CIMA: staying ahead of the curve

How have new formations fared over the last 12 months?

So far, 2011 is proving to be a strong year for new licence applications. The Cayman Islands Monetary Authority (CIMA) licensed 29 captive insurance companies in the first nine months of 2011, a figure which is 93 percent higher than that achieved during the same period in 2010, which had 15 formations. This increase in captive formations is a very positive indicator of the health of our captive insurance industry, despite generally soft international insurance market conditions. In 2010 there were a total of 25 new captives formed, so for our 2011 numbers already to be at 29, and with new applications pending, we anticipate this calendar year to reflect significant growth in new captives, exceeding the levels experienced in both 2008 and 2009. In fact, despite the current soft market, in 2011 we expect to see the highest level of new formations since the hard market of 2004.

"Solvency II is an evolving international standard and so we are taking the time to assess the proposals very carefully before making a final decision."

What’s more, Cayman captives established a new benchmark for total premiums. As of 30 September 2011, total premiums written by Cayman-based captives were reported at $9.6 billion. This is the highest recorded in CIMA’s history and compares with $8.6 billion as of 31 December 2010—a 12 percent increase. Total assets under management, as of 30 September 2011, were reported at $58.3 billion, compared to $57.9 billion as of 31 December 2010. Both premiums written and assets under management now stand at record levels for the Cayman Islands.

How significant do you expect the Canadian TIEA to be in attracting new formations?

The Canadian tax information exchange agreement (TIEA) puts Cayman on an equal footing with other jurisdictions with which Canada has tax arrangements. This, when added to our existing strong business and cultural ties with Canada, and our competitive strengths as a jurisdiction, should increase Cayman’s attractiveness when Canadian firms are considering new captive formations.

The Canada-Cayman Islands TIEA further extends Cayman’s network of international cooperation agreements with other jurisdictions on tax and regulatory matters. As of October 2011, the government has 27 bilateral TIEAs in place while, on the regulatory side, CIMA has 22 bilateral and multilateral cooperation and information exchange agreements, with organisations including the Office of the Superintendent of Financial Institutions in Canada. This extensive global cooperation network is something that should also increase Canadians’ confidence in establishing their captives here.

What steps has Cayman and CIMA taken in recent months to further strengthen its attraction as a captive domicile for international business?

One very important tool is the new Insurance Law, 2010, and its regulations, scheduled to be in force before year’s end.

The key principle underpinning the revised regime is the distinction we have made between our domestic and international markets and the sub-groups within the latter, including captive insurers, reinsurers, and reinsurance securitisation contracts. We have made the necessary adjustments to ensure that regulation is appropriate to each segment. For instance, capital, disclosure and risk management requirements are stratified based on the size, risk and complexity of the licensee. The restructuring of different types of insurers into defined categories enhances future business development because it gives clarity and the proportionality appropriate to the diversity of the market.

The regime also complies with international standards, a factor that has become just as important for attracting international business.

In addition to putting in place clear, appropriate legislation that is internationally compliant, we are constantly working to enhance our international credibility and the access of industry to business support services, both private sector and governmental. These are very important considerations for persons making decisions about where to domicile and expand. Clearly, the size of our funds industry, the maturity of our banking sector, the expertise of our legal, accounting, administrative and other service providers, our legal and judicial system that is based on English common law, and our modern infrastructure, create a package that gives us a distinct competitive advantage.

Added to that, CIMA as the regulator strives to ensure confidence by carrying out our regulatory activities in a fair, transparent and consistent manner.

How significant has the Dodd-Frank Act been in terms of increased regulatory demands?

We have not seen any specific effects on Cayman-based captives from the Dodd-Frank Act so far. While the act specifically does not pre-empt US state insurance laws and regulations, it does create the Federal Insurance Office, with information-gathering power to improve transparency by increasing reporting requirements on insurance companies. The potential impact on US-based captives represented by Dodd-Frank is that the cost of operational compliance will increase. However, the potential impact on non-US based captives is very difficult to determine at present.

