Living in a neighbour’s shadow


Living in a neighbour’s shadow


How much of a threat does the US pose to Cayman’s captives market? Cayman Captive investigates.

The problem with being not too far from the coast of the US is that the latter can cast a substantial shadow over somewhere like the Cayman Islands—especially when it comes to what might threaten the local captive insurance industry.

So far in 2016 Cayman has seen a steady growth in the number of fresh captives being founded there. However, with more states in the US seeing the benefits of becoming a captive domicile, there remains the persistent danger that Cayman might lose out in the future creation of captives.

It’s something that has always hung over Cayman—the sheer disparity between the tiny nation and its far larger neighbour the other side of Cuba.

Nothing new here

Linda Haddleton, managing director at Artex, makes this very relevant point—onshore competition is not new for Cayman. She says that it is important to analyse the growth across captive domiciles, as numbers alone can be misleading.

“There are some onshore and offshore domiciles hosting large numbers of relatively small captives. Captive formations in Cayman are steady, with 28 new class B licences year to date through September 30, plus four class Cs and one class D, already surpassing 2015 numbers,” Haddleton claims.

“That does not indicate a threat to vibrancy,” she says. “As a mature domicile, Cayman can be proud of its track record of successful captives which, together with a high level of comfort in local service providers, instils confidence in startups. Cayman remains an attractive and trusted domicile.”

"Regulation needs to be managed with a sense of balance and Cayman has a sound reputation for that.” says Clayton Price, Marsh’s Cayman.

Paul Macey, president of USA Risk Group (Cayman), and also head of captive management for the company, agrees that the threat is real. He highlights the fact that more US companies may feel pressured to use an onshore jurisdiction. The solution to this, he says, is that Cayman must set its ambitions further afield.

“Onshore competition is our biggest threat,” he says. “The home state issues facing many US companies are likely to lead to growth in US domiciles, to the detriment of all offshore domiciles. We must look to develop our business in other regions and not rely solely on the US.”

Others frame the issue in a different way, identifying other issues as posing possible threats to Cayman. Adrian Lynch, managing director at Aon Risk Solutions, says that he believes that lack of innovation is a threat to any industry and jurisdiction and that Cayman is no exception.

Lynch stresses that Cayman has to continue to work hard to remain relevant in the healthcare space, for example, and that requires an industry where people are driving each other on through innovation and continual high standards of management and commercially focused regulation.

“Vibrancy suggests energy and hustle and those qualities don’t exist consistently across the industry in any jurisdiction,” he says. “Continuing to operate the same way as you always have is a recipe for stagnancy and it behoves all of us to drive future growth. I don’t consider other jurisdictions or competition a threat because they can only threaten you if you are not doing a good enough job for your clients.”

Swings and roundabouts

Lynch points out that the onshore environment suits some players, but the market knows that regulation remains a key ingredient and it has become more onerous for some. As a result Cayman is always conscious of this in dealings with clients, and companies such as

Aon Solutions partner with the Cayman Islands Monetary Authority on that basis.

“Captive management is no longer a commodity and although the proliferation of captive managers might suggest otherwise, Aon Solutions has recognised through the development of the captive management model that it is continually expanding its skillsets and the value proposition for its client base.

“Pretty much every US state has captives legislation in place,” Lynch concludes. “However, you have to look at the architecture surrounding that legislation in terms of the service providers, auditors, actuaries, etc, in terms of delivering in that jurisdiction. I admire some of the onshore jurisdictions as they are truly commercial in their offering, although many are not.

“We essentially have a 40-year head start, but we need to continue reviewing our relevance in the captive world. If we do that we will not only compete but remain a world leader. Cayman is not quite as developed a re/insurance marketplace as Bermuda, but our healthcare industry is well and truly a world leader.”

Choosing wisely

Development is always a valid area of concern for the industry. Without it, inertia or stagnation can set in, leading to a loss of impetus, or worse, a loss of business to other areas.

The issue of how a domicile is run is therefore always a relevant one. Without a degree of trust in a regulator a domicile can be distrusted by the market as a whole, for a wide variety of reasons. It can be said that no small amount of political capital has been expended in some countries by people using the words ‘offshore domicile’ as a pejorative term. Regulation therefore needs to be carefully enforced.

“Regulation needs to be managed with a sense of balance and Cayman has a sound reputation for that,” says Clayton Price, head of Marsh’s Cayman office. However, he adds, there should also be consistency and therefore each domicile constantly needs to keep an eye on state regulatory and offshore developments and changes to ensure they do not result in a non-level playing field.

“As for offshore rivals, there will always be ‘somewhere else’,” Price points out.

“While that is always a competitive threat—whether due to lower fees or otherwise—the more important thing is that those serving the captives industry are top notch professionals. One needs to remember that, in general, a captive is a formalised self-insurance tool and that an appropriate level of reasonableness should be maintained by all professionals involved in its operation.”

Artex, Cayman Islands, Linda Haddleton, USA Risk Group, North America, Paul Macey, Aon Risk Solutions, Adrian Lynch, CIMA, Insurance, Captive, Reinsurance

Captive International