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Cayman is continuing to establish itself as the leading jurisdiction on healthcare, but there are other growth areas to watch. Cayman Captive investigates.
While the Cayman Islands has long been hailed as the leading jurisdiction for captives in the healthcare sector, there is a lot of activity going on outside this space, which together are keeping the domicile competitive and positioning it for growth in 2018.
Cayman had ended 2017 with 33 new insurance licences compared with 39 in 2016. This included 27 new class B insurers (captives and segregated portfolio companies) and six class C insurers (special purpose insurers).
In the first half of 2018, however, the Cayman Islands Monetary Authority (CIMA) issued a total of 17 new licences. As of June 30, 2018, there were a total of 698 class B, C and D insurance companies and 26 insurance managers under supervision. There were a total of 821 insurance licensees under supervision, of which 97 and 724 related to domestic and international insurance markets, respectively.
Cindy Scotland, CIMA’s managing director, said that steady growth is projected to continue in the Cayman Islands insurance sector throughout 2018 and 2018, and that captive insurance structures are being put to more sophisticated use by their owners.
Kevin Poole, client services director at Artex Risk Solutions, suggests this strong start to the year compares very well to the same period in 2017 when nine licences were issued, and the expectation for 2018 is that in excess of 40 new licences will be issued.
While around half of Cayman’s captives are focused on healthcare, a number of growth areas outside this have picked up steam as the industry continues to evolve and innovate.
Poole notes that Cayman’s expertise in both healthcare and group captives continues to drive captives formations, and its overall reputation as a well yet proportionately regulated domicile is helping to attract more business.
He adds that some current unease caused by regulators in other domiciles is helping make the domicile decision easier, but there are not many issues with redomiciliation at present.
“It is one thing for any particular US state to pass captive legislation, but quite another to have, on day one: knowledgeable regulators, insurance managers, auditors, lawyers and bankers, etc, in order to service the business to be written,” he says.
Monique MacDonald, senior vice president at Global Captive Management, suggests that the captives market remains strong, with growth in existing and new captive insurance structures, with the latter expanding their coverages.
“While Cayman is competing with onshore domiciles, this high level of expertise, combined with robust yet sensible legislation, ensures retention of captives over the long term,” says MacDonald.
“Like a sturdy seasoned ship with a new coat of paint, the Cayman Islands remains a jurisdiction of quality and strength even as it evolves to meet industry demands.”
Trends in healthcare
More than half of the Cayman Islands’ captives relate to healthcare, and medical malpractice liability continues to be the primary line of business, with approximately 32 percent companies re/insuring it, and workers’ compensation the second largest with 22 percent of companies assuming this risk.
Some of the healthcare captives in the Cayman Islands were licensed 30 to 40 years ago, and some of the larger healthcare systems in the US have some connection to Cayman.
One trend quite prevalent in the Cayman Islands is the consolidation of healthcare systems—often due to a drive for synergies and economies of scale.
The 2010 US Affordable Care Act resulted in consolidation in the US healthcare industry, which in turn has led to the merging of captive insurance programmes.
“We are still seeing some mergers and acquisitions (M&A) activity being driven by efforts to become larger and more efficient as costs come under pressure,” says Poole.
If it’s not to happen through acquisition, he sees a greater emphasis on smaller regional hospitals entering into working relationships through the use of strategic affiliations or alliances also to drive efficiencies.
“Overall the impact on captives is that an acquiring entity may find itself owning two or more captives, which is leading to mergers or rationalisation of the captives that are as a result becoming larger in terms of premiums and assets,” he says.
“These larger captives have the ability to assume higher limits or expand lines of business.”
MacDonald also notes that M&A activity continues to affect the healthcare captive market with migration to a smaller number of captives—albeit in more robust forms.
At the end of 2017, Cayman had new issued 33 licences. The domicile did have a few surrenders and cancellations of insurance licences, bringing down its number of formations year on year, largely due to consolidation in the healthcare sector, maturing programmes and catastrophe bonds.