How can Cayman best demonstrate to international jurisdictions that its captives and business community conform to standards such as Dodd-Frank and the Foreign Account Tax Compliance Act?

Cayman’s compliance with international standards of financial regulation, anti-money laundering and tax cooperation has been assessed repeatedly by independent bodies, including the International Monetary Fund, the Financial Action Task Force (FATF) and the Organisation for Economic Cooperation and Development (OECD). They have all acknowledged this jurisdiction’s high level of adherence. Their reports are in the public domain.

In addition, this jurisdiction demonstrates its commitment to international cooperation and the maintenance of high standards through our extensive involvement in international standard-setting bodies.

Cayman is a member of the Steering Committee and Peer Review Committee of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes and is the current chairman of the Caribbean FATF.

On the regulatory side, CIMA is a long-standing member of the International Association of Insurance Supervisors (IAIS), the global standard-setting body for regulation of the industry. We have adhered to the IAIS Core Principles of Insurance Supervision and actively assisted in the development of the revised Core Principles, which the IAIS adopted in September 2011. We acceded to the IAIS multilateral memorandum of understanding in June and were appointed to the IAIS Executive Committee in September.

We are members of the International Organisation of Securities Commissions (IOSCO) and are signatories to the IOSCO Multilateral Memorandum of Understanding which signifies our compliance with the standards of regulation and cooperation in the investments and securities sector.

We adhere to the Basel Core Principles for Effective Banking Supervision and have just assumed the post of deputy chair of the Group of International Financial Centre Supervisors (formerly the Offshore Group of Banking Supervisors). We completed in November 2011 our two-year appointment on the Board of the Association of Supervisors of Banks of the Americas (ASBA).

These are just some examples of our involvement with international groups and initiatives. I think they provide ample evidence of our commitment to high international standards.

What steps are you taking to ensure that Cayman remains at the forefront of regulatory developments?

CIMA has always been involved in international regulatory organisations but over the last two years we have made a strategic decision to increase the depth and scope of that involvement to ensure that we are aware of, and can have a voice in, developments that affect us as a jurisdiction. We also put a lot of resources into analysing and assessing the various proposals and recommendations from standard setters, regulators and individual jurisdictions.

Cayman has actively opted out of Solvency II. What advantages do you expect that this will confer on your captive sector? Is there a danger that you will slip behind the regulatory curve?

Actually, it is incorrect to say that Cayman has opted out of Solvency II. The fact is that we are still evaluating the proposed regime and have not yet made a final decision.

"Cayman demonstrates its commitment to international cooperation and the maintenance of high standards through its extensive involvement in international standard-setting bodies."

While the concept of Solvency II is a good one for commercial insurance entities, captives—which comprise the lion’s share of Cayman’s insurance market—do not bear the same systemic risk as their commercial counterparts. There are also significant risk measures and existing regulatory standards that have proven effective for Cayman’s captive market. These, along with the additional enhancements that the new Insurance Law and regulations will implement, must be factored in when determining the extent of change that is warranted. Our captive industry does not have an exposure in the European Union that would warrant immediate action. We also recognise that Solvency II is an evolving international standard and so we are taking the time to assess the proposals very carefully before making a final decision.

Our goal is to ensure that our regulation continues to be sound and appropriate while facilitating business development.

What have been the most significant lessons that CIMA has learned in recent years, particularly in the face of the wider economic downturn?

One of the most significant lessons we have been building on is the importance of qualitative analysis in complementing quantitative analysis in the supervisory process. We have been placing greater emphasis on this since the financial crisis. Failures are caused by people, and we have to take a closer look at the people and how they are operating their businesses within the global market. We believe that with the new Insurance Law and its regulations, and the talent we have at CIMA, we are well equipped to deal with these matters.

We have also been focusing on strengthening and formalising our framework for risk-based supervision. We have always taken a combination rules-based and risk-based approach, and CIMA is now taking steps further to enhance its risk-based framework.

Cindy Scotland is managing director of the Cayman Islands Monetary Authority. She can be contacted at: cima@cimoney.com.k