Cayman Captive round table
In the silver anniversary year of the Cayman Captive Forum, Cayman Captive magazine gathered a group of experts to discuss the current state of the industry and the opportunities that lie ahead.
- Erin Brosnihan, executive vice president, Kensington Management
- Howard Byrne, Cayman director, Aon Insurance Managers
- Kara Ebanks, chief analyst, Cayman Islands Monetary Authority
- Kevin Poole, client services director, Artex
- Suzanne Sadlier, deputy head of insurance, Cayman Islands Monetary Authority
- Jude Scott, chief executive officer, Cayman Finance
- Melanie Snyman, director, PwC
- Glen Trenouth, managing director, BDO Cayman Islands
- Moderator: Christian Wuestner, Cayman Captive
Contributor: Linda Haddleton, chair, Insurance Managers Association of Cayman/managing director, Artex
This year the Cayman Captive Forum will be celebrating its 25th anniversary, a period during which the Cayman Islands has seen significant growth in captive business, making it a worldwide leading jurisdiction.
In order to gauge the atmosphere in the industry there, Cayman Captive magazine gathered a panel of executives to discuss the current state of the industry and the opportunities that lie ahead.
Linda Haddleton, chair of the Insurance Managers Association of Cayman, was unable to attend, but she sent a statement reflecting her view that the captive sector in Cayman Islands is healthy.
“What I look at is not total numbers but indicators of growth: new insurer licences, new segregated portfolio companies (SPCs), new portfolio incorporated companies (PICs), new members in group captives, and importantly organic growth in existing captives,” Haddleton said.
There were 327 pure captives and 117 group captives under the Cayman Islands insurance supervision as of June 30, 2017, while the overall total captive licensees stood at 701, which also includes 146 SPCs with 603 cells. The Cayman Islands is the leading jurisdiction for healthcare captives. Medical malpractice liability continues to be the largest primary line of business with approximately 32 percent of companies re/insuring medmal, while workers’ compensation is the second largest with 21 percent of companies assuming this risk.
“From the Cayman Islands Monetary Authority’s (CIMA) perspective, we are seeing continued growth and having more and more meetings with prospective licensees including companies who are looking to re-domicile their captive operations,” said Suzanne Sadlier, deputy head of CIMA’s insurance division.
“The growth is positive for 2016, we issued 39 new licences. For the first half of 2017 we issued 17 new licences. Certainly, with regard to Cayman’s position as the number one healthcare domicile for captives and second in terms of overall captives remains very strong. From the trends we are seeing at present, that doesn’t look as though it will change any time soon.”
“What makes Cayman attractive to captives are the fundamentals we have built the business on: an entire industry working well together, providing the types of resources, quality insurance management, in conjunction with all the other service providers, as well as working very closely with the regulator,” said Jude Scott, chief executive officer of Cayman finance.
For captives, Cayman also offers access to all the ancillary parts of the business, professional service providers, that help them manage the risk exposure. Companies have easy access to the regulator who is willing invest time to understand what they are looking to do, and also have a balanced regulation in place, Scott added.
While noting that Kensington Management Group works extensively in the group captive space, executive vice president Erin Brosnihan noted that group captives have experienced tremendous organic growth in the last three years.
“On average we are adding approximately 300 member insured companies per year, and we don’t expect any slowdown in growth in the near term,” Brosnihan said. “The sweet spot for the group captive market is mid-size, well run US companies and we feel that the market is largely untapped at the moment, so significant opportunities for growth still exist.”
Regarding the biggest changes the sector has seen in recent years, Haddleton said that the greatest challenge has been the effort to ensure that the risk-profiling of the sector is taken into consideration in rules, regulations and laws required to counter money-laundering (ML), terrorism financing (TF) and other crimes.
“The captive sector largely assumes related party risks and does not possess the same vulnerabilities to ML and TF activities in the way areas such as banking or mutual fund management do. Nor does the captive sector pose systemic risk to the remainder of the financial sector.”
While noting that unfortunately, claims of applying proportional, risk-based regulation, from banks, reinsurance companies, regulators, etc, are sometimes hollow, Haddleton noted that the requirements for due diligence need to be examined for the value they will add to the assessment. “If they would not add value, much time and expense would be saved by a more filtered approach. The entire process would be more efficient and valuable,” she said.
