The growth of unrelated risk
The Cayman Islands has long been considered a jurisdiction of choice for a number of captive models—healthcare, group, large corporate and other pure captives—all of which are generally formed to predominantly underwrite related party risk.
Starting in 2017, the Cayman Islands Monetary Authority (CIMA) has published data on its separate B sub-class licensees. Sub-class is determined by the level of unrelated net premium written. There are some intriguing results for recent licensees supporting the understanding the Cayman Islands continues to be a diverse and evolving domicile.
In 2012, regulations to the Insurance Law 2010 were finalised, bringing into force the law and the process of dividing the pool of class B licensees into three separate sub-classes, each based upon the percentage of related business the captive writes:
- Class B(i): at least 95 percent of the net premiums written originate from the insurer’s related business;
- Class B(ii): more than 50 percent of the net premiums written originate from the insurer’s related business; and
- Class B(iii): 50 percent or less of the net premiums written originate from the insurer’s related business.
To assist the industry in the process of reclassifications, CIMA published a Frequently Asked Questions (FAQ) list. Included in the list was clarity over what was to be considered ‘related’ and ‘unrelated’ business. The FAQ quoted related business as “business which will originate from the insurer’s members or the members of any group with which it is related through common ownership or a common risk management plan, or as determined by CIMA”.
The majority of, if not all, healthcare, group, large corporate and other pure captives, naturally fell in the class B(i) category. At the end of the second quarter of 2017, 836 insurance-related licensees were issued and 673 were B-licensed captives; 522 of the 673 B-licensed captives (77.6 percent) held a B(i) licence. By contrast, the 134 B(iii) captives accounted for almost 20 percent of all B-licensed captives. But there is more to the story.
CIMA published a listing of all new licences granted in 2017 up to June 30, 2017. Of the 13 new B licences issued, four were B(i) captives; perhaps surprisingly nine were B(iii) captives. Therefore, almost 70 percent of new licences being granted in the Cayman Islands were formed for the purpose of writing 50 percent or more of unrelated risks. The 2017 trend of new licences supports what Global Captive Management (GCM) has been seeing in the marketplace.
B(iii) captives can be formed under a number of different models including agency, investment fund or other organisationally-owned entities. GCM has experienced an increased interest in agency-owned captives coming to the Cayman Islands in particular. While these captives have a common link in attracting business—ie, the agency—the underlying insured would not be related to the members.
If an agency-owned captive also underwrote some of its own risk then depending on the allocation of premiums, the captive could be a prime candidate for a B(iii) licence. Additionally, GCM has also witnessed growth of existing successful and well capitalised B(i) captives looking to offer their captive strategies to other businesses which may not have the capital, experience, or capacity for starting their own captive.
A B(iii) captive, by nature of its independence to 50 percent or more of the premiums, requires additional consideration during its formation and operation. Given the potential inherent increase in underwriting risk for insuring unrelated parties, there are increased minimum and prescribed capital requirements and potentially additional actuarial requirements.
Those considering obtaining a B(iii) licence should be aware of related corporate governance responsibilities, not only to meet regulatory requirements but also to implement industry best practices. A well-advised B(iii) captive should ensure its captive manager is knowledgeable and experienced in captives writing predominantly unrelated business.
The trend of increasing B(iii) captives in the Cayman Islands should come as no surprise to those familiar with the vibrant jurisdiction. With robust regulation and knowledgeable, experienced service providers those exploring captive programmes of unrelated risk should continue to examine all the Cayman Islands has to offer.
Ian Bridges is vice president at Global Captive Management. He can be contacted at: firstname.lastname@example.org