28 November 2013Analysis

Opportunity knocks

Despite suggestions in some quarters that there are significant headwinds facing the captive sector, 2012 and 2013 were good years for Cayman. As Paul Scrivener, partner and head of the insurance group at Solomon Harris outlined, Cayman achieved near-record licences issued in 2012: 53 in total, “the best since the hard market of 2004”. Meanwhile, captive licences issued up to the end of the third quarter of 2013 reached 29, a number Scrivener described as being typical for a whole year of issuance. It is apparent that Cayman has reasons to be bullish about its prospects.

A key driver of rising captive numbers appears to be the US Affordable Care Act (ACA), which has encouraged medical care facilities and physician groups to consider the captive concept more closely. As Scrivener made clear, “There is no doubt that in the healthcare area there is continuing interest in setting up captives, either as standalone entities or as part of a cell structure.”

He explained that restructuring among healthcare providers as a result of the ACA is leading to hospitals taking physician groups on as employees, as opposed to treating them as outside contractors. This has in turn raised questions regarding their position within any existing healthcare providers insurance programme.

Some are considering adding them to their existing captives, while other healthcare organisations have sought to set up separate cells for new physician groups. All this has led to an uptick in interest in healthcare captives, which is clearly playing to Cayman’s strengths. Howard Byrne, vice president and senior underwriter at Aon Insurance Managers (Cayman), said that assisted living and long-term care facilities are increasingly considering Cayman as the leading offshore option, particularly in light of the Islands’ existing strengths in that area. Healthcare, it would seem, begets healthcare.

Simon Kilpatrick, president of Advantage Insurance Management explained: “Industry-wise, healthcare is in state of flux so there is significant opportunity there. Medical liability for professionals, nursing home liability and add-ons such as medical device manufacturers, are all experiencing booms. With the rising cost of healthcare and associated lawsuits and claims, healthcare and supporting industries are areas where we see considerable opportunity.”

Healthcare facilities will primarily be considering primary medical malpractice coverage, said Byrne, but there are opportunities for healthcare providers to consider running medical benefits stop loss through their captives, he explained. This has been a “common theme, with parents running a buffer layer through their captive, generally on a direct basis, and then purchasing reinsurance behind the captive or direct excess of loss coverage above the captive to take out that spike loss exposure”, said Byrne.

Kevin Poole, client services director at Kane in Cayman, added that some of the specific challenges that healthcare organisations could face include “systemic loss or common cause coverage arising from things such as mis-calibrated equipment and unnecessary treatment, or billing errors and cyber liability”. Newly-formed accountable care organisations (ACOs) will need to “manage their financial risks associated with healthcare delivery”.

“We are also seeing an increased focus on additional coverage lines such as cyber liability, billing errors and equipment maintenance, while medical stop loss across the board continues to receive a considerable amount of attention,” said Poole. The changing landscape certainly presents considerable opportunity for Cayman.

Fiona Moseley, president and director of Advantage International Management (Cayman) said that “Cayman already sets itself out as the healthcare domicile. North of 60 percent of Cayman captives are covering healthcare risks already. Therefore Cayman is likely to be in the sights of any healthcare facility considering a captive domicile.”

Line by line

Workers’ comp is another line that has been a traditional strength of Cayman and it is evident that further growth is expected. As Scrivener outlined, workers’ comp captives already make up 159 of Cayman’s 755 captives and therefore represent a “pretty big, and growing, slice of the captive pie”. He argued that it probably won’t be through innovative lines that Cayman will experience further growth; rather it is likely to be through the development of its existing strengths—in healthcare and workers’ comp.

Suggestions that other less significant lines are going to support notable growth are misplaced, agreed Simon Owen, principal of Hyperion Risk Solutions and Folio Insurance Management. “You constantly read about cyber liability. While it is a potentially feasible addition, it certainly won’t have a significant impact on the captive world,” he said. “No single business line is likely to be a game-changer.”

Again, Cayman’s unwavering flexibility means that careful re-examination of existing structures offers a simple and immediate way to achieve growth. “Captives need to look to re-optimise their portfolios. In some cases this hasn’t been done for a number years. There’s no room for complacency in the business world and captives should be operated on the same premise. Continuous review and innovation are the keys to the success of a captive,” said Owen.

Byrne said that there are nevertheless opportunities to “engage with clients at each renewal to consider adding new lines”. He admitted that while the addition of cyber liability or intellectual property protection was likely to be “minor in the scheme of things”, such additions can help to diversify Cayman’s traditional focus on healthcare and workers’ comp.

“Directors’ and officers’ and employment practices liability insurance can all be considered as add-ons. We need to encourage clients to consider captives more closely as an alternative to the commercial market.” He cautioned however that while adding in new lines can make sense, captives “don’t want to take a loss leader into what has hitherto been a profitable captive”.