PwC director Melanie Snyman described the biggest changes in her view as being the consolidation and merging of healthcare captives in the US. “We have seen captives either merge, re-domicile out or in, or liquidate.
“We continue to service our healthcare clients and look for new opportunities to expand their programmes. I don’t see it as a negative in that respect,” she explained.
Glen Trenouth, managing partner at BDO Cayman Islands added: “We’ve seen an increase in competition by virtue of a growing number of onshore jurisdictions, and dealing with the rhetoric around the legitimacy of the offshore ones. Cayman has responded by mainly continuing doing
what we do best, while building on our past success in terms of innovations and quality.”
Trenouth noted that the captive industry in Cayman has resisted the urge to venture into sometimes controversial captives products.
“While they may have promised opportunity for growth in our market, they are potentially unstable and questionable in terms of their legitimacy and usefulness,” he explained.
Captive insurance has been driven particularly by traditional sources and while this is good, it is time for Cayman to make inroads to new markets, Haddleton said.
“Latin America has been opening up to captives. It is a very different market from North America, concentrated on property and bancassurance and for the most part very protective of local insurance carriers, agents and brokers,” she noted.
“Nevertheless, there is huge potential for Latin American businesses to make use of captives and Cayman’s proximity to Miami and existing relationships in other financial sectors must be explored to expand Cayman’s captive remit.”
At the same time, the recent growth in Cayman captives demonstrates that North American businesses, particularly mid-sized, remain untapped to an extent and Cayman has tried and tested captive models to offer.
Artex client services director Kevin Poole agreed that the captive industry is currently experiencing strong growth.
“We’ve also been experiencing growth in group captive membership,” Poole said. He noted that there are whole new industries coming to the fore such as the shared economy space. “We are definitely seeing a number of opportunities for captives in different industry sectors.”
Howard Byrne, director of captive services at Aon Insurance Managers, referred to the soft commercial property & casualty market as one of the challenges facing the industry.
“The pricing is so competitive in the commercial market that those traditional lines of business are not being run through captive programmes. The captive programmes are not being set up to write those lines,” Byrne said.
Instead, he sees a more diverse client base than before looking at varied programmes and insurance and reinsurance solutions.
“We are looking in the healthcare space and healthcare clients, looking at managed care,” he said. Aon is also looking into the B(iii) space (captives with greater than 50 percent non-related business), looking at special purpose reinsurance companies falling under the B(iii) licences and that do not have a multinational or global mandate, but are focused on a particular market (eg, US) or line of business.
Kara Ebanks, chief analyst in the insurance division at Cayman Islands Monetary Authority, noted that so far in 2017, most of the new captive formations, about 52 percent, have included unrelated risk lines of business and non-traditional risk.
“The captive model seems to be diversifying in that there is more sophistication, and more complex structures in place,” she said.
The role of the Cayman Captive Forum
The Cayman Captive Forum has been invaluable to the captives industry, Brosnihan said. She has been involved in the forum for the last eight years and has been the chair of the Forum Committee for the last four.
The forum is fully planned and organised by IMAC, and more specifically by the Forum Committee which consists of volunteers from various Cayman insurance managers. She noted that the forum is the largest captives-focused conference in the world and the largest conference held in Cayman. “Hosting such a high quality and high profile event certainly boosts Cayman’s reputation in the captives space” Brosnihan noted.
The forum has made, and continues to make, a tremendous contribution to the local economy, she said.
Poole, currently the vice-chair of the committee added that a large number of captive owners take the opportunity to have their board meetings at the same time as the forum takes place.
“When you have a large number of captive owners, it helps attract other people to come to the conference as well,” Poole said. This helps make
the forum a high-profile event and secures a very diverse group of delegates representing the whole captive industry, he suggested. “It gets a lot of attention.”
Byrne noted that there is a high client penetration and attendance from C-suite representatives at the conference.
“What has happened as a result of that is that the insurance and reinsurance markets from Bermuda, the US and Lloyd’s of London have recognised this unique client concentration and access opportunity and send representatives to the conference, which enables clients to engage and/or conduct business with markets on the ground.”
