Cindy Scotland outlines the progress the Cayman Islands Monetary Authority has made in the face of changing local and international re/insurance standards.
Cindy, could you tell us a little about your background before you became managing director of the Cayman Islands Monetary Authority (CIMA), and how this experience has helped you in your current role?
I joined the authority at its inception in January 1997 as the head of currency operations, and was promoted to the post of general manager in June of that year. Prior to the authority, I spent six years with one of its predecessor organisations, the Cayman Islands Currency Board, the last three of those years as the board’s manager. As the managing director of the authority since June 2002, I am responsible for the implementation of policies to ensure the sound management of the Cayman Islands’ currency and the effective supervision of the more than 14,000 regulated entities operating in and from the Cayman Islands. I also have responsibility for the development and maintenance of strong working relationships between CIM A and other international regulatory bodies.
Obviously, my 19 years of experience within the public service, and specifically in the area of finance, has positioned me well to deal with the many challenges we face today.
I also represent the jurisdiction extensively on regulatory matters to organisations including the Offshore Group of Banking Supervisors, the International Organization of Securities Commissions, the International Monetary Fund and the Caribbean Financial Action Task Force, as well as on a regulator-to-regulator basis.
As managing director of CIMA, what have been your greatest triumphs and challenges during your time as head of the authority?
In the area of financial services regulation, there are always daily challenges and triumphs. For me personally, and I think for many regulators, the greatest challenge is the ability to keeppace with the ever-evolving international standards and ensuring that, as a jurisdiction, we are always in compliance. A few of my greatest triumphs as managing director have been Cayman’s removal from the Financial Action Task Force (FATF) blacklist, the authority gaining membership in the International Organization of Securities Commissions (IOSCO) as well as the many independent assessments that have been conducted and have all proven that we are a well-regulated jurisdiction.
What role has CIMA played in maintaining Cayman’s leading position as a captive domicile and what have been the major lessons learned in recent years?
Clearly, there are some fundamental tenets that we try and adhere to, including being fair, transparent and consistent in our treatment of licensees, and we further have a highly competent set of regulators with an excellent legislative framework.
However, one factor that does differentiate CIM A is that we go to great lengths to understand not only the insurance captive programme, but also the role of the captive as part of the overall risk management programme of the parent company. This is done through face-to-face meetings before, during and after the formation of a captive, and has many benefits, including developing close working relationships with the captive boards of directors and their insurance managers, but also in anticipating and avoiding problems that may occur during different market cycles, such as soft pricing and credit availability.
Interestingly enough, with the advent of Solvency II and Basel III , the world has shifted away from a prescriptive compliance-based approach to a regulatory approach that is both risk-based and proportional to the scope, nature and complexity of the licensee. This is an approach CIMA has always taken with our licenseesand it is comforting to note that international regulators are now recognising proportionality as a fundamental concept in regulation.
What is CIMA’s overall strategy moving forward and how are external pressures impacting the authority’s approach?
Our regulatory model of the past has worked very well and we don’t anticipate any major strategic shifts going forward. The Cayman Islands has successfully risen to external pressures from the Organisation for Economic Co-operation and Development (taxation), FATF (anti-money laundering) and the International Monetary Fund (regulatory), and continues to maintain international recognition arising from our continuous compliance with international standards. However, equally as important is that we continue to work closely with our licensees to make sure that their business plans remain viable and successful. These two approaches have worked very successfully in laying the foundation for a dynamic insurance market with negligible solvency issues.
How are preparations for Solvency II faring and what have been the greatest challenges faced by CIMA?
At present, our preparations for Solvency II are proceeding to plan. Whilst we do have a separate reinsurance and captive market, we do not have an exposure in the European Union that would warrant immediate action. However, we have contributed to the Committee of European Insurance and Occupational Pensions (CEI OPS) consultation processes, particularly in highlighting some suggestions for the regulation of captives under Solvency II . There are a number of areas that still need resolution from the recent QIS5 assessments, including the validity of the benchmarks used, the calibrations and the definition of proportionality as applied to all insurers. However, the challenges of Solvency II to captive regulation are not unique to the Cayman Islands, but a challenge to all international captive jurisdictions.
