Despite initial concerns that competition would slow the growth of the captive industry in the Cayman Islands, 2012 has ultimately been successful for Cayman , and the industry is showing no signs of waning.
The groundwork that was established over the last five years remains sound and the industry, in general, has been relatively resilient given the challenging market environment, with subdued global captive formations ranging from 30 to 40 per jurisdiction, annually. However, the first two quarters of 2012 started with tremendous growth resulting in a total of 48 application submissions and 33 captives licensed by September 30, 2012. A total of 16 applications were received in May and June, alone. In short, more licences were received by September 2012 than during the entire year of 2010, and 15 more licences were received compared to this time last year (Figure 1).
Among the 33 new Class B applications, 12 are reinsurers, four are healthcare captives, four provide workers’ compensation and several are in construction and transportation. The two main categories of Class B entities are pure captives and segregated portfolio companies (SPCs) with 419 and 131 companies respectively, with the SPCs containing 818 segregated portfolios (cells). As of September 30, 2012, total premiums were reported at $8.6 billion and total assets of $82.8 billion.
These figures are particularly pleasing because of the breadth of industries covered by captive insurers. Although our traditional healthcare captives still constitute about 40 percent of all licensees, we also have representations from industries such as transportation, construction, energy and finance.
Previously, the Cayman Islands Monetary Authority (CIMA) has suggested that the soft global insurance market will show signs of hardening in 2012, but it continues to last due to enduring high insurance and reinsurance underwriting capacity. However, we also noted that certain underlying economic events have affected the economics of global insurance markets, including a weak US economy, poor global investment opportunities, natural catastrophes, low interest rates and bond yields, and weak insurer profits.
The Cayman Islands
As will undoubtedly be revealed during the Cayman Captive Forum in November 2012, the country’s ongoing success as a captive domicile can be attributed—to a large extent—to the joint efforts of CIMA and the Insurance Managers Association of Cayman (IMAC). In fact, the forum has expanded well beyond expectations of IMAC and is now recognised as a prominent educational conference within the captive industry. Attracting more than 1,200 participants, the forum provides exceptional networking opportunities for captive owners, IMAC, CIMA and other service providers.
The country remains an attractive jurisdiction for new sources of capital and business partners due to its modern infrastructure, telecommunications and political stability, which are complemented by a high standard of living; global law, accounting and insurance management fi rms with experienced personnel and strong multinational experience and capabilities; a pragmatic, constructive and efficient regulatory body with an outstanding, proven track record; and a sophisticated business environment which consistently maintains strong public and private sector partnerships.
The Cayman Islands is still internationally recognised as a growth market for financial services for the insurance industry, and beyond. This is evidenced by the growth in the hedge fund market, where Cayman now accounts for approximately 80 percent of the world’s offshore hedge funds. This influx of capital helps provide increased confi dence in Cayman as a domicile. The country also maintains an extremely broad base of fi nancial services as evidenced by its strong banking, fiduciary and funds services.
The country’s regulatory framework reflects recognised international standards, as set out by the International Association of Insurance Supervisors (IAIS) and, as is not the case with some other regulatory bodies, open communication is encouraged as part of the regulatory process to cultivate and maintain positive relationships with licensees, service providers and international agencies associated with the domicile. Enhanced international cooperation and collaboration has undoubtedly contributed to safeguarding the interests of the jurisdictions which fall within the international sectors, and as this is of paramount importance to the Cayman Islands, CIMA consistently commits both time and resources to participation in international initiatives with the IAIS, Organisation for Economic Cooperation and Development, the Financial Action Task Force and the International Monetary Fund, including the various subcommittees of these organisations.
The new Insurance Law
The introduction of the new Insurance Law (2010), and its new supporting regulations, has the dual cooperative concept very much in mind. The revisions to the law are broadly based and include stricter reporting and solvency standards for domestic insurers; a restructuring of Class B companies into three categories, depending on the amount of related party business; a new class of insurer for reinsurance companies and insurancelinked securities; and a harmonisation of solvency provisions that are appropriate to the type of risks being undertaken. CIMA is confident that the new law will significantly strengthen the already rigorous supervisory framework, as well as presenting new business opportunities.
The Cayman Islands has always benefited significantly from having modern, innovative and practical legislation. Since the legislative framework of a domicile is fundamental to a successful, sophisticated business environment, this is recognised as being an ongoing requirement to the country’s future growth as a market leader.
As mentioned, a number of global challenges remain in the insurance sector, and in particular for captive growth. They involve limited collateral options and—indirectly—the competitively priced primary markets which have a knock-on effect for captive owners. Principal among these are:
• Justification It is difficult to justify the existence of a captive to corporate sponsors when there is a viable commercial market option, especially when factoring in the additional collateral and ancillary costs.
• Competition Particularly for group captives, it can be very hard to expand, or even remain stable, when new and existing participants have competitive premiums. This has the added effect of putting pressure on the underlying expenses, resulting in an increase ofexpense loadings in the combined ratios which results in group captives being more costly.
• Investment returns The current market presents significant difficulties in achieving growth or earnings on assets and with a relatively unstable economic situation in the Western hemisphere, options are becoming quite limited. The perpetuation of a low interest rate environment is also stifling economic growth.
The general consensus that economic growth may not recover for several years poses yet another challenge. If this occurs, the captive industry will need seriously to contemplate their asset risk exposure. With a weak US dollar and a weak euro, as well as significant global debt loads, we do not anticipate guaranteed safety in fixed income securities, while the bond markets have passed their apex.
Indeed, these are challenging times, when governments no longer have economic tools at their disposal and with the majority of Western debt being held as reserves by a small number of Eastern countries. Unfortunately, we do not expect these problems to be completely resolved in 2012. In fact, given recent developments in banking oversight globally, and the burgeoning national debts of the US and the European Union, we foresee greater tightening of credit, despite global government attempts to the contrary.
On the positive side, we acknowledge the strength of the captive industry, built on a solid foundation of rigorous risk management, resulting in low loss ratios and efficient expenses. Certainly in the last four years, captives and insurance managers have been very efficient at maximising value. We propose that good fundamentals will continually lead to an increase in the usage of captives.
A number of factors on the immediate horizon could positively affect global captive growth in the foreseeable future, including the Dodd Frank Act, the Patient Protection and Affordable Care Act, the Foreign Account Tax Compliance Act, the US presidential and congressional elections, and the threat of further global economic weakening in the EU and the US.
Despite global economic conditions, the Cayman Islands remains a very popular jurisdiction for captive formations, which we attribute to a combination of our open international dialogue and a harmonised regulatory environment. Although these have been factors for the last few years, CIMA is now reaping the benefits of effective strategies in the level of captive growth and an increase in the size of existing captive licensees.
Balancing the commercial needs of the captive market, and the need to ensure sound, constructive regulation, CIMA will continue to leverage its positive relationship with IMAC, and other international agencies, and will leverage the new law complementing an already proportional form of regulation. In conclusion, we are highly optimistic that the Cayman Islands will surpass its current status as one of the global leaders in captive formations to become the premier captive domicile.
Cindy Scotland is managing director of the Cayman Islands Monetary Authority. She can be contacted at: firstname.lastname@example.org
Cayman, growth, 2012, captive, insurance, CIMA, results