The forum is also an opportunity for current and prospective licensees to meet with CIMA during the conference, Sadlier said. “We spend most of the day during the conference hosting meetings.”
CIMA has a booth at the conference. “We are available at the CIMA booth should any stakeholders have questions about the regulatory framework or relevant matters,” she noted.
“The work of IMAC has been tremendous in building the success of the forum,” Scott said. “I see it as the differentiator in terms of Cayman versus other jurisdictions.”
The forum brings together multiple clients, prospective clients and business partners in an environment which allows them to meet the executives involved in delivering the quality and expertise. It gives them reassurance that they are in right jurisdiction, Scott explained.
“They also get a better understanding of how they can benefit from
Poole noted that the forum is now hosting many sessions, led by various industry practitioners. “We get the best of the best speaking at
the conference and we can make sure everything is topical and relevant,” he noted.
Brosnihan added that the proceeds generated by the forum are funnelled towards the IMAC Educational Scholarship Foundation. IMAC is very proud of its ongoing contribution to the youth of Cayman, with the scholarship allowing these students to pursue a college education, which they would otherwise not have the ability to do, she noted.
Haddleton mentioned something that does not get much of an airing but which is vital to the future of the industry: the efficiency of the captive management model. “The industry works well because of the efficiencies of this model. It is not a high-margin business,” she noted.
As a result, captive owners and insurance managers have to ensure that the economic model continues to serve well and does not impair the relevance of having a captive. In this respect, risk-based regulation is essential for this sector, Haddleton said.
“A stacking of regulatory filing fees can reach the equivalent of a multiple of the annual licence fee, and this cannot go unchecked,” she explained.
The industry is adapting
“We’ve seen there is a closer contact with regulators, IMAC and CIMA, as to emerging accounting announcements and their effect on our clients’ financial statements and other operational considerations,” Trenouth said.
Over the years BDO Cayman Islands has been expanding its audit procedures, scoping in a number of compliance measures which have been introduced. “Technology, client portals, and data mining software allow us to perform audits more efficiently and effectively,” he noted
Snyman said that PwC has expanded its service offerings in Cayman as the industry has grown. “We now have a tax practice here, and partners, and we have two in-house actuaries which we wouldn’t have had before.
“Similarly, PwC now offers risk assurance services which offer governance purposes, AML, and cyber risk services.”
The regulations have been updated to include things such as portfolio insurance companies (PICs), and Cayman is starting to attract some class D reinsurers which can only help the Cayman insurance market, Poole noted.
CIMA is particularly well informed and up to date in terms of the international regulatory environment, Sadlier said. CIMA is an active member of the International Association of Insurance Supervisors (IAIS), and more specifically, is a member of several working groups of the IAIS including the market conduct working group, as well as the reinsurance task force.
“We are therefore actively participating in the development of evolving and emerging regulations from a global standpoint. That allows us to be one step ahead in terms of the integration and implementation of such regulations,” Sadlier commented.
CIMA is also a participant of other international bodies including the Group of International Insurance Centre Supervisors (GIICS) and from this activity, CIMA continually conducts research, looking at emerging risks and technological innovations.
“Insurtech is a rapid growth area at present, and we want to ensure that at CIMA we are well placed to understand and supervise these new products that are emerging within captives and other licensees too,” Sadlier said. “Discussion on big data and blockchain technologies is something that we are actively researching to ensure we are positioned to adapt as necessary.”
Byrne emphasised the need to engage more with clients to move away from the traditional lines. “We have unique access to the client leadership and are using this opportunity to proactively drive the captive conversation as it relates to captive best practices, bench marking, utilisation and expansion opportunities.” He noted that Cayman managers are becoming more proactive in this regard, and more consultancy-based than they were in the past.
While Cayman has lost some of the insurance-linked securities (ILS) business to Bermuda, Poole said that Artex is talking to some clients to try to include such programmes as an add-on to traditional captive programmes.
“Cayman is very plugged in globally from a regulatory perspective,” Scott noted. “When you look at global trends, what I’ve always been pleased with is not only do we ensure that we understand what the global trends are but we try to anticipate where they are going.”