What are your expectations regarding the impact of Solvency II and equivalence upon captives in the Cayman’s?
How is CIMA looking to help prepare captives for regulatory change? CIM A has continued to assert that the concept of Solvency II must be applauded as one approach to commercial insurance regulation, although the key in implementing any new framework is making sure that everyone is in agreement with the methodologies and underlying definitions. As stated, a fundamental principle of the Lisbon Treaty is the definition of proportionality and, at present, we are interested in hearing CEIOPS’ advice on how this definition applies on a wider scope to not just commercial insurers and reinsurers, but also any other form of insurance entity, including captives.
In terms of helping prepare captives for regulatory change, it is a common practice in Cayman for all stakeholders in a process to work together and, at CIM A, we keep our local market fully engaged in any international developments.
What are the regulatory implications of US health insurance reform and what impact will they have on the Cayman captive industry?
We recognise that it is quite an expansive reform to health insurance that, amongst other things, prohibits lifetime limits on health insurance policies, exclusion based on pre-existing conditions and further mandates coverage for preventative medicine. How will this affect captives? Well, some possibilities include:
• It will likely affect licensees through increased responsibility and paperwork
• Captives reinsuring employee benefits under stop-loss coverage will need to evaluate pricing because of the increase in costs, and
• Captives reinsuring workers’ compensation may see a reduction in claim costs due to the shifting of medical costs from the workers’ compensation programme to the employer/employee health plan.
Ultimately, these can have an effect on any international jurisdiction offering captive or reinsurance options. However, given the recent legal challenges in Florida with respect to the constitutionality of healthcare reform, and recent moves in Congress, it is difficult to see what final shape US healthcare reform will take and hence the impact on the captive industry.
Are there any further regulatory changes on the horizon in Cayman, and what implications might these have for captives on the Islands?
The Insurance Law 2010 was passed by the legislative assembly in September 2010, following review by CIM A, the Ministry of Finance, the Insurance Managers Association of Cayman (IM AC), the Cayman Islands Insurance Association (CII A) and other interested parties. The Insurance Law seeks to address a number of different objectives. The key principle is that we must recognise that we have two distinct markets—domestic and international—and that the laws and regulations should reflect the appropriate risks inherent in both. We believe the new Insurance Law is modern, addresses risk proportionally (i.e. appropriate to the size, risk and complexity of the licensee) and attains the flexibility to maintain not only our international commitments, but also to enhance our insurance business. In addition to creating an explicit class of licence for special purpose vehicles and for reinsurers, the new law creates distinct sub-categories for international insurers, from pure captives to open market insurers, and provides appropriate regulation for each. The categories are based on the proportion of risk they are covering from their related business as compared to the proportion from their unrelated business.
The final stage of this process is the development of the insurance regulations that will reflect these objectives. It would be reasonable to say that we are comfortable with the existing compliance environment of our captive licensees and do not anticipate any material changes to our present captive regulatory structure.
Finally, how is CIMA looking to strengthen and secure Cayman’s position as a leading captive domicile moving forward?
There have been a number of economic and international developments in recent months, including US healthcare and financial reform (the Dodd-Frank Act), soft insurance and reinsurance markets, Solvency II and developing International Financial Reporting Standards (IFRS). CIM A recognises that these events may have impacts both positive and negative on the captive sector, and works closely with the private sector to listen to their concerns and also works closely in its role as an advisor to government. I would say that the Cayman Islands government has been historically proactive in maintaining our legislation on the forefront of development and that CIM A has been very good at meeting changing market needs.
Cindy Scotland is managing director of the Cayman Islands Monetary Authority. She can be contacted at: email@example.com