20 December 2019Analysis

The other island for reinsurance

In July 2018, Barents Re, a large, ‘A’-rated reinsurer moved from Panama to Cayman. In a release explaining its decision, Barents Re said it had conducted comprehensive research and analysis of a number of potential jurisdictions.

If a company has no European business and is focused on the North American or emerging markets, Cayman clearly makes sense.

“We have chosen the Cayman Islands for our domiciled jurisdiction as it offers a strong legislative framework, political stability and a positive long-term credit outlook,” Barents Re said.

“Cayman Islands was selected as the preferred domicile to strengthen our reputation and credibility with clients, business partners, regulators and rating agencies.”

Barents is not the only reinsurer to have decided to move to Cayman. This sentiment is echoed by many that have done business in or with Cayman, with Nassau Re among the other reinsurers to have recently opened an affiliated company on the Island for certain business.

Aon saw reinsurance as a way to grow an existing practice in Cayman. Adrian Lynch, managing director of Aon’s Cayman office and captive strategy leader for the Americas, says: “Since I started running the Cayman office in 2014 I have been looking at how we can strengthen the other businesses we do here, to make them as strong as our healthcare business.

“Reinsurance has been a big part of that. We also want more fixed annuity business and more long-term healthcare.”

Lynch sees reinsurance as a really attractive business for Aon. “The quantum is substantial, the capital requirements are reasonable and commercial,” he says. “The growth potential in the business is solid.”

“Cayman’s reputation has grown over the years, from being principally a healthcare domicile to being an international re/insurance centre,” says Martin Cooke, director at Hyperion Risk.

“We offer a large community of experienced and diverse service providers. These include an array of large and specialist independent insurance managers, leading offshore law firms and audit practices—not forgetting a highly regarded regulatory body and legislative system,” he says.

Cayman has had a presence in the reinsurance market for more than 40 years. United Insurance Company (UIC), formed in 1975, claims to be the first Cayman reinsurance company, having been established by a group of captive insurance companies.

“It initially offered reinsurance support and risk pooling for casualty lines in response to the shortage of traditional reinsurance capacity at that time,” says Helen Stephenson, senior vice president of underwriting at UIC.

“Over the years, the company expanded to reinsure property, marine and casualty risks for those original shareholders and many other unrelated captive insurance companies.”

Since late 2016 UIC has shifted away from captive insurance business towards doing more open market reinsurance, following Quasha Group’s becoming its main shareholder and captives selling their interests in the company.

UIC continues to offer direct and reinsurance fronting to captives and risk pooling via Nexus, a subsidiary it formed in 1998 to provide primary casualty risk pooling for captives.

Cayman is seeing growth among category D1 reinsurers, which are fully staffed, self-managed and standalone entities that have staff on the ground in Cayman, and category B3 reinsurers, which use the services of a third party reinsurance manager which serves as the conduit with the Cayman Insurance Monetary Authority (CIMA).

Lynch says he has seen considerable growth among B3 reinsurers in particular, which he sees as an opportunity for Aon.

“Clients like having the kind of architecture Aon can offer behind them, it makes risk management and compliance much easier for them,” he explains.

Cooke notes a similar trend. “We have seen a handful of category D reinsurers setting up in Cayman, although we expect more will be coming,” he says.

“But there have been numerous class B3 formations, which provide a viable alternative to the commercial market.”

As the number of reinsurers on the Island grows, and in recognition of their growing influence, a group of Cayman-domiciled companies are in the process of forming an association to represent their interests, says Timothy Adair, head of UIC’s Cayman office, with UIC one of the founding members of the group.

“The association will meet periodically to discuss issues impacting our jurisdiction and business, and will maintain an open dialogue with CIMA and the Ministry of Finance. United is one of the founding members of the group,” says Adair.

Island rivalry

Cayman’s growing reputation in reinsurance has invited comparisons with another island renowned for its reinsurance business some 2,000 km away.

Cooke says: “In the past, reinsurance  companies barely looked beyond Bermuda. Today they are giving other jurisdictions more serious consideration.

“Solvency II equivalence is a factor, meaning reinsurers in Bermuda have extra compliance requirements. If a company has no European business and is focused on the North American or emerging markets, Cayman clearly makes sense.”

There are other reasons for reinsurers to choose Cayman over Bermuda, including its higher rating from Moody’s and healthier budget, which operates at a surplus.

Senior executives in regulated entities can obtain a 25-year work permit, and there is no restriction on home ownership or automobiles, which arguably makes it easier to recruit and retain senior people.

In addition, insurance laws in the Cayman Islands have explicit and clear policyholder protections that include the prohibition of third party creditor claims against policyholder assets.

It is similar to Bermuda’s segregated account legislation, but sources say Bermuda’s is conditional on certain criteria being met around disclosure and no commingling of assets, while Cayman’s is absolute.

This means that although Bermuda remains the jurisdiction most synonymous with reinsurance, Cayman is closing the gap between the two.

One source argues that these factors are seeing “momentum moving towards Cayman and away from Bermuda”.

Captives have helped attract reinsurers to Cayman. As the second largest captive insurance jurisdiction in the world, large re/insurance institutions that want to do business with captives feel compelled to have a presence on the Island.

Stephenson says: “UIC has always enjoyed a very close relationship with captives due to its owners and reinsureds being captives.

“Insurance managers, auditors, banks and other local service providers are involved with both captives and reinsurers and there is a mutually beneficial working relationship between the sectors.”