“The resulting captives are providing coverage to a greater number of insureds and expanding into additional product lines such as surplus lines deductible coverage, reinsurance for the downside performance risk of accountable care organisations (ACOs), and medical stop loss for health benefit plans,” she says.
MacDonald adds that healthcare captives are now subject to more scrutiny to ensure that they are continuing to enhance their parent systems’ overall risk management programmes, in terms of both loss control and financial management.
“This additional scrutiny is positive as it provides the system with more detailed information on their captive subsidiary, and how best to evolve and expand the captive’s insurance program,” she says.
“The flexibility of the captive structure easily allows for this evolution, and healthcare systems will continue to utilise captive insurance as a value-added proposition.”
Captives in Cayman have generally been formed to underwrite related party risk, which can be seen in the large amount of healthcare, group and other pure captives within the jurisdiction.
Since the introduction of dividing the pool of class B licences in 2012 into three separate sub-classes, there has been an emergence of captives that are writing unrelated cover, particularly in the last couple of years.
“Existing captives are expanding coverage and there is greater interest in new captives formations, especially in relation to unrelated risk,” says MacDonald.
The class B insurer’s licence permits an exempted insurer to carry
on insurance business other than domestic business, in respect of
which (i) at least 95 percent of the net premiums written will originate from the insurer’s related business; (ii) more than 50 percent of the net premiums written will originate from the insurer’s related business; or (iii) 50 percent or less of the net premiums written will originate from the insurer’s related business.
CIMA statistics show that four new class B(iii) licences were issued in the second quarter of 2018: Gardant Risk Solutions; Navesink Insurance Company; Poseidon Reinsurance Company; and TPAC Risk Partners Assurance Company.
A similar trend can be seen from last year: in the first half of 2017, nine of the 13 new B licences issued were B(iii) captives formed for the purpose of writing 50 percent or more of unrelated risks.
“In Cayman we are definitely seeing more interest in the formation of B(iii) licensees, being those that write predominantly third party business,” says Poole.
“Cayman’s expertise in healthcare and group captives continues to drive captives formations, while startup costs for those forming B(iii) captives mean Cayman remains the domicile of choice.”
Cayman continues to lead on healthcare, but it is also exploring other ways to make the domicile attractive to owners and prospective captives owners.
One such area outside healthcare is segregated portfolio companies (SPCs) and group captives which, MacDonald says, are flourishing, as small and medium-sized entities (SMEs) seek coverage with more predictable pricing and greater ability to direct loss control.
“The ability to obtain coverage in an alternative risk transfer (ART) structure without substantial capital injections attracts SMEs to group and SPC captives,” she says.
“New prospects appreciate that captive insurance participation allows them greater ability to participate in the handling of their own losses and to focus on the high-risk areas producing adverse losses.”
Further to this, MacDonald notes that agency and broker-owned captives continue to be of interest in the domicile as agents pursue additional competitive advantages in the ART industry or identify profitable blocks of business that fit well in a SPC or group structure.
While Cayman’s international insurance industry comprises mainly companies insuring risk in North America (90 percent), it should be noted there are a few Canadian companies and there is some interest from the Far East, Latin America, Europe, and Africa.
Poole notes that the cell company concept continues to be popular, with more clients considering using portfolio insurance company (PIC) legislation.
“We have seen formations and interest in Cayman from regions such as Australia, the MENA and South America,” says Poole.
Another area where MacDonald sees some interest is in the coverage for medical cannabis through a captive structure.
“While captive insurance coverage is not yet available to US entities due to US federal restrictions, coverage can be provided to the Canadian market,” she explains.
Medical marijuana is already legal in Canada, and recreational cannabis was legalised on October 17. There are almost 100 cannabis producers in Canada, which could present an opportunity for captives to step in.
Healthcare, Third party risk, CIMA, GCM, Artex, Cayman Islands