Still on the captive front row
Although conditions for growth in the captive industry have not been favourable in recent years, the Cayman Islands remains a leading domicile for captives, explains Cindy Scotland, managing director of the Cayman Islands Monetary Authority.
As well as being at the forefront of the overall captive sector the Cayman Islands is the leading domicile for healthcare captives. The most popular region of origin of Cayman captives continues to be North America, which accounted for 90 percent of captives at fiscal year-end.
State of the industry
Conditions for growth in the captive industry have not been very favourable in recent times. This is due primarily to a prolonged soft market for the medical liability industry, and the consolidation of healthcare systems in the US.
Another contributing factor is the phenomenon of independent physicians becoming employees of hospitals or healthcare systems, partly as a result of healthcare reforms in the US market.
Despite these not-so-favourable conditions, 39 new entities were added to the Cayman Islands’ international insurance market in the year 2013, to bring the total number of licensees to 761 as at the end of 2013.
There was also a decrease in the number of licences cancelled during 2013 (19), compared to 2012 (51) and 2011 (37).
"the Cayman Islands continued to demonstrate its prominence as a captive domicile. It was the only jurisdiction to record growth - 3 percent, with 761 licences."
Despite the general soft global insurance marketplace, there has been continued demand in 2014 for the use of captives, primarily in the areas of medical malpractice liability (the primary class of business for 34 percent of Class B licences at September 30, 2014), workers’ compensation (22 percent of licences) and property coverage (12 percent).
As mentioned at the outset, North America is the primary region of origin of Cayman captives, accounting for 90 percent. This was followed by Latin America and the Caribbean: 3.1 percent and 2.0 percent of companies covering risk in Europe.
Between 2010 and 2013, most of the jurisdictions for which figures are available experienced very small variations/declines in the number of licences recorded. This is evidence of the extremely soft commercial insurance markets.
Nevertheless, the Cayman Islands continued to demonstrate its prominence as a captive domicile. It was the only jurisdiction to record growth—3 percent, with 761 licences. While still the leading jurisdiction for captives, Bermuda recorded a 3 percent decline during this period, to close with 831 licences. Vermont, the third-placed domicile, saw a 1 percent decline, retaining 588 captive licences.
There is still a degree of uncertainty surrounding healthcare reforms in the US, and this could result in hospital systems and other healthcare organisations there taking a wait-and-see approach to determine whether their risk management strategies should include captives. This, coupled with the prolonged soft market for the medical liability industry could result in a drop in new healthcare captive formations.
There is a bright spot, however: an increased popularity of hedge funds establishing reinsurance captives in offshore jurisdictions. Asset managers are realising that by setting up their own reinsurance operations, they could not only achieve substantial returns, but could also attract larger investments from institutional investors such as pension funds.
With the Cayman Islands being a leading jurisdiction for hedge funds, and the second largest jurisdiction for offshore re/insurance operations, it is well positioned to build on its expertise to be the domicile of choice for the emerging hedge fund-backed reinsurers.
The Cayman Islands is already home to such hedge fund-backed reinsurance operations, and has seen an increased interest from hedge fund administrators and investment managers to set up re/insurance operations in the jurisdiction, especially to provide long-term/long-tail, low-severity reinsurance cover.
Cindy Scotland is managing director of the Cayman Islands Monetary Authority. For more information visit www.cimoney.com.ky