Ruwan Jayasekera, Suzanne Sadlier and Razaak Busari of CIMA
2 February 2018Accounting & tax analysis

Cayman remains robust despite new US tax rules

The Tax Cuts and Jobs Act of 2017, introduced by the Trump administration in the US late last year, could have far-reaching implications for many parts of the insurance industry—including captives. Some believe the act could change the relative appeal of forming a captive offshore.

Regulators in the Cayman Islands have been poring over the legislation to understand its potential impact. So far, they have concluded that while the legislation may influence the thinking of some companies, most will have seen the legislation and planned for it accordingly, and Cayman has seen robust levels of new formations in recent months.

“There have been some significant changes recently as a result of the latest tax bill in the US, and we are studying the details of it,” says Ruwan Jayasekera, head of the Insurance Supervision Division at the Cayman Islands Monetary Authority (CIMA).

Based on what he has heard from the industry and trends CIMA can identify, Jayasekera stresses that although the legislation was only passed in December, corporates will have been aware it was coming and would have factored it in when carrying out feasibility studies.

“The fact that we ended the year with 33 high quality new issuances means that even those US corporates aren’t really worried about these tax changes,” he says.

In fact, Jayasekera notes, when a new licence application is submitted, one of the factors CIMA considers carefully is the extent to which tax is a motivator. Jayasekera emphasises that there has to be a genuine business purpose and risk mitigating factors behind the application.

In view of this, he doesn’t foresee the new US tax law having a big impact on Cayman’s captive industry. Instead, he says, the domicile is seeking ways to make itself more competitive—whether that be through making the application process for new licences more efficient or tweaking legislation as required in 2018.

Robust activity

The sector seems to have succeeded in doing this last year. In 2017, Cayman licensed 33 new insurers compared with 39 in 2016 and 22 in 2015. Included in those new licences were 27 new class B insurers (captives and other commercial (re)insurers) and six class C insurers (special purpose insurers).

The domicile did have a few surrenders and cancellations of insurance licences, largely due to consolidation in the healthcare sector, maturing programmes and catastrophe bonds.

Altogether there was a total of 696 class B, class C and class D (reinsurers) licences at the end of the year. Pure captives and group captives represent the two main categories in the domicile, with 317 and 121 companies, respectively.

The total premiums of Cayman’s insurance industry were $12.4 billion as of December 31, and total assets were reported at $61 billion.

As it has been for some time now, the Cayman Islands continued to be the leading jurisdiction for healthcare captives in 2017; this sector represents more than half of all captives domiciled there.

“CIMA is actively researching areas such as digital claims processing for captives, big data and blockchain technologies.”

Medical malpractice liability is the largest primary line of business in the jurisdiction, with approximately 32 percent of companies re/insuring this risk. This is followed by workers’ compensation, with 21 percent of companies assuming the risk.

“The expertise is hard to match, every time healthcare is mentioned Cayman comes to mind,” Jayasekera says. “We have some healthcare captives that were licensed 30 or 40 years ago. Some of the larger healthcare systems in the US will also have a connection to Cayman.”

He notes that while the number of new licences in 2017 is down from the previous year, the programmes CIMA is seeing coming in now are much broader in scope and operations. This includes formations of more captives with liability lines and brokers setting up companies to write for their clients as well as commercial reinsurance operations.

“These are new, and they haven’t yet hit the balance sheet of the Cayman industry, but I’m sure in the next 12 months when they start to send their annual returns we will see significant increases in assets and premiums,” he explains.

Even with the consolidation and mergers and acquisitions taking place, Jayasekera says that Cayman is still seeing new healthcare captive formations.

“Insurance managers, other service providers, and even regulators are very familiar with these programmes over the last years. Thousands of programmes have gone through our systems,” he says.

Word of mouth

Razaak Busari, deputy head at CIMA, suggests that owners or potential owners wanting to set up a captive will often speak to people they know, and then find that many of the healthcare captives set up in Cayman have thrived.

“Word definitely gets around. When you need the best accountants, auditors, solicitors—all these third party service providers that aid the success of these kinds of establishments are based in Cayman, and that’s one of the main attractions,” says Busari.

Suzanne Sadlier, also a deputy head, adds that the expertise in Cayman is not concentrated to one particular insurance manager or one single law firm, but rather is spread out among all stakeholders.

She says: “If you look at the current 26 insurance managers, it’s fair to say almost every insurance manager has a minimum of one healthcare captive in their portfolio; some even have 60 to 70 healthcare captives.”

With regard to changes to healthcare regulations in the US, Jayasekera says that a captive can help reduce any uncertainty that may come with that.

“When things happen in the US—or anywhere else for that matter—it creates a level of uncertainty,” he explains.

“The most established commercial carriers tend to take a wait-and-see approach but if you own a captive you can easily accommodate some of these risks.

“The commercial market is always an option—when it is offering coverage at reasonable prices you can always go there, but when they aren’t offering it, having your own captive provides that flexibility.”

Competitive edge

While Cayman continues to lead on healthcare, it is also exploring other ways to make the domicile attractive to owners and prospective captive owners.

Flexibility and accessibility are high on CIMA’s agenda for 2018. The regulator holds around 400 or 500 meetings with its licensees and industry bodies throughout the year, during which it seeks thoughts and feedback regarding changes to regulatory laws.

When it comes to new licences in Cayman, CIMA has a quick turnaround, and when potential licensees submit an application they know how long it’s going to take.

“For every request we receive there is a timeframe, we adhere to those very strictly,” says Jayasekera. “We are constantly working on improving our procedures.”

One example of this is that CIMA now claims it can issue a licence for a catastrophe bond in just five working days, when it used to be two to three weeks.

CIMA says it can turn around a pure captive application within just four to five weeks, given it has the necessary information and due diligence.

Busari adds: “In the past when we used to look at cat bonds, we treated them like most other licences. We now see that cat bonds are dealt with a lot more quickly than in other jurisdictions.

“We’ve listened to the industry, we’ve reviewed our practices and now we’ve got it down to five days. It’s a good example of us looking at what we’re doing and what the competitors are doing.”

Furthermore, while Cayman’s international insurance industry comprises mainly companies insuring risk in North America (90 percent), there are quite a few Canadian companies and there is some interest from the Far East, Latin America, Europe, and Africa.

Jayasekera says: “We as regulators do not directly involve ourselves in the marketing of the jurisdiction. The Insurance Managers Association of Cayman (IMAC) and Cayman Finance do roadshows and attend conferences in other parts of the world and look at geographical expansion, but we are seeing the results.”

Sadlier notes that insurtech is also a rapid growth area in the captives market, and CIMA is actively researching areas such as digital claims processing for captives, big data and blockchain technologies.

“Insurtech is something that has been on the cards for the last few years and we are monitoring it very closely in 2018,” she says, “We are researching and discussing the topic with the local industry and also internationally with developments going on overseas.

“Some of these technologies are going to drive efficiencies for the market, and we want to ensure that our framework is well placed to facilitate these capabilities as appropriate.”