The current state of the Caribbean market.
Over the past couple of years, the plethora of initiatives investigating tax and regulation issues mounted by the OECD, FATF, KPMG and all the other acronymic international bodies, have sometimes appeared to be aimed unfairly at countries in the Caribbean. Calvin Wilson, the region's chief anti-money laundering official, went so far as to say that the OECD is pursuing a “second agenda ... to claw back revenues coming to the offshore centres because of their competitiveness.”
Others argue that the attention focused by the OECD and others, particularly on the smaller offshore economies, can only lead to positive results. Some of the economies are now gearing up for new business, or are preparing their legislative and regulatory programmes to enable them to do so.
The Caribbean domestic insurance industry began to grow 25 years ago, and has evolved into what is principally a component of the larger financial products and services industry. Relatively few independent insurers operate in the region and local Caribbean insurance companies have not generated or exposed significant capital for underwriting catastrophe risk. Instead, they tend to limit their catastrophe retention levels below 15%, the balance being ceded to reinsurers.
The domestic Caribbean insurance market needs consolidation; too many companies are chasing too few dollars, given the population and recent economic performance of the region. In a nutshell, the industry is under-capitalised. One successful incentive recently used by several Caribbean countries has been to allow locally dedicated insurance reserves to be tax-deductible.
To shelter a major portion of its risk exposure in the Caribbean, the reinsurance industry has introduced a combination of deductibles and average clauses on claims resulting from damage caused by natural events. Typically, the deductible clauses require self-insurance for the first 2% of the full insurable value of the property. For the average clauses, the proportion by which the insurance covers less than the full insurable value may limit claim payments.
Some 80% of insured catastrophe exposures fall under reinsurance contracts. Policy deductibles (on full values) are 2% for hurricanes and 5% for earthquakes, and the previous problem of withdrawal of hurricane-related cover is no longer an issue. Reinsurance prices have continued to decline although the soft market cycle is plainly ending. Earthquake coverage is less available, and it is for this peril that some real scarcity of reinsurance continues to exist.
The offshore insurance sector in the Caribbean has most notably established itself in Cayman and the Turks and Caicos. Other jurisdictions have concentrated primarily on banking services, but may well enter the re/insurance sector as they create satisfactory environments in which new risk products can flower. Two significant factors that have inhibited the growth of the reinsurance sector outside the main centres have been the cost of telecommunications and the stigma associated in the minds of some with less well-regulated corners of the Caribbean. Nevertheless, with the cost of telecoms declining worldwide, and the cleansing work of the international initiatives complete, both problems should ease going forward.
Soon, most of the Caribbean jurisdictions will carry the good housekeeping seal of approval and their more relaxed atmospheres may prove a pull as they establish themselves as processing and documentation centres. Such activity could well spark the interest of international markets.
Cayman and the Turks and Caicos aside, what is at stake in the ongoing review of the financial services sector in many jurisdictions is not necessarily existing activity, but potential business. Caribbean insurance industry statistics are, in the main, inadequate. Where they do exist, they are often not comparable, leading to problems in weighing different territories against each other. Parts of the following selective review of the insurance and reinsurance sector in the Caribbean were taken from KPMG's Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda and documents arising, and from Insurance, Reinsurance and Catastrophe Protection in the Caribbean, a working paper prepared in collaboration with the World Bank by the General Secretariat of the Organisation of American States.
Anguilla is a British overseas territory with a population of about 12,000. GDP for 1998 was estimated at $88m and real growth at 6.5%. It has a relatively small insurance industry dominated by the domestic sector. The total corporate complement is 17 insurers operating on the island and one offshore captive, which writes reinsurance cover for its Vermont-licensed parent company. No further insurance statistics exist for the territory.
With the exception of two local companies, all the island's insurance operations are offices of overseas companies, and there are five or six major insurance companies in the domestic market. Local agents represent most overseas insurers, and one external insurer maintains a branch office. The majority of these companies have less than $100,000 premium income each year. Estimates put total annual premium income at under $5m.
Anguilla has no rules or requirements for the calculation of admitted or non-admitted assets or asset valuations to support liabilities. Similarly, there is no requirement or guidance for assets to remain in Anguilla to match liabilities. The regulator may request that, under the legislation, a deposit of 10% of premiums should be made if it is deemed to be necessary. To date, this deposit has been obtained from four companies.
Until a new insurance law meeting international standards is introduced, approved and properly implemented, Anguilla is not accepting any applications from companies wishing to establish offshore insurance companies. Proposed draft insurance legislation currently under consideration includes regulations for both domestic and offshore insurance business.
British Virgin Islands
The British Virgin Islands are a British overseas territory, with a population of 20,000. GDP in 1999 was estimated at $287m, with the real growth rate for the economy hitting an estimated 6.8% last year. International companies started incorporating in the mid-1980s, with financial services now the mainstay of the BVI economy. About half the BVI government's revenues are estimated to derive from financial services business. An estimated 250,000 companies – 45% of the global market – were registered in the BVI at year-end 1998.
The adoption of a comprehensive insurance law in late 1994 provides confidentiality, with regulated statutory gateways for investigation of criminal offences.
The BVI's prominent insurance sector is in the offshore captive market. BVI has 131 captive insurance companies and 59 credit life reinsurance captives. Three companies registered in the BVI are licensed to undertake third party business, but this type of licence is no longer issued.
