Cayman Islands: 20 years of insurance

Kevin Poole of the Insurance Managers Association of Cayman provides an overview of the Cayman Islands’ past two decades in captives and looks ahead to what’s on the horizon.

"Cayman was fortunate to have such a loyal client base determined to attend the conference." Kevin Poole

The Cayman Islands has been a natural home for captive insurance companies since the industry began in the 1970s. Over the last two-decades in the dynamic world of global finance and risk management, the Cayman Islands has continued to enhance its reputation as a leading captive domicile, based on its innovative approach and proportional regulation for those seeking effective risk management solutions.

Hurricane Ivan and Cayman resilience

Looking back 20 years, no story about the Cayman Islands would be complete without remembering. Hurricane Ivan. When the category 5 storm hit on September 11, 2004, it caused over $2.86 billion of damage, leaving 95 percent of the islands’ buildings either damaged or completely destroyed.

The total economic impact on the Cayman Islands was estimated by the UN Economic Commission of Latin America and the Caribbean (ECLAC) to be $3.4 billion (183 percent of gross domestic product). Approximately 83 percent, or 13,535 units, of Grand Cayman’s housing stock suffered some degree of damage. The financial cost to the housing sector was estimated at $1.7 billion, while the financial services and tourism sectors were each estimated to have lost around $552 million.

Insurance coverage, while widespread for the private sector and government infrastructure, covered only part of the assets damaged or destroyed. In most cases, insurance did not cover any income lost or business interruption. According to the ECLAC team, the loss and damage per capita was estimated at $75,700, which is the highest ever encountered by ECLAC.

During this time the Cayman Islands Monetary Authority (CIMA) had to ensure its local class A insurers were able to deal with the aftermath of Ivan and ensure that property claims were paid. Questions from consumers also needed to be answered, in addition to dealing with the fallout from the failure of Jamaican insurer, Dyoll Insurance Company.

Despite all these challenges, CIMA was able to license 75 new insurers in 2004. Undaunted by the disruption, the Insurance Managers Association of Cayman (IMAC), working closely with government, held the Cayman Captive Forum in early December, less than three months after the disaster. Cayman was fortunate to have such a loyal client base determined to attend the conference and help get the domicile back on its feet. The airport reopened on November 17, just a few weeks before the 2004 conference kicked off, with more than 300 delegates attending a successful event.

Early growth: 2004 to 2014

The early 2000s marked a significant period of growth for the Cayman captive insurance industry, as a hard market, particularly for medical malpractice liability, formed in the late 1990s. Cayman captive formations peaked in 2002 with 97 new formations, edging down to 83 formation in 2003 and a further 75 in 2004. This activity was largely driven by healthcare captives, including physician groups, long-term care facilities, nursing homes and assisted living facilities.

Growth continued until 2010 when commercial markets began to soften and new licence figures fell to 25. Activity picked again in 2011 with 38 new licences, plus 53 and 38 new licences in 2012 and 2013, respectively. By the end of 2013, there were 761 total International insurance licences, down slightly from the 2009 peak of 780, as CIMA tidied up its register, removing a number of inactive and surrendered licences.

The Cayman Islands Insurance Act 2010

One of the most significant changes over the last 20 years was the Cayman Islands Insurance Act, 2010 which came into force on November 1, 2012. Derived from significant public and private sector consultation, the Act represented a comprehensive modernisation of the prior Insurance Law in alignment with international standards. Principally, the legislation strengthened CIMA’s regulatory powers and enhanced protection for policyholders in Cayman’s domestic market.

It facilitated the further development of Cayman’s reinsurance and insurance-linked securities (ILS) business. For the captive insurance industry, the new Act had little practical impact. Many of the new provisions simply brought into law CIMA’s existing practices, which had not previously been enshrined in legislation.

Most notable for captives was that class B licences were no longer divided into restricted and unrestricted sub-divisions. That distinction was eliminated and replaced with class B licences sub-divided into class B(i), class B(ii) and class B(iii) depending upon the percentage of related business that the captive wrote. Additional licence classes were also introduced, with class C for fully collateralised transactions, such as ILS, and class D for open market reinsurers.

The new Act also included provisions covering segregated portfolio companies (SPCs) which had been incorporated into the Companies Act in 1998, in response to strong demand, particularly from the international insurance community.