"Worker's comp captives already make up 159 of Caymans 755 captives and therefore represent a 'pretty big, and growing, slice of the captive pie'."

Opportunities in lines such as workers’ comp, property and casualty may yet be helped by developing commercial market conditions. Poole said that rate increases are already being seen on such lines, with 72 percent of mid-sized accounts reporting commercial rate increases of between 1 and 10 percent in the second quarter of 2013, according to data from Business Insurance. A quarter of workers’ comp accounts experienced 10 to 20 percent rate increases, Poole added, creating opportunities for captive growth. He said that there had “already been some movement towards the use of captive structures in industries such as trucking and other specialty risk areas”, with commercial rate increases likely to help concentrate the mind.

Kilpatrick agreed that the “commercial market has a lot to do with interest”, adding that the “trick is finding areas of the market that arehardening, and as people come under pressure to improve their bottom lines, and you can have that conversation with them about captives. You need to keep looking for those industries that are starting to have those kinds of troubles.”

Byrne concurred, arguing that “captives should be seen as protection against the pin being pulled by commercial carriers. Conditions in the commercial market are often reflected in captive interest”.

State by state

While Cayman is looking to develop its existing strengths in healthcare and workers’ comp, there are also opportunities by geography. While the US continues to dominate the captive market, Cayman is exploring an increasingly diverse range of locations. As Poole explained, according to statistics from the Cayman Islands Monetary Authority published in September 2013, 90 percent of Cayman risks are located in North America. He added that he “did not expect this geographical profile to change significantly; although efforts are underway to attract business to Cayman from both Canada and various South American countries”.

Byrne added that “captive penetration throughout the Fortune 500 is significant”, although there are opportunities to seize upon the uptake of captives among mid-market North American companies. Moseley also pinpointed this part of the market as an area for growth, where Cayman managers can deliver “risk solutions to entrepreneurial businesses that are writing more than $1 or $2 million in premium”.

Moseley added that there is also “quite a market to be tapped in Canada, particularly considering Cayman’s recent tax information exchange agreement (TIEA), but Canada as a market has not yet grasped the captive nettle as it could”. Poole agreed that recent TIEAs had helped to make Cayman “a more attractive place to do business”, but it is apparent that initial forays into new markets need to be developed.

Scrivener said that in the case of Canada, the TIEA “has not opened the floodgate of new business”. Rather there has been “a significant amount of inertia”, with those captives domiciled in Barbados—which has traditionally been the home of Canadian captives due to an existing double taxation agreement—largely staying put. Scrivener said that he expects Cayman to prove “more attractive over the long term”, but counselled against expectations of a major rush of Canadian business to Cayman’s shores.

Opportunities are apparent in both Latin America and the Caribbean, particularly in light of a raft of TIEAs with countries in both regions. Owen said that in the case of the Hyperion companies, “We have always sought geographical diversity in our client portfolio. The balance of power in the global economy is very different from that of a decade ago. As a result, there is a growing need to utilise double taxation agreements and actively assess where captive business is geographically viable.”

He noted that opportunities abound in Latin America, but warned that the industry needs to do its homework. Local regulation, state monopolies and tax laws are all significant challenges.

Byrne said that Aon is already actively working with Latin American clients, adding that the company “would dearly love to grow that book of business”. He said that Aon has achieved some success selling the captive alternative and risk financing capabilities in Latin America, but added that penetration in the region is about “continuing that drive”. He said that there is a need for local captive experts to market Cayman and the captive concept, which will in turn generate business for the Islands.

Owen said that, in Latin America, the industry “has only just scratched the surface, but the region is quickly warming to the concept”, arguing that the industry there and elsewhere needs to be more proactive and innovative in its approach to sourcing new business. “The days of waiting for the phone to ring are gone. Unless you are one of the large, broker-owned managers, it’s imperative to build calculated distribution channels. As an independent firm, we need to be out in the field, pounding the streets.”

Another region of interest raised by Byrne was the Caribbean, where he has seen a marked rise in interest from parent companies in Jamaica and, increasingly, Trinidad and Tobago. “Clients there are maturing in their risk financing strategies and appetites and considering captives as an alternative to traditional commercial buying.” Caribbean-sourced enquiries have risen threefold over the last year, he said, although there is yet to be a rush of new formations.

It seems that Cayman has opportunities to develop existing ties in the US, driven forward by developments associated with the ACA, as well as emerging geographies in Latin America and the Caribbean. As Kilpatrick made clear, “There is cause to be optimistic about Cayman as a domicile; it is apparent that there is a real hunger to grow.”