Cayman: where entrepreneurs meet regulation
Cayman has many unique attributes that set it apart from other domiciles, writes Scott Simmons, director, Verve Risk Services, ahead of the Cayman Captive Forum 2024, which takes place in the Cayman Islands this week.
The Cayman Islands has harnessed the entrepreneurial spirit of captive owners and board members since the 1970s.
The unique and varied structures deployed by captive insurance companies afford owners advantages that include flexibility and efficiency. Those advantages can be shared among the captive’s members. These structures are non-traditional when compared to property, casualty and life insurers.
With flexibility and efficiency comes a huge pot of responsibility. That pot of responsibility lies firmly with the owners and the selected board of directors.
The Cayman Islands Monetary Authority (CIMA) has played a prominent part in building and improving legislation designed to attract high quality captive structures that operate within a framework designed to uphold the highest standards in corporate governance and management.
Owners and board members should recognise that demonstrating their entrepreneurial spirit goes hand in hand with implementing strong management and operational structures.
Get that right and the captive can thrive. Get it wrong and the potential for director and officers (D&O) lawsuits increases.
With more than 670 captives currently licensed and active on the Cayman Islands the importance of balance between creativity and adherence to regulation is clear.
“The importance of balance between creativity and adherence to regulation is clear.”
Regulatory scrutiny
The captive insurance industry is regularly under the microscope of regulatory bodies. The Cayman Islands enjoys a prominent position as a leading captive jurisdiction, and is currently placed as the second-largest captive domicile in the world. This automatically ensures that authorities continue to hold captives and board members to the highest possible corporate governance standards.
The examples discussed below are real-life cases of D&O claims brought by regulators against captives and their boards.
In addition to allegations of wrongful acts by members, owners, shareholders and third parties, directors and officers of captive boards are open to regulatory investigations and potential claims.
Industry experts have highlighted concerns that in the US the Internal Revenue Service’s focus will move from microcaptives and into the wider captive insurance world. The potential impact that could have on the formation of new captives is wide- reaching. With over 90 percent of Cayman Island-based captives’ business emanating from the US this keeps the eyes of regulators on owners of Cayman Island-based Captives.
Examples of D&O lawsuits
We have more than 20 years’ experience of underwriting D&O products for the captive industry. Here are some examples of claims we have experienced:
• Healthcare provider and its board alleged to have used the captive to avoid paying Medicaid-funded homecare workers
• Alleged board mismanagement of reserving practices and financials leading to the insolvency of captives (separate insureds)
• Founding members alleged to have fraudulently diverted money from the captive to personal bank accounts
• Alleged board investment misrepresentation to captive members which led to a group of directors funnelling investment into external vehicles
• Regulatory lawsuit against the board alleging improper methods used in calculation of deductibility of federal income taxes for purposes of premium payments made by brother/sister entities to captives
• Regulatory investigation alleging the captive was insuring business in Washington without formal licensing and authorisation to do so
Each of these examples has led to significant claims payments.
The solution
For owners and board member of a Cayman Islands-based captive, working with reputable captive managers and other service providers, along with the regulatory authorities, are key to the longevity and profitability of the entrepreneurial spirit that generated the idea in the first place.
Consider D&O protection against exposures and lawsuits that occur in the industry.
At Verve we have created the online Aura platform that provides D&O coverage to ensure captives and board members have market-leading bespoke coverage to offer protection against the specific scenarios discussed here.
Via the Aura platform it’s possible to quote, bind and issue policy documentation in a matter of minutes.
About Verve
Established in 2016, Verve stands out as an independent owner-operated managing general agent—with exceptional service and expert knowledge at heart. Verve’s innovative range of products is tailored to fit your needs and exposures, underpinned by our deep subject matter expertise. With 50+ years of specialist experience between them, Verve’s directors have witnessed plenty of change in the insurance industry. Our underwriters have provided specialist products and solutions to the captive industry for over 20 years.
To find out more visit ververisk.com/
Scott Simmons is a director at Verve Risk. He can be contacted at: scott.simmons@ververisk.com
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