It has been a good year for captive redomestications, with Cayman playing to its unique strengths in 2011. Clayton Price details why Cayman can expect further captive interest in the coming years.
Although the insurance market has not officially hardened, Cayman may be realising the benefit with newly formed captives positioning for the future. In spite of the catastrophic events that have occurred over the past two years, including earthquakes in Haiti, Chile, New Zealand and Japan and their devastating tsunami, significant flooding from the cyclone in Australia, tornados that ravaged the US this spring and losses associated with Hurricane Irene, the impact of which is not yet fully realised, caution lends itself to being well positioned should the cumulative effect cause the market to have a hard adjustment.
Insurance buyers faced with catastrophic exposures have already been impacted with rate increases. One buyer with catastrophe Caribbean wind exposures instead elected to insurer its property cover in a newly formed Cayman captive instead of remaining in the commercial market.
A good vintage
As of the end of September 2011, 29 new Class B captive licences have been issued in Cayman, almost double the number for the same time period during 2010 when 15 such entities were registered in Cayman. Cayman has a further four captives approved in principle but not included in the 29, and could well be on track for 40 formations for 2011. This would match strong 2009 results.
Cayman reached record premium levels of $9.59 billion and record assets under management of $53.8 billion in 2011. Of the 29 Class B licences granted this year, three are for redomestications—one of which is currently in process. Cayman has clearly bucked the trend of captives moving onshore that some North American captive industry leaders suggested would become the norm at the end of 2010.
A track record of excellence
There are several likely reasons for Cayman’s success thus far in 2011. Its sound regulatory approach, with its solid and long-standing track record, including its reputation for providing reliable data, has stood the Island in good stead. Further aiding matters, Cayman, the world’s second largest offshore domicile and most complete financial centre, boasts high quality service providers and insurance laws that embrace the captive proposition while regulating in accordance with International Association of Insurance Supervisors (IAIS) international standards.
As stated by Gordon Rowell, the head of insurance for the Cayman Island’s Monetary Authority, “Cayman was elected to the IAIS executive committee this year, which is the main seat on the IAIS council”, which speaks well for the Cayman Islands. Cayman has also been diligent in the ratification of Tax Information Exchange Agreements (TIEAs), signing its most recent agreement on October 13 with Argentina, bringing the number to 27 and building on the signature of its 26th agreement with China on September 27.
Having ratified the TIEA with Canada earlier this year, Cayman is poised to offer Canadian businesses a viable alternative to Barbados when it comes to forming captive insurance companies. This agreement in particular is expected to offer a more taxeffective platform for Canadian-owned companies that have foreign operating subsidiaries. It will exempt certain dividends payable to foreign affiliates resident in the Cayman Islands and distributed to their Canadian parent companies from relevant Canadian taxation.
In addition, it will make it easier for Canadian firms to form new Cayman companies, particularly captives and financing vehicles, and potentially to move business to Cayman from other double tax treaty jurisdictions through redomestication. While Bermuda has similarly ratified a TIEA with Canada, Cayman offers a more efficient proposition since Bermuda has chosen to adopt Solvency II and, unless a dual regulatory status is granted to Bermuda, Solvency II is likely to add extra capital costs to those considering establishing a captive there.
A bright future
Four captives, three being reinsurers of commercial insurance companies, have already chosen to redomesticate to Cayman in the past year and a half. Others are in the process of evaluating the feasibility of following suit. Considering the successes achieved in 2011—the licensing of new Class B companies, the TIEAs that have been ratified, the sensible and consistent regulatory approach and the decision not to adopt Solvency II—Cayman is clearly setting a direction to be the leader in new captive formations in years to come.
Clayton Price is chairman of the Cayman Insurance Managers Association. He can be contacted at: email@example.com
IMAC, Cayman, captive, insurance, formations