Continued regulatory enhancements

The aftermath of the 2008 financial crisis ushered in a wave of regulatory reforms worldwide, aimed at strengthening oversight and risk management practices across financial sectors. Captive insurance domiciles, including the Cayman Islands, encountered heightened scrutiny and evolving regulatory requirements, necessitating proactive measures to maintain regulatory compliance and uphold industry standards.

CIMA has issued and amended various rules, statements of guidance and statements of principle applicable to the captive insurance industry, covering licensing, business conduct, prudential standards and reporting requirements. These include the need for licensees to implement risk management and corporate governance frameworks, documenting outsourcing and reinsurance arrangements, as well as investment activities and dealing with issues such as cybersecurity and succession planning.

In its efforts to fulfil its regulatory and supervisory mandate, CIMA is represented in various international bodies. CIMA’s participation seeks to ensure that the Cayman Islands is kept abreast of the developments affecting offshore centres and that the jurisdiction plays an active role in international regulatory developments and standards.

CIMA recognises the importance of providing an environment conducive for captive insurance growth. Legislative reforms and regulatory enhancements to streamline the licensing process, improve transparency, and ensure compliance with international standards, have bolstered investor confidence, attracting a diverse array of businesses to the jurisdiction.

At the end of 2014 CIMA introduced a new online, automated method for submissions of mandatory financial returns. The new system, called Regulatory Enhanced Electronic Forms Submission—REEFS—facilitated change requests and new licence applications. While it was phased in slowly, REEFS is now the only approved method for submissions to CIMA, with paper-based applications no longer accepted.

In 2015 the Cayman Islands further enhanced its regulatory capabilities, introducing legislation for portfolio insurance companies (PICs). Insurers incorporated as SPCs were afforded more flexibility by allowing an SPC insurance company to incorporate cells by establishing a PIC under an established segregated portfolio. Once the PIC is registered with CIMA it may write insurance business in its own name, as a separate legal entity, as an exempted company limited by shares.

The number of PICs in Cayman has increased significantly over the last few years rising from 10 in 2017 to 54 by the end of 2023. Growth has been driven by cell sponsors who feel more comfortable with the enhanced legal segregation and protection offered by a PIC structure, while PIC owners welcome the greater control from an incorporated entity.

Cayman developments: 2014 to 2024

The landscape over the past decade has seen rapid evolution, with technological advancements, geopolitical shifts, and emerging risks, presenting opportunities and challenges for the Cayman international insurance sector.

Growth has come from many different industry sectors. SMEs have adopted cell and group captive structures, and larger companies are using captives to take on more risk or expand coverage. New lines of business include cyber, medical stop-loss, property, and third-party risks as well as climate-related risks. ILS transactions offer a more sophisticated solution for some companies.

The existing hard market continues to fuel captive formations, as has been experienced by many domiciles. Notably for the Cayman Islands, the 40 new International Insurer licences issued in 2023 represented a 10-year high. This positive trend is expected to continue into 2024—CIMA has already reported it is reviewing a number of licence applications.

Cayman is experiencing an expanded interest from commercial reinsurance entrants. These new reinsurers recognise the Cayman Islands is renowned for its expertise in capital market transactions, portfolio management, alternative investment strategies, and risk management and has an experienced and approachable regulator. This has fostered trust among reinsurers, cedants, and investors and this growth is expected to continue in 2024 and beyond.

The Cayman Captive Forum

In 2023 Cayman celebrated 30 years of the Cayman Captive Forum (CCF), which has grown from humble beginnings into what is now recognised as the largest captive insurance conference in the world. The CCF continues to be a “not to be missed” event offering the highest quality educational and networking opportunities, arranged by the industry for the industry. In 2023, Cayman hosted 1,500 attendees for yet another successful event that set the standards, enabling key industry stakeholders and leaders to meet, learn and shape the future of captive insurance.

The future

In the past 20 years the Cayman captive insurance industry has reflected a narrative of resilience, evolution, and innovation. From its inception as a niche alternative risk management solution to its prominence today as a global leader in captive insurance, the Cayman Islands has been steadfast in its commitment to excellence, regulatory compliance, and client-centric service.

As the industry navigates the complexities of an increasingly interconnected and dynamic global landscape, the Cayman captive insurance and reinsurance sectors embrace the future with confidence, leveraging on its strengths, embracing innovation, and charting new pathways for sustainable growth and resilience for the years to come.

To find out more visit: www.caymanintinsurance.ky

Kevin Poole is general manager of the Insurance Managers Association of Cayman. He can be contacted at: kevin.poole@imac.ky