Tax neutrality benefits Cayman captives

The Cayman Islands is a premier global tax-neutral financial hub. Its tax-neutral regime is a globally responsible tax model that is simple and transparent, and efficiently supports the global flow of investment capital and financing without posing tax harm to other countries’ tax bases.

Parties are responsible for paying taxes in their home jurisdictions based on the tax rules applicable to them there, but Cayman does not add an extra layer of taxation to transactions in its jurisdiction.

As of June 30, 2019, there was a total of 779 insurance licensees, of which 97 and 682 related to domestic and international insurance markets, respectively. There were 27 insurers licensed to offer their products in the domestic market, supported by 70 insurance intermediaries.

There was a total of 657 class B, C and D insurance companies and 25 insurance managers. Pure captives and group captives represented the two main categories, with 293 and 121 companies, respectively. Twenty percent of the total class B, C and D insurance companies were formed as segregated portfolio companies, with more than 600 segregated portfolios.

The Cayman Islands is the second largest domicile in the world for captives and the number one domicile for healthcare captives. The 657 international insurance companies in the Cayman Islands manage more than $64 billion in total assets and $17.5 billion in total premiums. Over 90 percent of these premiums are located in North America; the others are spread across the world. Pure captives accounted for 44.6 percent, and group captives 18.4 percent of all licences.

Industry experts have provided responses to the following questions to help provide a better understanding of how tax neutrality works for Cayman Islands captives.

Why is tax neutrality important to captive insurance companies?

Tax neutrality sets a level playing field for Cayman-domiciled insurers and reinsurers. The majority of Cayman captives have US parent companies and require some form of tax reporting to the US tax authorities with regard to their captives, so Cayman’s being tax-neutral eliminates double taxation risk and contributes to the efficiency of time and resources spent on global tax compliance.

Tax neutrality also allows those entities whose parent organisations are “tax-exempt” to operate in a manner that meets their parent companies’ constitutional directives. It continues the trend of Cayman’s being transparent and an ideal place to do captive insurance business.

What are the typical types of owners of Cayman captive insurance companies?

The Cayman Islands is the leading jurisdiction for healthcare captives, representing almost one-third of all the captives. As at June 30, 2019, medical malpractice liability was the largest primary line of business with approximately 33 percent of companies re/insuring medical malpractice, and workers’ compensation the second largest with 21 percent of companies assuming this risk.

Many healthcare parents of captives are tax-exempt or not-for-profit companies, so tax is not a concern for these organisations. They are in the Cayman Islands for its cross-disciplinary expertise, its mature, tried and tested regulatory environment, its legal underpinning, its infrastructure and its governmental stability.

In addition, there are Fortune 1,000 companies, small and medium enterprises, managing general agents (MGAs) or a managing general underwriters (MGUs), and insurer/reinsurer owned class B(iii)s, which generally make the 953(d) tax election to be subject to US federal income tax as if they are US domestic corporations.

How does Cayman support captives that are subject to tax with appropriate tax reporting?

The Cayman environment of tax service providers is very knowledgeable on captive-specific tax issues and provides high quality service to
those captives that are subject to tax reporting. Tax filings are made on behalf of the captive by its tax advisors based upon the financial performance of the Cayman re/insurer as evidenced on its financial statements prepared by the insurance manager and as audited by
the company’s auditors.

What are the benefits to captives from being domiciled in Cayman?

Cayman is known worldwide as having a stable government and sound proportionate insurance regulatory environment and is the second-largest captive insurance domicile in the world. Cayman has a large suite of best-in-class captive managers, law firms, and other service providers. There is a wealth of institutional knowledge residing within the Cayman captives community, including insurance managers, auditors, actuaries, bankers, lawyers, investment managers, etc.

Cedant insurer/reinsurer carriers and international industry service providers (re/insurance brokers, re/insurance consultants, lawyers, banks/investment managers, etc) have a high comfort level with the jurisdiction, its professionals and its laws and regulations.

Cayman is widely recognised as a healthcare, group captive and MGA/MGU domicile of choice, benefiting from cross class/line of business expertise: property, liability, marine, and alternative risk transfer (in its broadest forms).

Its professional expertise, stable government, sound regulatory environment, proximity to the US, legal system—based upon English Common Law—and English-speaking population, all make Cayman a top choice of domicile.

The Cayman Islands’ Non-Solvency II and Non-Qualified Jurisdiction Status equivalence means that the Cayman Islands has but one insurance regulator, the Cayman Islands Monetary Authority. This provides greater control and ownership of the jurisdiction’s regulatory destiny and thus its continued success, serves as a significant differentiator from other domiciles and maintains Cayman’s unique value proposition of sound proportionate regulation that is ideal for the high-quality business Cayman attracts.

How do Cayman captives benefit their owners and groups?

First is lower premiums based on risk experience. Captive insurers act as a risk-financing and risk-management tool. Both uses lead to an enhanced risk profile, reduced loss experience that help to lower premiums charged to the (ultimate) policyholder when compared to premiums charged in the commercial industry.

Second, they provide access to coverage not commercially available. Captives often insure the uninsurable: captives can provide tailored insurance or coverage that is either not readily available in the commercial market or is prohibitively priced.

As a risk transfer vehicle, a Cayman captive insurer/reinsurer can provide access to “wholesale” capital, ie, reinsurance/retrocession capacity, that is not available to the “retail” market. The vehicle on its own or in combination with a more tailored, nimble and responsive reinsurance market can deliver bespoke coverages and/or greater capacity not available in the traditional market.

In other words, Cayman captives provide a framework in which to more efficiently and effectively retain and manage risk and control losses.

Third, they provide access to the global reinsurance market. Cayman insurers and reinsurers regularly access the London, US, and other markets for financial and intellectual capital, to deliver solutions to their policyholders or cedants.

Lower premium costs available to not-for-profit hospital groups can help them pass on lower costs to US patients and provide better capability to retain high-quality staff:

Computing risk premium that is reflective of a specific (enhanced/preferred) risk profile and actual loss experience of a well-operated captive risk management programme can often be significantly lower than premiums charged in the traditional market.

This reduced risk premium is often coupled with reduced running costs of a captive versus a traditional commercial insurer (such expense being built in to the traditional markets’ “gross” premium).

Cayman captives generally reduce the overall “total cost of risk” to parent organisations, which is an immediate expense saving on a line item (insurance spend) that is otherwise one of the top five expense items for many organisations. Further, any surpluses that are built up in the captive can be returned via dividend to the parent organisation.

These surpluses would otherwise have been profits to a third-party traditional insurer. Instead, because of the surpluses a successful captive insurance company can produce, dividends can be reinvested into the parent organisation operations and/or risk control/loss mitigation efforts—further improving risk management and reducing insurance costs.

Summary

In addition to the benefits that Cayman Islands captive insurance companies provide to other countries, there is independent support from global standard-setters that evidences Cayman is not a tax haven and provides these benefits without posing tax harm to other countries’ tax bases.

In 2019, the Organisation for Economic Cooperation and Development (OECD) completed a review of the Cayman Islands’ domestic legal framework that includes economic substance and found that the Cayman Islands tax-neutral regime is not harmful and meets all economic substance requirements.

The Cayman Islands’ tax neutrality provides tremendous benefits to countries around the world whose businesses, not-for-profit organisations and others operate Cayman Islands captive insurance companies, while respecting all of their countries’ domestic reporting and tax obligations without posing tax harm to those countries.

This once again demonstrates the importance of Cayman’s tax neutrality in the global financial system.

Jude Scott is chief executive officer of Cayman Finance. Cayman Finance can be contacted at: enquiries@caymanfinance.ky