Matching the competition

Any comparison of modern business practices with those of a century ago would very quickly show some massive differences. It’s not simply a question of technology—some concepts are very different indeed. One of these is the ease in which companies can redomicile.

Many countries and US states have been looking at captive insurance companies for some time, and then working out the most efficient way of attracting them to those jurisdictions. Captive-friendly laws and regulations have been written and voted into place in all kinds of places.

This has created the kind of environment in which redomiciling is easier to do than it has been before. Which brings up the question: could redomiciling be a threat to Cayman’s position as a domicile for captives?

Looking at Cayman, its position is indeed a strong one. According to Rob Humphries, an attorney at legal firm Solomon Harris, Cayman’s appeal as a leading captives domicile now extends well beyond its traditional client base of US healthcare captives.

There are currently about 730 insurance-related licensees conducting international business from Cayman. At 31 June 2017 there was a total of 701 class B, C and D insurance companies, and 29 licensed insurance managers to service their needs.

Total premiums across the board came to $13.5 billion and total assets were $57.9 billion. Pure captives and group captives represented the two main categories, with 327 and 117 companies respectively; 145 of those companies have been set up as segregated portfolio or ‘cell’ companies (SPCs) with 603 segregated cells among them, a significant number of which will each house completely separate captive insurance programmes.

Innovate and respond

Humphries says that Cayman’s success as an insurance and financial services jurisdiction stems from its ability to innovate and respond to market demands. As a British Overseas Territory, Cayman continues to adapt and provide solutions in a business-friendly, politically stable environment, with a respected judiciary and common law legal system based on English law.

The insurance industry is well established, with sophisticated service providers including insurance managers, lawyers, bankers and auditors, all with significant industry experience who are used to providing high quality services in a very competitive environment. Finally, there is a well thought-out captive-specific legislative and regulatory framework in place with oversight by an open and approachable insurance regulator, focused on appropriate but proportionate regulation of the industry.

“There are more domiciles in competition with us: you just have to look at the US market, where more than 30 states now have captive legislation on their books to try and attract business,” says Michael Gibbs, president of Kensington Management Group.

“People get interested in a captive and they think ‘where’s the best place to do it?’. There is definitely a strong element about going to a domicile such as Cayman that has the history, strength and infrastructure to give them the right level of support.

“Do we see challenges from Vermont and South Carolina and the other main US onshore domiciles? Yes, absolutely, and that’s a good thing as it keeps us on our toes. There is a historic perception about offshore domiciles that business is being done there for tax avoidance and other scenarios that are so far from the truth, so there is still significant education that needs to be carried out, but these issues can be overcome,” he says.

“Certainly in the statistics I’ve seen, there hasn’t been much in the way of redomiciling overall, certainly not from Cayman, and we are still seeing continued growth, with 2017 being another strong year for the domicile.”

Humphries agrees that Cayman faces a threat from redomiciling. “Yes, of course,” he says. “We continue to see other jurisdictions both onshore and offshore taking steps to develop legislation and infrastructure to encourage the growth of their own captive insurance industries and the economic benefits they hope will follow.

“There is now more competition than ever between domiciles trying to attract new incorporations and also the transfer-in of existing captives business from other domiciles.”

Steady movement

According to Humphries, although no formal statistics are available, a number of discussions Solomon Harris has had with significant industry participants seem to place the number of transfers in and out of Cayman at roughly five per annum over the last five years. In an industry with over 700 insurance licensees those numbers don’t appear to be indicative of a trend in any particular direction.

“As a leading insurance practice in Cayman, we have not seen any transfers-out this year but are currently dealing with two interesting transfers-in, both from other well-known offshore jurisdictions,” says Humphries.

“One is a transfer-in by way of merger with a newly incorporated and licensed Cayman Islands captive pursuant to Part XVI of the Companies Law (2016 Revision). The other is a transfer-in pursuant to Part XII of the Companies Law (2016 Revision) as a portfolio insurance company (PIC) under a cell of the parent’s existing
SPC structure.

“This would not have been legally possible but for the recent introduction of Cayman’s PIC legislation. In both cases, Cayman was preferred for reasons of service provider expertise, cost and administrative and regulatory efficiencies.”

According to Gibbs, the upcoming Cayman Captive Forum is something that can be used to help Cayman react to that threat. “We regularly hear from people about the new challenging exposure areas being faced now and in the future, so as an industry, we need to keep abreast of new issues, and as a forum, as a conference, we need to be able to showcase that and brainstorm it. The forum needs to be a vehicle to do that.”

Humphries believes that in order to maintain its position as a leading captive insurance domicile Cayman needs to innovate and adapt to respond to competition and market demands, and that he sees that happening in several ways.

First, there is a constant review of the captive and insurance specific legal and regulatory framework. This resulted in the introduction of PICs into Cayman’s Insurance Law as a means by which a cell of a SPC could effectively become incorporated and have its own legal personality.

An unincorporated cell of an SPC is not a legal entity in its own right and therefore cannot contract with other cells of its SPC (eg, for risk-pooling or quota-sharing purposes) or have its own board of directors. There is also a material level of uncertainty as to the US tax status of an unincorporated cell. A PIC overcomes all these drawbacks because it is a company in its own right, albeit that for regulatory reasons it must at all times be under the control of a ‘parent’ SPC.

“The transfer-in mentioned above is an innovative example of
how new legislation creates new solutions for new market demands,” says Humphries.

“Second, we see the professional services industry adapting to meet new client demands in a growing and more diversified Cayman insurance market, with licensees looking to write and reinsure new lines of cover, for new industries, in innovative new structures.

“For example, insurance managers and other service providers have recently been building client service teams focused on the significant growth in both group captives and the reinsurance market.

“Finally, the Cayman Islands Monetary Authority (CIMA) remains open and approachable as a regulator and has recently allocated additional resources, and hired new staff in the insurance division, in an effort to improve processing times and efficiency.”

Although Cayman can take some comfort from its established position as a leading captives domicile, it will need to become increasingly agile and responsive, Humphries points out. The global captive insurance industry continues to grow and evolve in order to meet the risk management requirements of its many participants in a changing economic, political and regulatory landscape. New solutions will need to be found for new problems and international captives domiciles will need to adapt to make sure they remain part of the solution.

He concludes that Cayman is no exception and it will need to continue to respond to market demands with the introduction of new legislation, in a business-friendly legal and regulatory environment, which will need to be flexible enough to allow for the continued growth and diversification of new licensees which are writing and reinsuring new lines of cover, for new industries, in innovative new structures.