The Cayman Islands has done a great deal to lose its reputation as a place where banks and multinationals conduct secret capital manoeuvres through sparse shoebox offices that offer little more than a mailing address. While it does make for a good John Grisham novel, today's Cayman is a sophisticated well-regulated jurisdiction that is home to, at last count, 733 captives (of which 433 are pure captives - see figure 1). Mainly servicing the US market, Cayman is now going head-to-head with Bermuda as the offshore domicile of choice for a burgeoning captive market and is particularly popular for those writing healthcare and medical malpractice cover.
According to the Cayman Islands Financial Services Association, Cayman's captive insurance sector grew by 5.8% last year and the Cayman Islands Monetary Authority (CIMA) licensed 59 new captives. Total assets at the year's end totalled $26.6bn and written premiums amounted to $6.7bn. In 2005, as in the past, North America was the origin of most of the new captives. Overall, 88% of all licensees provide cover in Canada and the US, writing premiums amounting to $5.6bn. This is followed by the Caribbean and Latin America, which makes up around 5% of total licensees and has premiums amounting to $132.4m.
The captive industry in Cayman has increased steadily over the last decade. At the end of 1995 there were 390 captives, increasing to 516 in 2000 and to 733 in 2005. "In my opinion this is partly a reflection of an increasing need for alternative risk management solutions, driven in many cases by the less attractive terms provided by the commercial markets, but is also indicative of the increasing awareness of those running a successful business on the merits and advantages available when utilising a captive," explains Morag Nicol, deputy head of insurance supervision division at CIMA.
Healthcare is still the primary class of business for Cayman-based captives (making up 38% in 2005, writing $2.5bn in premiums). The growth in healthcare-related captives happened following 9/11 when rates in healthcare insurance were spiralling and capacity dwindled as major players, such as St Paul Travelers, exited the arena completely. "For 2006, although the rate of new licensees had reduced, which is a global trend, it is again the case that more than 50% of new captives formed in Cayman provide for the insurance needs of the healthcare market," explains Nicol. Workers' compensation was the class of business for 21% of captives in 2005 and property was the third most popular category with 10% of captives listing it as their primary class of business.
The Cayman Islands is the third largest captive insurance domicile after Bermuda and the US, but it may be about to win the battle in the captive stakes between the offshore jurisdictions (while captive registrations in Bermuda tapered off in the last two years Cayman grew its captive base by 20%). But until recently it didn't receive so much as a look-in from the global reinsurance market. This all changed last year. On 1 June 2005, Bermuda-based Montpelier Re, in partnership with Bermuda hedge fund manager West End Capital, set up Rockridge Reinsurance, which is based in Grand Cayman. Rockridge, a so-called "sidecar", was set up with just $91m in capital to offer retrocessional coverage solely to Montpelier Re, which gives the reinsurer the capacity to write high-layer, short-tail contracts in peak catastrophe zones.
As a dedicated vehicle for Montpelier with strong Bermuda ties, Rockridge in isolation would have barely raised an eyebrow in the reinsurance world. Then Hurricane Katrina struck New Orleans followed closely by a flood of new start-ups. All except one were formed in Bermuda. Greenlight Reinsurance, the exception, is the Cayman Islands' first open market property/casualty reinsurer. Set up in November 2005 by hedge fund Greenlight Capital, the new reinsurer has a capitalisation of $250m and will work with Cayman insurance managers to develop tailored solutions for captives. With not one but two reinsurers, Cayman has now arguably started a new trend. "It is too early to say whether Cayman will develop into a reinsurance market, but having an open market reinsurer of this calibre setting up shop here does add a string to Cayman's bow," says Linda Haddleton, associate director at HSBC Financial Services (Cayman).
Len Goldberg, Greenlight Re's new CEO is quick to point out that it should not be grouped into the Class of 2005 because it was not set up in response to hurricanes Katrina, Rita and Wilma. In fact, he says, the concept for Greenlight was borne in 2003 and the funding completed in August 2005. But he is willing to concede that this may be the start of a new trend. "I think Grand Cayman works very well for the reinsurance industry and I do expect, over time, that there will be other reinsurance companies that will make the same decision that we made." Whether or not others follow suit he believes Greenlight Re will retain its "first mover advantage".
No more dodgy deals
One way in which Cayman does work well for the reinsurance industry is through its strong regulatory infrastructure. The shadows of a past beset by whispers of narcotics trafficking and money laundering were all but washed away a decade ago by a new regime with an exacting legal and regulatory framework. The two bodies responsible for financial service regulation are the CIMA and the Stock Exchange Authority. CIMA, which was set up in 1996 to replace the Financial Services Supervision department, was a major step towards strengthening regulation on the island and putting it on a par with international standards.
