28 November 2013Cayman analysis

Striding ahead

Despite initial concerns that ever-increasing competition from onshore captive domiciles would slow the growth of the captive industry in the Cayman Islands, 2012 and 2013 have ultimately proved fruitful for the Cayman Islands as a top-rated domicile for captive insurance companies, and the country’s captive industry is showing no signs of waning.

The groundwork that was established over the last six years for the insurance sector remains sound and the industry, in general, has been relatively resilient given the challenging market environment, with subdued global captive formations ranging from 30 to 40 per jurisdiction, annually. However, 2012 was a year of tremendous growth for the Cayman Islands, with 53 licences granted.

To put this in perspective, in 2012 Cayman received the highest number of captive applications since the hard market of 2004. 2013 continues to show steady growth for the Cayman Islands with a combined total of 29 licences granted during the first three quarters of 2013, compared to the 31 licences granted during the same period in 2012.

Of the 29 new licensees, 25 are licensed as Class B, three as Class C and one as Class D. Regarding categories, 11 are pure captives, sixare segregated portfolio companies (SPCs), two are group captives, six are commercial insurers, three are special purpose vehicles and one is a reinsurer. In terms of industries, the majority of new licensees relate to financial services and healthcare. Also well represented are the construction and manufacturing industries.

As of September 30, 2013, there are 714 Class B, 39 Class C and two Class D licensees in the Cayman Islands. The two main categories of licensees are pure captives and SPCs with 413 and 137 companies respectively, with the SPCs containing 589 segregated portfolios (cells). As of September 30, 2013, total premiums reported were at an all-time high of $13.8 billion, with total assets reported at $85.6 billion.

These figures are particularly pleasing because of the breadth of industries covered by captive insurers. Although our traditional healthcare captives still constitute about 34 percent of all licensees, we also have representation from industries such as transportation, construction, energy and finance.

Previously, the Cayman Islands Monetary Authority (CIMA) posted that the soft global insurance market would show signs of hardening in 2012/2013, but would endure due to continually high insurance and reinsurance underwriting capacity. However, we also noted that certain underlying economic events have affected the economics of global insurance markets, including a weak US economy, poor global investment opportunities, natural catastrophes, low interest rates and bond yields, and weak insurer profits, all of which will be addressed later in this article.

A joint effort

As will undoubtedly be revealed by the Cayman Captive Forum in December 2013, the country’s ongoing success as a captive domicile can be attributed, to a large extent, to the joint efforts of CIMA and the Insurance Managers Association of Cayman (IMAC). In fact, the Forum has expanded well beyond expectations under the guidance of IMAC and is now recognised as a prominent educational conference within the captive industry. Attracting almost 1,300 participants in 2012, the Cayman Captive Forum is the world’s largest captive conference and provides exceptional networking opportunities for captive owners, IMAC, CIMA and other service providers.

The country remains an attractive jurisdiction for new sources of capital and business partners due to the modern infrastructure and telecommunications and political stability, which are complemented by a high standard of living; global law, accounting and insurance management firms with experienced personnel and strong multinational experience and capabilities; a pragmatic, constructive and efficient regulatory body with an outstanding, proven track record; and a sophisticated business environment which consistently maintains strong public and private sector partnerships.

The Cayman Islands is still internationally recognised as a growth market for financial services for the insurance industry, and beyond. This is evidenced by the growth in the hedge fund market, where Cayman now accounts for approximately 80 percent of the world’s offshore hedge funds. This influx of capital helps provide increased confidence in Cayman as a domicile. The country also maintains an extremely broad base of financial services as evidenced by its strong banking, fiduciary and funds services.

The country’s regulatory framework reflects recognised international standards, as set out by the International Association of Insurance Supervisors (IAIS). Open communication is encouraged as part of the regulatory process to cultivate, and maintain, positive relationships with licensees, service providers and international agencies associated with the domicile. Enhanced international cooperation and collaboration has undoubtedly contributed to safeguarding the interest of the jurisdictions which fall within the international sectors, and as this is of paramount importance to the Cayman Islands, CIMA consistently commits both time and resources to participating in international initiatives with the IAIS, the Organisation for Economic Development and Cooperation, the Financial Action Task Force and the IMF.

Legal revisions

The introduction of the new Insurance Law, 2010, and its supporting regulations, has this dual cooperative concept very much in mind. Revisions to the Insurance Law are broad based and include stricter reporting and solvency standards for domestic insurers; a restructuring of Class B companies into four categories, depending on the amount of related party business; a new class of insurer for reinsurance companies and insurance-inked securities; and a harmonisation of solvency provisions that are appropriate to the type of risks being undertaken. CIMA is confident that the new law will significantly strengthen the already rigorous supervisory framework, as well as present new business opportunities.

The country has always benefited significantly from having modern, innovative and practical legislation. Since the legislative framework of a domicile is fundamental for a successful, sophisticated business environment, this is recognised as being an ongoing requirement for the country’s future growth as a market leader.

The challenges

As mentioned earlier, there remain some global challenges in the insurance sector, and in particular for captive growth, which involve limited collateral options and indirectly, the competitively priced primary markets which have a knock-on effect for captive owners. Principal among these are:

a. Justification: It is difficult to justify the existence of a captive to corporate sponsors when there is a viable commercial market option, especially when factoring in the additional collateral and ancillary costs.

b. Competition: Particularly for group captives, it can be very hard to expand, or even remain stable, when new and existing participants have competitive premiums. This also has the added effect of putting pressure on the underlying expenses, resulting in an increase of expense loadings in the combined ratios making group captives more costly.

c. Investment returns: The current market presents significant difficulties to gain growth or earnings on assets and with a relatively unstable economic situation in the Western hemisphere, options are becoming quite limited. The perpetuation of a low interest rate environment is, possibly, stifling economic growth artificially.

The general consensus that economic growth may not recover for several years poses yet another challenge. If this occurs, the captive industry will need to seriously contemplate its asset risk exposure. With a weak US dollar and weak euro, as well as significant global debt loads, we do not anticipate guaranteed safety in fixed-income securities, the bond markets having passed their apex.

Indeed, these are challenging times, when governments no longer have economic tools at their disposal and with the majority of Western debt being held as reserves by a small number of Asian countries. Unfortunately, we do not predict that these problems will be completely resolved in 2013. In fact, given recent developments in banking oversight globally, and the burgeoning national debts of the US and the European Union, we foresee greater tightening of credit, despite global government attempts to the contrary.

On the positive side, we acknowledge the strength of the captive industry, built on a solid foundation of rigorous risk management, resulting in low loss ratios and efficient expenses. Certainly in the last five years, captives and insurance managers have been very efficient at maximising value. We propose that good fundamentals will continually lead to an increase in the usage of captives.

The future

 A number of factors on the immediate horizon could also positively affect global captive growth in the foreseeable future, including the potential impact of the Dodd-Frank Act, the Patient Protection and Affordable Care Act, the Foreign Account Tax Compliance Act, and the threat of further global economic weakening in the EU and the US.

Despite global economic conditions, the Cayman Islands remains a very popular jurisdiction for captive formations, which we attribute to a combination of our open international dialogue, together with a harmonised regulatory environment. Although these have been factors for the last several years, CIMA is now reaping the benefits of effective strategies in the form of captive growth and an increase in the size of the existing captive licensees.

Balancing the commercial needs of the captive market, and the need to ensure sound, constructive regulation, CIMA will continue to leverage its positive relationship with international agencies, as well as leverage the new law complementing an already proportional form of regulation. In conclusion, we are highly optimistic that the Cayman Islands will surpass its current status as one of the global leaders in captive formations to become the premier captive domicile.

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