Cayman looks to model regulations to fit the client base. Scott emphasised the ability of the industry in Cayman to constantly innovate, develop skillsets, and focus on what the clients’ needs are and the risk.
“That and the sheer knowledge also helps the jurisdiction continue to move and progress because it’s looking at all the different aspects of the stakeholders in the industry, bringing together clients, working close with the regulator. It’s moving and developing forward as an ecosystem,” he added.
The support of CIMA is very important, Snyman said. What’s great about CIMA is they are accessible and very open to dialogue and discussion. That helps new captive formations and clients that are adapting their business. “We all appreciate that. Even with the new laws and regulations, we as service providers can provide input into that,” she noted.
Trenouth added: “There is a really good balance between a respected overseer, and not stifling innovation.”
What makes IMAC special?
IMAC acts as the primary and key liaison between industry members and CIMA from a regulatory standpoint, and the government from a legislative and marketing standpoint, Brosnihan said. IMAC and CIMA hold regular meetings to discuss any issues and flush out any concerns that may arise, in order to maintain the innovation and competitive edge of the jurisdiction.
“We believe our members view this as IMAC’s most critical role,” Brosnihan added.
Byrne noted that IMAC is a collective. “While some of us compete with each other through the week, there is a common bond between the representatives of the industry here. There is a consistency to the messaging which is important,” he said.
Brosnihan agreed: “I think that is a unique feature, we are competing for business, yet but we come together for the greater good of the domicile.”
The importance of IMAC can’t be overstated, Scott said. “The only way a jurisdiction can overcome the challenges and embrace the opportunities is by having this kind of environment which IMAC creates.
“It’s all about the jurisdiction, and bringing together the best minds, thoughts and ideas and to share those for the benefit of the jurisdiction and clients. I think it’s a tremendous advantage and one which is not easily replicated.”
Looking at the future of the captive industry
“Despite continued growth in the numbers and size of captives, and the proliferation of captive domiciles, I feel the captive model remains underutilised, in both new and existing markets,” Haddleton said.
“Emerging industries and risks are at an all-time high—think of the shared economy space. It is up to captive domiciles to be receptive to sustainable captive business plans in order to facilitate these risks and thereby guarantee new sources of business, so as to keep up the momentum in this extremely useful alternative risk sector that has so much to offer.”
Trenouth suggested that the captive industry in Cayman should divert some attention to different geographical markets such as Latin America, Asia, Canada, and the opportunities these may offer.
At the moment, 90 percent of the risk from the captive market business originates from North America, Sadlier said. However, the other 10 percent is diversified between Latin America, Asia, and Europe. “We’re seeing an increase in growth from those jurisdictions, looking to startup operations in the Cayman Islands or to redomicile from those jurisdictions. So that diversification is certainly happening,” she said.
The captives industry is also veering away from the ‘traditional’
P&C business and adding other lines such as cybersecurity, Brosnihan noted.
“This speaks to the success of the market in that in our clients’ view the captive is critical to the business and they are looking to utilise the captive for other coverage types.
“Despite the soft market in the US, we see a huge amount of potential for continued growth in the group captives space,” she said.
“We have seen more interest in blockchain technologies from an underwriting perspective, with telematics and the use of sensors which can improve the overall underwriting process,” Poole said. It will make the industry a lot more efficient also from the claims process.
Sadlier noted that as the technological changes evolve quite quickly, there are lessons learned from those technologies: what works, what doesn’t, where the risks are and how to identify them.
“From CIMA’s perspective, we are continuing to research those technologies to understand the risks they pose, to understand the opportunities they present for the licensees and to use that understanding in the context of our regulatory framework,” she explained.
The world has become a lot more complicated and connected as well, Poole noted. He mentioned supply chain interruption with hurricanes that can have a big impact on clients.
There is an opportunity, when looking at big data, specifically at the captive insurance industry, Scott noted.
Current trends in the captives industry
Trenouth said that BDO has seen a reduction in some smaller captives, for example where small healthcare systems are being merged into other systems, but that there is a trend in audit gains from larger entities, SPCs and group capitals.
Board meetings are delivering a much higher level of engagement, Byrne said. “Whereas years ago, you’d have a passive management positioning, now there’s a focus on providing proactive value, initiating strategic discussions with boards at each meeting.”