Statistical information on the insurance market is not available. Total gross premium income is estimated by the insurance commissioner to be $200m-$300m annually.
The onshore insurance sector comprises 18 life insurance companies, two locally incorporated general insurance companies and ten general insurance companies incorporated outside the BVI. Thirteen insurance agents operate in the local market, representing overseas companies licensed in the BVI, and 11 insurance managers represent the captive insurance companies locally. Nine brokers, representing the BVI insurance risk buyers, and seven loss adjusters, are also regulated in the BVI.
The BVI's two locally incorporated insurance companies are very small, reflecting the small local population base. Premium income is between $1m and $2m each.
The main legislation applicable to insurance is the Insurance Act 1994. Minimum margins of solvency for general insurance are in line with generally accepted standards.
The Cayman Islands is a British overseas territory, north-west of Jamaica. The estimated population was 36,600 in 1997. GDP was estimated in 1998 at $1.1bn, with an estimated growth rate of 5.5%.
Cayman is the second largest captive insurance centre in the world with 502 captive insurance companies, drawn largely from the US market.
Insurance company licenses are issued in two classes: ‘A', in respect of domestic business (Cayman risks); and ‘B' for all other business (which is loosely defined as captive insurance).
The Cayman Islands life assurance market comprises 17 companies. Total gross premiums for 1998 were $32m (life $11m, health $18.8m, annuity and other $2.2m). Net claims reserves were $18.4m.
The Cayman Islands domestic general insurance market comprises 14 companies. Total gross premiums for 1998 were $34.7m (property $22.3m, motor $9.8m, liability and casualty $2.2m, marine and aviation, $0.4m).
In March 2000, the captive market comprised 302 pure captives, 89 association captives, 32 group captives, 24 open market insurers, 22 alternate financing vehicles, 21 segregated portfolio companies and 12 rent-a-captives.
For 1999, gross premiums totalled $2.7bn and net income $522m. Total assets of the sector were $13.1bn, and capital and surplus stood at $3.8bn. A total of 26 licensed insurance managers represent the captive insurance companies, and 22 insurance brokers are involved in international and domestic insurance and reinsurance.
The Insurance Law (1999 Revision) provides for licensing of insurance companies, managers, brokers and agents and sets minimum net worth margins of: US$120,000 for general insurance business; US$240,000 for long-term business; and US$360,000 for composite companies writing both general and long-term business. In practice, the level of capital stipulated by the Cayman Islands Monetary Authority on granting a licence may be higher according to the risks assessed in the company's business plan.
Montserrat is a British territory, 39 square miles in size. An erupting volcano destroyed much of the island's infrastructure between 1995 and 1998; since then the population has fallen from 16,000 to fewer than 5,000, and only one-third of the island is habitable.
Montserrat has no licensed offshore insurance business and no specific legislation relating to the undertaking of offshore insurance. Currently, six companies with the word ‘insurance' in their name are registered as ‘International Business Companies', an apparent breach of law currently under investigation.
Seven foreign insurance companies are registered to underwrite general insurance in Montserrat. No Montserrat-owned or registered company undertakes domestic insurance business. The principal types of business written are motor and property. Three out of the seven are also authorised to carry on life insurance business.
Until suitable legislation is put in place, it has been agreed that no companies incorporated in Montserrat should be permitted to undertake offshore insurance business. The KPMG report of last year recommended: “If Montserrat wishes to permit firms to engage in offshore insurance business, it will be necessary to introduce legislation which covers this. Such legislation must be supported by adequate regulatory resources.”
The Turks & Caicos Islands
The Turks & Caicos Islands (TCI) are a British overseas territory, with an estimated population of 17,500. Its 1997 estimated GDP was $117m and its real growth rate that year was estimated at 4%.
At 31 December 1999, there were 2,512 licensed insurance companies, of which 2,322 were specialist ‘credit life' producer-owned reinsurance companies (‘PORCs'). No statistics in relation to premiums, assets or liabilities are available as these companies do not file financial statements.
PORCs are usually owned by producers of credit-related insurance, which provide insurance products to their customers in which credit is arranged in sales transactions from motor dealerships, retailers and finance companies. Credit life insurance settles the outstanding debt if the insured borrower dies, is disabled, or becomes unemployed. The direct writing insurance company in the US, where the business originates, reinsures a portion of the business produced by the dealership with an insurance company in TCI. The reinsurance relationship is overseen by various state regulations and is subject to the mandatory trust or custodial agreement, under the control and administration of the primary writer.
TCI has also registered 114 companies under the Limited Life Company Act. TCI is regarded, at least in terms of active licences, as one of the world's largest offshore insurance centres. The number of companies continues to grow rapidly, making TCI a leading offshore credit life insurance centre.TCI is also home to 48 offshore insurance companies writing third party business direct, 73 captive insurance companies, 56 mortgage guarantee/motor warranty companies and 13 domestic insurance companies, two locally incorporated.
Capital requirements guidelines state that companies engaged in reinsurance and general business should expect to have a minimum paid up capital of $100,000. Most PORC companies are capitalised at no more than $50,000, although they may have trust/custodial agreements for greater sums in place within the US. The minimum capital requirement for companies engaging in long-term business is $180,000.