Healthcare reform injects new wealth into captives


Cindy Scotland, managing director of the Cayman Islands Monetary Authority, explains how the Cayman captive sector is poised to benefit following the introduction of the US Affordable Care Act.

The international insurance segment in the Cayman Islands began in the mid-1970s with the medical malpractice insurance crisis in the US, and was formalised with the introduction of the Insurance Law in 1979. Since then, the Cayman Islands has become a major centre for international insurance business. The jurisdiction is the second largest domicile for international insurers, including captives, and holds the number one position worldwide for healthcare captives.

Despite less favourable external conditions, especially as a result of the emerging onshore captive domiciles in the US and healthcare reforms introduced by the Patient Protection and Affordable Care Act (ACA), 23 new entities were added to the Cayman Islands’ international insurance market in 2014. Various states in the US have introduced regulations to be more attractive to captive insurance companies and they have experienced political pressure to stay onshore.

This, coupled with increased merger and acquisition activity in the healthcare industry, has posed challenges to the growth of the Cayman Islands’ international insurance market, especially the healthcare segment, which accounted for 45 percent of the Cayman-based international insurers.

"There’s also a possibility that physicians and practices will team up to form large provider groups and establish captive insurance companies for professional liability and other risks."

Despite these challenges, the fundamentals of the Cayman Islands international insurance sector remain sound and the industry remains resilient. The Cayman Islands Monetary Authority (CIMA) has recognised that the globalisation of insurance markets evolves at a rapid pace and that captive structures are being put to more sophisticated use by their owners. Therefore there is a need to adopt the best and highest international standards to protect the best interests of all stakeholders.

Good regulation

CIMA strives to ensure that Cayman’s insurance sector is regulated in accordance with international best practices, while having consideration for the competitiveness and innovation that are required for Cayman to remain among the leading jurisdictions.

One such innovative development to the insurance statutory framework was the enactment of the Portfolio Insurance Companies (PIC) legislation in early 2015. This enhanced the risk management options available to insurance participants in the Cayman Islands.

A PIC, which is an incorporated company within a segregated portfolio company (SPC) structure, offers several benefits, including the ability to transact with other PICs and standalone re/insurance companies, as well as the ability to have a different board of directors from that of its controlling SPC and recognition as a separate legal entity.

Another development in Cayman’s international insurance sector has been the increased interest by hedge funds seeking opportunities to participate in insurance to aid profitability and considering Cayman as a jurisdiction for their structures, commonly referred to as hedge fund re vehicles.

With the Cayman Islands being a leading jurisdiction for hedge funds, it is well positioned to build on its expertise to be the domicile of choice for the emerging sector of hedge fund-backed reinsurers.

Future prospects

Forecasts are that the captive insurance industry is expected to grow globally, as more organisations recognise the benefits of arranging insurance through captives, with flexibility and cost efficiency being the key reasons. Although healthcare reforms in the US have posed some challenges to the healthcare captive industry, CIMA believes that the changing landscape may present opportunities as well.

For example, it is possible that hospitals acquiring physician practices will establish new captives or expand existing captives. There’s also a possibility that physicians and practices will team up to form large provider groups and establish captive insurance companies for professional liability and other risks.

In addition, captive insurance is one option to meet the need for insurance against non-traditional healthcare-related risks.

We are confident that with its robust yet flexible and competitive regulatory regime, infrastructure and high levels of expertise and experience in service areas such as insurance, legal, accounting, etc, the Cayman Islands will continue its dominance as a leading offshore insurance jurisdiction with international repute.

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Cindy Scotland, Cayman Islands Monetary Authority, Cayman

Captive International