Sharing good ideas which worked with similar clients changes the board’s expectations. “There has been a material increase in engaging client dialogue more than before,” Byrne said.
Cyber and the benefits business is getting most interest at
the moment, Poole said. However, most important is to talk to clients. “What we’re seeing is existing captives expanding their uses,”
The importance of big data
Technology is driving efficiencies, Scott said. When you accumulate large volumes of data it is essential to have the capability to analyse the data, and to mine the data that has been sitting idle. “We are now moving towards a future where we are predicting what the future will be, where the organisations need to be. We want Cayman to play a central role here, being able to have that data accessible and appropriately shared.
“We think that will be a huge differentiator going forward,” Scott noted.
In the last few years, CIMA has enhanced its expectations in terms of licensee’s risk management frameworks, Sadlier said. It is critical that licensees can appropriately identify their risks, have a full look through the risks and incorporate controls to manage the risks. Big data is a key part of that process as licensees’ business plans become increasingly complex and therefore so does the extent of their data.
Until the licensee’s data can be turned into meaningful information which in turn is used in the risk management process, it’s difficult to advance their risk management frameworks appropriately, she noted.
One of the innovations we are looking at is developing a globally certified digital ID, Scott said. “We believe there’s lots of benefits from that, one being the ability to develop more concrete global standards,” he said. “A certified digital ID also removes duplications of compliance from the marketplace.
“You create a lot more efficiency. We think it reshapes how clients are able to transact and in particular in terms of new technologies. We believe that this is one of the unlocking mechanisms to pre-certify parties in a closed system, providing automatic updates of a status change,” he explained.
“We are not afraid of change,” Scott said. “We make sure Cayman is globally connected and that we focus on sustainability, and maintain competitive advantage.
“Cayman has done a good job of not getting overly excited about the new and shiny, but investing time to analyse the risk and innovate the product to minimise the risk,” he stated.
Where is technology taking the industry?
Technological innovation is important because millennials are going into senior positions, Snyman said. “They are used to instant gratification,” she noted. It’s important to ensure the technology works, and doesn’t cause disruption, as well as getting accurate and complete information. “Be cautious, look at the new technological innovations and be sure that what you have is tried and tested,” she said.
Scott noted that a lot of innovation will be seen related to smart contracts, which requires everything to be built upfront into the technology and is then automatically executed.
Technology is set to cause some disruption within the industry. The emergence of artificial intelligence will make the jobs of accountants obsolete, Trenouth said. Accountancy firms will turn into technology firms, he said.
The innovations implemented elsewhere in the insurance industry in the Cayman Islands, for example by large reinsurance companies, has a positive knock-on effect on the captives market here, Sadlier noted.
Blockchain to change contract work
Blockchain is going to be a big thing for anyone doing contracts, said Trenouth. “That’s where the value is,” he noted.
In terms of reporting requirements, captive companies need to be able to keep up to date with changing requirements, Sadlier said. “The more efficiencies they have in the business from a technological standpoint, the more adaptable they can be.
“Technological improvements can reduce operational costs and increase accuracy for reliable and efficient results,” Sadlier said.
Recruiting in Cayman
“Cayman as a domicile has done a good job of blending local talent and international talent,” Scott said.
It is important to have the right balance from an immigration perspective, enabling the best talent to be brought in, he said. To continue to change going forward, means continuing to upscale people who are in the industry already, and sharing this knowledge broadly across the industry.
“But it also means attracting the talent we need to go forward. It’s a commitment that’s natural to the jurisdiction and the businesses that are here.
“A group within Cayman Finance focuses on identifying the key areas that drive businesses’ decisions on selecting Cayman as a domicile, and want to bring their talent to Cayman. What helps is that the quality of life is amazing in Cayman, with the ability to work with the best talent in the world.
“It’s an environment of sharing information, skillsets, and dynamically looking forward. It’s an environment that embraces positive change,” Scott said.
“It’s an exciting time for a forward-looking jurisdiction such as Cayman,” he added.
Kensington Management, Aon Insurance Managers, CIMA, Artex, Cayman Finance, PwC, BDO, Captives, Cayman