Cayman introduces incorporated cell legislation for insurance sector
The Amendment Law, whilst now on the statute book, is not yet in force but will be brought into force once necessary amendments have been made to the Insurance Regulations.
Solomon Harris partner and head of its insurance group, Paul Scrivener, chaired the sub-committee of the Financial Services Legislative Committee (“FSLC”) which assisted the Cayman Islands Government in the development of the legislation. Paul comments, “This legislation has been widely anticipated and is the fruits of a tremendous collaborative effort between the Cayman Islands Government, the Insurance Managers Association of Cayman (IMAC) and the FSLC over a two year period. It is, arguably, the most significant legal development for Cayman’s insurance sector since the introduction of segregated portfolio company legislation in 1998.”
The legislation provides a model for incorporated cells which differs from that in other domiciles in that it is specific to the insurance sector and, at this stage, would not extend to other sectors of Cayman’s financial services industry. The legislation amends the Insurance Law rather than the Companies Law and was deliberately crafted as a modification to the existing regulatory regime for SPC insurers rather than a change to substantive law.
The other difference with the Cayman model is that cell incorporation is achieved by a separate company being established by the SPC underlying the relevant cell rather than the cell itself taking on incorporated status. Cayman preferred a more conservative solution than competitor jurisdictions based on clear and well-established principles of corporate law.
An SPC insurer which wishes to incorporate one of its cells will set up a regular Cayman exempted company – called a portfolio insurance company or PIC for short - which will be owned by the SPC insurer on behalf of the cell in question. Effectively, the cell will own the PIC and the PIC, for all practical purposes, will replace the cell. So if the cell has an existing insurance program, going forward, that program will be operated by the cell’s PIC and no longer by the cell. A PIC is simply a subsidiary of the SPC but tied to a particular cell of that SPC.
Once the Amendment Law is in force it is anticipated that a significant number of SPC insurers will wish to set up one or more PICs to address current limiting factors such as intra-cell contracting and the tax uncertainty surrounding non-US unincorporated cells.
In addition PICs have a number of other benefits. Although they would have to be CIMA approved, the members of the board of directors of the PIC need not be the same people as the members of the board of directors of the SPC insurer itself, permitting governance flexibility. For third parties unfamiliar with cell companies, a PIC is probably easier to understand than an unincorporated cell and a PIC can also more easily transition to a stand-alone captive than an unincorporated cell.
Paul Scrivener added, “Discussions with clients and consultants in Cayman and the US point to the fact that the ability to set up PICs will bring new insurance business to Cayman which may well have been lost to other domiciles. Therefore, PICs should provide an important new revenue stream for the Cayman Islands Monetary Authority (“CIMA”) and the Cayman Islands government and keep Cayman on the cutting edge of developments in the global insurance industry.”
A PIC will be regulated by CIMA but, as long as it remains a PIC, it will not need its own insurance licence. Instead it will operate under the umbrella of the licence held by the SPC insurer which controls it. The legislation provides for a straightforward registration process for each PIC with CIMA and of course an initial and annual registration fee, still to be determined.
The level of regulatory oversight that CIMA will have over a PIC would be largely the same as for an unincorporated cell. So, for example, audited financial statements for each PIC will need to be filed with CIMA.
However, the ability for a PIC to simply register with CIMA only applies as long as the PIC is wholly-owned by the cell of a licensed SPC insurer. For example, if a PIC were to be sold off to a third party, perhaps as part of becoming a stand-alone captive, the PIC would have to obtain its own insurance licence.
Only a cell – or strictly the SPC acting on behalf of a cell – will be able to hold the voting shares in the PIC.
The incorporation process
The incorporation of the PIC would be the same as any incorporation in the Cayman Islands – a 24 hour process. The registration of the PIC with CIMA will be largely the same as the current procedure for creating a new cell for an SPC.
The issue that had to be considered was the need for a streamlined process for novating the assets and liabilities of an existing cell program to the underlying PIC. This is addressed by providing for an automatic novation by operation of law by simply filing with CIMA a straightforward declaration sworn by two directors of the SPC containing certain prescribed particulars and obtaining creditor consents.
New Class of Insurer
In addition to introducing PICs, the Amendment Law also creates a new class of insurer – a Class B(iv) insurer – and amends the description of a Class B(iii) insurer so that an insurer will only remain within Class B(Iii) if its annual net earned premiums are less than US$20 million and if greater than that the insurer will fall within Class B(iv). The reason for this further class is to avoid smaller open market reinsurers seeking a Class B(iii) licence rather than applying for the more expensive Class D licence, the licensing category intended for open market reinsurers. The fee for a Class B(iv) licence has not yet been finalised but will fall somewhere between the US$12,800 for a Class B(iii) licence and US$100,000 for a Class D licence.