CIMA is responsible for day-to-day supervision of banks, trust companies, mutual funds, insurance and company managers. The activities of insurance and reinsurance companies, insurance managers, agents and brokers are all subject to the terms of the Insurance Law (2001 Revision). The law was drafted with the belief that it should be capable of being effectively and efficiently administered whilst requiring minimum supervision. "The law has been amended a number of times since its initial passing in 1979," explains Haddleton, adding that it is about to be amended again. "The interesting thing is that on the whole, these enhancements have been relatively minor. The Cayman Insurance Law is a very concise piece of legislation."
Setting up shop in Cayman is a relatively hassle-free process. The legislative framework is straightforward and the registration process relatively short. "CIMA has been very welcoming and helpful," endorses Goldberg. "They made sure we dotted our 'i's crossed our 't's and did everything correctly." And because Cayman is so effectively geared towards servicing the captive industry there is no shortage of law firms, accountants, consultancies, IT providers and auditors ready and somewhat able to service the reinsurance industry too. "Service providers, both on and off island, are knowledgeable and professional," says HSBC's Haddleton. "They and the regulators are very proactive in keeping informed about their clients, the underlying business being insured/reinsured, and industry developments that affect them. We very much have a teamwork approach to the business."
They may not be particularly well versed in servicing the reinsurance arena but Cayman's service providers are, according to Goldberg, eager to learn. "I've been very impressed with the professionalism, the positive energy and the desire to work with us, it's just been a great experience," he enthuses. "They know they need to learn a bit more and there are a number of people who have done a tonne of extra work to make sure they understand what our needs are. I think some of them are anticipating that more reinsurance companies will come down and that the service provider who has worked with Greenlight Re will perhaps be the partner of choice for the second, third and forth reinsurance company." Goldberg adds that the reinsurer is also getting a lot of attention from the broking community.
"We're going to be Grand Cayman. I don't see it as any kind of competition at all with Bermuda," insists Goldberg. "I think Grand Cayman could be very good at being Grand Cayman - whatever that turns out to be." And yet it is a somewhat logical step to assume that if the Cayman Islands becomes a popular domicile for reinsurance start-ups its most obvious comparison would be with that other island 1,500 miles to the northeast. And there are the obvious similarities in tax advantages, established insurance markets, strong regulatory regimes, infrastructure and even politics (both are British Overseas Territories).
Cayman is a more hurricane-prone locale than Bermuda. When Hurricane Ivan struck in September 2004 as a category 5 with winds of over 200mph it tested the islands' ability to cope. There have been mixed reports on the success of this but most parties insist the recovery was swift and seamless. "Many lessons were learned from Hurricane Ivan, both personal and business," explains CIMA's Nicol. "Obviously as part of the recovery process the existing disaster recovery plan was revisited to allow enhancement built on the practical experience of Ivan. Looking at the big picture, Cayman can now comfortably say (with the benefit of experience behind it) that it not only provides a stable financial services environment under normal working condition, but that even in the event of a major hurricane impacting the islands, the business world is adequately geared up to respond."
Since the Class of 2005 was established, there has been justified concern that the necessary physical space to house Bermuda's growing reinsurance market may be running out in Hamilton. This is not a problem Grand Cayman is contending with. "The benefit we have over Bermuda is that space constraints do not apply in the way they do in Bermuda these days," Nicol explains. "In fact, Cayman is seeing a construction boom at present, which includes a variety of good quality, new business premises." Another issue that is being talked about in Bermuda is a potential skills shortage, but there is no reason why this may not also become an issue in Cayman. The jurisdictions could even end up tussling over the same individuals. Indeed, when Greenlight Re was formed it hired Barton Hedges away from Platinum Underwriters in Bermuda to be its president and chief underwriting officer.
With more than 80% of the world's hedge funds currently registered with CIMA it is not unlikely that this could fuel further growth of reinsurers in Cayman. Cash rich hedge funds, as it has been well documented, are becoming increasingly enamoured with the reinsurance sector. Much of the new capital that entered the market and funded many of the post Katrina start-ups came from hedge funds. And of course Cayman's massive captive industry could potentially provide many customers for new reinsurers. "The most obvious relationship that I can see is these reinsurers providing reinsurance to captives," says Haddleton. "They will also be bringing a new pool of skilled professionals to the island." While CIMA's Nicol does not think Cayman is about to become another Bermuda, she does believe more reinsurers will be attracted to the islands. "Cayman is ideally placed to expand into the regulation of open market reinsurers, such as Greenlight Re," she insists.
But John Andre, vice president at AM Best does not think Cayman is there yet. "The Bermuda market including its infrastructure has evolved over many years," he explains. "Given the number of reinsurers and brokers on the island it has evolved into a very self-contained marketplace for both the buyers and sellers of reinsurance. In addition, a number of banks, auditors, actuaries, IT experts and other service providers are present in Bermuda. Lastly, the island is very convenient to the US, particularly the northeast. Cayman does have some of the service providers and other infrastructure established, but it would take some time to establish the sheer number and financial strength of reinsurers which has resulted in the enviable 'one stop shopping' aspect of Bermuda."
- Helen Yates is deputy editor of Global Reinsurance.