A bold move by Lloyd's of London has prompted the spotlight to fall on the Cayman Islands. Warren Cabral finds out why.
Lloyd's special purpose vehicle (SPV) Thunderbird Re was formed earlier this year and is a shelf registration that will give syndicates access to a pool of reinsurance capacity for US earthquake and windstorm in 2007.
Thunderbird Re will provide a way of accessing the capital markets for Lloyd's syndicates which otherwise would not have found it cost effective.
The market's forward planning was necessitated by the 1999 European windstorms, the 9/11 losses and Hurricane Katrina in 2005, which drained large amounts of capital out of the reinsurance market. As prices rose, new investment came into the market but the process has been volatile, leaving large businesses and insurance companies concerned about the continuity of cover for their peak risks. In this sense, Thunderbird Re is a sidecar for Lloyd's.
The Cayman Islands are the leading jurisdiction for the establishment of such SPVs, given the high concentration of financial institutions. It has just under 300 active banks, over 750 insurance companies, primarily captives underwriting the risks of their owners and associates, and more than 8,000 active mutual funds. It is also a leading jurisdiction for specialised financing methods and in recent years has become the jurisdiction of choice for the establishment of capital markets vehicles that are used to underwrite reinsurance risk. To date, it has licensed 27 insurance related companies described as alternative financing vehicles, which is a large proportion of the total number created worldwide.
An SPV that is established in the Cayman Islands is generally incorporated as a Cayman-exempted company and is also licensed as a class B insurance company (or possibly as a reinsurance company depending on the outcome of the legislative review currently taking place).
Having already established itself as a leading jurisdiction for the establishment of sidecars and captive insurance companies, the Government of the Cayman Islands is also keen to establish it as a preferred jurisdiction for the establishment of open-market reinsurance companies following the formation of Greenlight Re in August 2004. The aim is to differentiate commercial, open market reinsurers from captives that underwrite reinsurance.