks, delays in HMOs providing payments and a critical nursing shortage. These influences represent both challenges and opportunities to the astute risk manager and the captive has consistently been shown as a successful alternative for meeting these challenges.
New products are also driving growth. As a result of Cayman's expertise in the capital markets, trust and insurance industries, a number of Cayman firms were approached in 1996 to help structure one of the first catastrophe bond deals. From 1997 through 1999, Cayman witnessed a tremendous increase in the issue of catastrophe bonds from Cayman-domiciled special purpose vehicles (SPVs). These SPVs access the capital markets by securitising insurance and non-insurance risks.
Basic SPVs are designed to cover risks of catastrophic natural disasters, primarily earthquakes and windstorm, which are expected to occur on an infrequent basis. While these risks continue to drive most of the growth, as they are easily understandable to investors, we have seen a recent SPV offer securitisation of credit risk.
Growth in the securitisation area has slowed during 2000, likely as a result of traditional reinsurers recognising the fact that risk securitisation is a truly viable alternative, forcing competitive premium rates. From discussions with promoters of these deals, it seems that a significant number of potential securitisation opportunities are currently being developed as options and the potential exists for a flurry of new deals when the timing is right.
The introduction of the Segregated Portfolio legislation in 1998 provides a single entity for the legal separation of assets and liabilities in each portfolio. If the liabilities of one portfolio exceed its assets, another portfolio's assets would be inaccessible to the creditors of the insolvent portfolio.
This legislation has resulted in significant interest in the use of Segregated Portfolio Companies (SPCs) in 1999 and 2000, with 25 SPCs with 60 portfolios in existence at 30 September, 2000. New SPCs have been formed and several existing captives have converted to the SPC format.
Prime uses for the SPC concept include the typical rent-a-captive business, deferred variable annuity/variable life products, association captives, life reinsurers and single parent captives looking to expand their offerings to include third party business. Tremendous potential exists for the SPC concept and as a result, several other jurisdictions are also promoting similar legislation.
As is the case with many new products, a number of rapid adopters immediately recognised the potential benefits of the SPC concept. It now appears that the industry as a whole is becoming more aware and comfortable with the concept and accordingly, we expect that the strong growth in this area in the current year will continue.
The Cayman Islands has always been a popular domicile for variable life and annuity products. These structures are both complex and highly specialised and require a management company with great expertise. Offshore variable products offer significant advantages over traditional life and annuity products including, for example, greater flexibility and control over investment of the assets.
On a final note, it is worth mentioning the current challenges in the long-term care industry. In the last year, rates for professional liability increased by as much as 1000% in some cases. This sudden hardening of the market, similar to that in the medical malpractice market in the 1980s, will undoubtedly lead to risk managers strongly considering the formation of a captive programme. In fact, the commercial liability market is showing signs of stretched capacity in all sectors and there is no doubt that risk retention will be high on an organisation's agenda.
Other growth drivers
During the past year, we have continued to see captives, formed by US agencies, which have developed loss histories and are able to set up a captive to reinsure a portion of their premium risks. For example, employee leasing companies in the US have also been setting up captives to help insure the workers' compensation risks of their employed staff.
There is significant interest in warranty and extended warranty business being placed in captives. Finally, captives formed to accept loss portfolio transfers due to some of the merger and acquisition activity noted previously and rationalisations of risk management programmes continue at a fairly steady pace.
A record year?
As can be seen from the tables, the Cayman insurance industry appears to be well on its way to a record number of new licenses issued in 2000. Some 39 new licenses were issued during the first nine months of the year and as at 30 September , a further 11 applications were approved in principle, seven were in for consideration with Executive Council and a further two applications were in for review with the Cayman Islands Monetary Authority.
The highlight of the year was the licensing of the 500th captive, a redomiciliation from Bermuda, of Emory Hospital in Georgia.
The lion's share of the captive business is still sourced from North America, primarily the US. For a number of years, growth in the Latin American and Caribbean markets has been predicted, but has not yet materialised to any great extent. Caribbean and Latin American risks total 5% at 30 September, 2000.
One of the significant differentiating features of Cayman as a jurisdiction is its regulatory environment. Throughout the growth of the industry, its regulators have been successful at effectively supervising the industry while remaining accessible and willing to listen to the industry.
This environment has continued with the appointment of Clive Thursby as Head of Insurance and the promotions of Gordon Rowell to Head of Insurance (Designate) and Mary-Lou Gallegos to Deputy Head of Insurance during 2000.
We continue to note clients who are favourably impressed - and pleasantly surprised - with their dealings with the Monetary Authority. This bodes well for future growth and demonstrates that Cayman, as a jurisdiction, is not about to lose sight of the reasons for its success to date.
In order to continue to improve the efficiency and effectiveness of the working partnership with the insurance industry, the Department of Insurance has begun a project to document guidelines on a variety of insurance regulatory matters. These guidelines are intended to be a formalisation of statutory interpretations that are already understood by the industry.
The Department also released its first International Insurance Market Bulletin in September 2000 to help accomplish its aim to improve communications between the Cayman Islands Monetary Authority and those who serve captive insurers by addressing topics of general interest.
The professionals that service the captive industry welcomed these changes and they represent a positive sign for Cayman's future.
It is important to note that the industry does work in partnership and all the service providers, including the insurance managers, audit firms and attorneys, have contributed greatly to both the reputation and success in the insurance industry.
This year looks like it will close as a record year for new formations. New products and existing stalwarts both appear primed for future growth. Regulatory supervision remains effective, accessible and flexible. As a result, the ingredients for continued growth in Cayman's captive industry are all intact. Next year looks as if it has the makings of another strong year.
Kevin Lloyd is the Insurance Practice Partner with KPMG in the Cayman Islands and has been involved with the captive insurance industry in the Cayman Islands for nine years. He would like to thank the Cayman Islands Monetary Authority for its assistance in completing this article.