Cayman: leading the way

An article in Cayman Captive 2009, entitled ‘Working together for a stronger domicile’, indicated that one of the ongoing challenges for the Cayman Islands would be international scrutiny. During the past year, this certainly turned out to be true. Reviews were performed by teams from both the International Monetary Fund and Michael Foot’s Independent Review of British Offshore Financial Centres. There was also substantially more international press than usual for the Cayman Islands. Although our industry was not specifically mentioned in the press, whenever the Cayman Islands was mentioned, our industry representatives worked diligently to keep our clients informed of the facts.

Consumption-based revenue system

The Cayman Islands is a tax-neutral country that has an indirect or consumption-based revenue system, rather than a direct revenue taxation system. This means that companies in the Cayman Islands are not assessed for income tax based upon their taxable income. Instead, fees are payable for filing annual returns, various licences, work permits, etc. It should be noted that these fees are transparent and, at the beginning of the year, the owners will have a very accurate estimate of the costs that will be incurred in running that company. The costs of international companies that do not have direct employees but instead hire the professional services of an insurance manager to run their day-to-day affairs include not only government fees and the insurance licence fee, but also fees paid to the insurance manager, as well as to other consultants involved in maintaining the high governance structure for the captive, such as an actuary, auditor, banker, investment manager, legal consultant and tax professional.

"More than $1.25 million has been raised for the IMAC Educational Scholarship Fund over the past 15 years, such that the Fund has been able to help many young Caymanians achieve their goal of higher education."

It may be considered rather strange that a captive would hire a tax professional if the Cayman Islands does not have a direct taxation system. That must be a fairly straightforward job! However, the reason why a large majority of captives domiciled in the Cayman Islands retain a tax professional is due to the fact that approximately 90 percent of captives have a majority of shareholders located in the United States. Due to this US ownership, captives normally fall into one of the following categories:

1) A US taxpayer, or

2) A Controlled Foreign Corporation whose owners pay US taxes.

A captive is a US taxpayer if it makes an election under Internal Revenue Service Code section 953(b). Most captives owned by a forprofit entity make this election and file the relevant IRS Form 1120. If a US owner of a non-US captive does not make the 953(d) election, it will, in most cases, be deemed to be a Controlled Foreign Corporation, and therefore the shareholders or members will report the income of the captive on their tax returns. The captive in this case will normally prepare a Form 5471 for the shareholder or member to include on its tax return. Since the owners of captives are often not in the insurance business and are not always familiar with some of the intricacies of the tax forms for insurance companies, they secure the services of an industry specialist for good corporate governance.

Competition

Competition was another ongoing challenge listed in last year’s article. Although the Cayman Islands continues to be a leading captive domicile for new formations (32 new captives formed in 2008 and 30 more at September 30, 2009), several new domiciles have developed in the past few years within the US. The concern with new captive domiciles is always regulation. Will the new domicile be able to appropriately regulate captives if this is a new type of business for the domicile, and does it have the resources to do so? The Cayman Islands has proven time and again that it has the appropriate regulatory structure in place. A testament to this solid regulatory structure is the low turnover in personnel experienced over the past 15 years. Although there has been some turnover in the position of head of insurance supervision, the regulatory environment has remained consistent.

Achievements of the Cayman captive industry

The Cayman Islands’ captive insurance industry has been resilient in meeting the challenges it has faced—not only over the past year, but since the Insurance Law was enacted in 1979. The Insurance Managers Association of Cayman (IMAC) is one of the main reasons why the domicile has been successful through its continuing efforts to ensure that the professionals involved in the industry work together in order to create a stronger captive domicile. The following is a list of some of the leading achievements of the industry:

• The annual Cayman Captive Forum, which is promoted, organised and operated entirely by IMAC. This is no small feat, considering that it is purely volunteers from the insurance management industry in the Cayman Islands who do virtually all of the organisation of the Forum, and only recently has a full-time employee been hired: William Forsythe, who has been employed as general manager.

• A holistic marketing strategy to promote the Cayman Islands at such industry events as RIMS and ASHRM. The Cayman Islands Government’s Ministry of Finance is the main exhibitor at these conferences in North America; however, more than 30 IMAC members and local associate members usually attend to aid the promotion of the Cayman Islands as a leading captive domicile and truly work together on these public /private venues.

• An internally developed educational platform to help Caymanians and those new to the Island to understand our industry, which is smaller than some of the other financial services sectors in the Cayman Islands. • A functional private sector consultative approach between IMAC, the Cayman Islands Monetary Authority and the Cayman Islands Government on the implementation of new rules and regulations.

• The ability to raise more than $1.25 million for the IMAC Educational Scholarship Fund over the past 15 years, such that the Fund has been able to help many young Caymanians achieve their goal of higher education. For many, this is probably the most rewarding part of being involved in IMAC, especially when one hears the gratitude from the recipients of the Fund over the years.

Condolences to an industry veteran

In August 2009, the Cayman Islands captive industry was saddened to learn the news that Tom Clark had passed away after a long and courageous battle with cancer. Tom earned enormous respect throughout his life from colleagues, clients and consultants, many of whom became good friends. His intelligence, perception, creativity and sincerely respectful manner were only some of the many attributes that he was admired for, along with his sense of humour and sense of fairness. Tom served on the executive committee of IMAC, as its chairman for two years, and was a founding director of the IMAC Educational Scholarship Fund. Tom was a true gentleman who will be sadly missed by all who knew him.

Cayman is a leading captive domicile

With 779 captives as of September 30, 2009, the Cayman Islands continues to be the second-largest captive domicile in the world; and with 274 medical malpractice liability captives as of September 30, 2009, it continues to be the leading captive domicile for healthcare captives in the world. The Cayman Islands’ captive insurance industry is well positioned to continue to be a leading captive domicile, and those persons involved in our industry will work hard to keep it that way.

Ron Sulisz is chairman of IMAC and director of Strategic Risk Solutions (Cayman) Limited. He can be contacted at: ron.sulisz@strategicrisks.com