Simon Owen, managing director at Hyperion Risk, notes that captives are using reinsurance services more than they have in the past.

“We see a growing trend of agency captive and diversified captive formations,” he says.

“This in turn, creates a need for a variety of services, including the sourcing of risk premium, reinsurance capacity and fronting arrangements.”

Stephenson adds: “The hardening insurance market will increase demand for captives to write additional business, particularly in response to increased retentions and lower limits offered by traditional insurers.

“Reinsurers will in turn have an opportunity to offer support to these new or increased captive risks.”

Healthy growth

Cayman has long been a centre for healthcare captives, and around 40 percent of the business Aon does in Cayman relates to the healthcare sector. For the Island as a whole, the figure is around 60 percent, Lynch estimates, illustrating the importance of the sector.

Restrictions on the capacity of the medical malpractice sector have created considerable pressure on hospitals in the US, forcing them to increase the amount of risk they retain. This has created more demand for captives in the healthcare sector, in which Cayman specialises, and that in turn has created more demand for reinsurance capacity in Cayman.

Reinsurers may also be benefiting from the increasing diversity of the captives community in Cayman.

Owen says: “There has been a proliferation of new types of captives in Cayman. The sector has been dominated by healthcare captives historically, but Cayman captives and other re/insurance vehicles are increasingly likely to be involved in other areas, whether that be property and casualty, specialty lines or life.

“Cayman is quickly emerging as a jurisdiction of choice for property and casualty and life and annuity lines, with a significant longevity swap market being established in Cayman.”

He adds that there has also been a huge uptick in new reinsurance structures, many that are rated or significantly capitalised, hence creating a new market writing large treaty programs and sizeable transactions.

“Many are backed by hedge funds or large private equity companies, with family offices also increasingly involved in the sector.”

Increasing interest in reinsurance among hedge funds plays to Cayman’s strength in the hedge fund industry, with its existing relationships with the funds community encouraging new structures to choose the Island.

Owen says: “Cayman’s strong links with hedge funds and private equity is certainly one of the key reasons for reinsurance on the Island. When hedge funds and private equity funds want to launch a reinsurer or special purpose vehicle they are more likely to do so in a jurisdiction they know well.

“The capital markets are looking for diversification opportunities beyond just insurance-linked securities (ILS), and reinsurers are an interesting opportunity with good growth potential.

“Smart capital is seeing the benefit of hardening insurance rates and opportunities to participate in non-financial market correlated risks.”

Traditionally not associated with reinsurance, the industry has now grown to the point that in July 2018, Derek Stenson, partner at Conyers, wrote a blogpost on the firm’s website titled “Why Cayman is Becoming A Hub For Financial Reinsurance”.

In the article, Stenson ascribes this growth principally to regulatory changes. Financial reinsurance (finre) transactions tend to be underwritten with financial management rather than risk transfer as the primary driver, he explains.

“Recent global regulatory changes have caused a capital strain on many international pension, life and annuity insurance companies,” Stenson wrote.

“Finre is now a popular way to access capital relief for these strains and this has stimulated growth in the formation of finre companies, both globally and locally in the Cayman Islands.”

Solvency II: no thanks

Perhaps Cayman’s biggest differentiator has been its decision not to pursue Solvency II equivalence. This decision was taken in recognition of the overwhelming majority of its business coming from the US, where Solvency II does not apply. Cayman has therefore positioned itself as an alternative to a Solvency II jurisdiction.

Lynch says that around 95 to 97 percent of the business done in Cayman originates in the US market, leaving only around 2.5 percent exposed to Solvency II. For Cayman it therefore did not make sense to impose additional regulatory requirements on businesses that were not doing business with Europe.

“Bermuda went the other way and took steps to secure equivalence, but this was Cayman’s niche,” says Lynch.

“That is one reason why we now have around 60 reinsurers in Cayman, especially B3 and D1 reinsurers.”

Cayman’s reinsurers feel the island’s regulatory offering is strict enough, without being Solvency II-equivalent, allowing reinsurers there to better reflect their US clients.

Solvency II is an EU economic model that works very well for EU-facing business, but may not be necessary for US business.

Some of Cayman’s reinsurance growth therefore includes reinsurers based elsewhere opening affiliate offices to conduct business outside the scope of Solvency II.

Cooke says: “Bermuda has the more international focus, especially in being more aligned with Europe. Cayman has traditionally been about captives and funds, with a more North American focus, but even this is changing. Cayman is becoming more global.”

Despite turning its back on Europe over Solvency II, Cayman’s business is increasingly international. In recognition of this, in 2018 the Insurance Managers Association of Cayman changed its name and tagline to Cayman International Insurance: The Better Alternative, in recognition of the insurance community’s increasingly international profile.

This is consistent with changes that have taken place throughout the whole industry.

“The industry has changed beyond all recognition in the last 25 years,” says Lynch. “Risk management in particular is a completely different animal now, it is more sophisticated, more data-driven.”

Lynch predicts that the number of reinsurers in Cayman will grow by around 50 percent over the next five years, which will make it even more significant as a global reinsurance hub. That is unequivocally good news for the Island and the reinsurance industry generally, and there is little concern this growth could lead to oversupply.

“Reinsurers in Cayman are not only serving the local market, they are focused on international risk, just as those based in Bermuda are,” Owen concludes.

“There is plenty of room for more reinsurers with different models and strategies.”