Captive Insurance in the Cayman Islands

A Captive insurance company is a wholly-owned subsidiary insurer that provides risk mitigation services for its parent company or related entities. In its simplest form, the “Captive” wholly-owned subsidiary is incorporated to insure against one or more risks to which its parent company is exposed. It is essentially a form of self-insurance which is put in place within a group corporate structure for a number of reasons. Captives are usually established in the context of a company’s risk management strategy and are typically put in place because those risks which are looking to be insured by the Captive are either non-insurable or priced too high in the current market.

The potential benefits of having a Captive insurance company include:

i. lower insurance costs,

ii. tax advantages,

iii. underwriting profits,

ability to tailor coverage for hard to insure or emerging risks,

ability to apply alternative strategies to deal with insurance market cycles,

ability to allocate costs to business units,

vii. provide financial incentives for loss control,

viii. offer flexibility in managing risk, 

offer creative insurance solutions, and consolidate risk management, and greater control over coverage.

The Cayman Islands has historically been a jurisdiction for Captive insurance companies and is currently one of the leading Captive hubs in the world, both in terms of number of Captive insurance companies and total assets under management, owing to Cayman’s world-wide reputation as a highly professional, yet business friendly and well-regulated environment with a philosophy of imposing proportionate, risk-based regulations and rules backed by consistency of enforcement. In particular, the Cayman Islands is the absolute leader domicile for healthcare sector Captives, with healthcare-related Captives taking up over a third of Cayman’s Captive industry.

According to the latest data released by the regulatory authority for Captive insurance companies, which in the Cayman Islands is the Cayman Islands Monetary Authority (“CIMA”), there are currently 666 Captive insurance companies in Cayman. Single parent Captives (more commonly known as “Pure Captives”), Segregated Portfolio Companies (“SPCs”) and Captives with two or more shareholders (“Group Captives”) make up the largest part of Captives in the Cayman Islands, counting 278, 153 and 128 companies, respectively.

SPC’s growing popularity in the Captive insurance industry is partly owed to the fact that such structures allow insurers to add additional participants in a reinsurance programme without risk of cross liability. A distinctive feature of all SPCs, in fact, is that the assets and liabilities of each segregated portfolio (also referred to as ‘cells’) are, as the name suggests, segregated from one another. Each SPC cell, however, does not have legal personality and ownership of the underlying assets in the cells is through classes or series of shares in the SPC which are designated to that particular cell.

The SPC structure is often seen in the context of the so-called ‘Rent-A-Captives’ whereby those wishing to reap the benefits of a Captive insurance company (either for their own insurance or reinsurance) whilst minimizing matters such as time, upfront costs and maintenance, can simply become shareholders in an existing SPC and ‘rent’ a cell. The participants in a rent-a-Captive structure pay premiums and service fees into the cell and in return they get access to the capital base they need to underwrite the risk as well as an entitlement to any distributions made out of that cell.

There are also Portfolio Insurance Companies (“PICs”) which can be seen as a slight variation of the SPCs mentioned above. A PIC is similar to an SPC except that its cells have separate legal personality.

Other forms of Captives include “Association Captives” which are insurance companies owned by an association to meet the insurance needs of its members, and “Agency Captives” which are insurance or reinsurance companies owned by one or more insurance agents and are used to insure against the risks of those agents or any of their clients.

As with any other industry, the Cayman Islands is a dynamic jurisdiction and strive to offer cutting edge solutions to industry problems owing to the strong relationship and continuous dialogue between the regulator and the private sector. This is no different when it comes to the insurance industry. Captives in the Cayman Islands are principally governed by the Insurance Act, 2010 (the “Act”).

To establish a Captive in the Cayman Islands CIMA will require a formal application for a Class “B” Insurer’s Licence. This application is prescribed in the Act, and requires, among other things, the following information:

Name of applicant. This refers to the name that the Class “B” Insurer company will bear, which should be pre-approved for use by CIMA and the Registrar of Companies.

A detailed business plan. CIMA will expect to see from the business plan that the proposed Captive operation has been thoroughly researched and properly planned with, among other things, feasibility studies and risk management studies supporting the proposal. It is a requirement of the Act that all Captive insurance companies appoint a local insurance manager and the appointed insurance manager is usually integrally involved in the application process.

iii. Three (3) years’ financial projections.

Personal details and references for proposed directors and shareholders. A completed Personal Questionnaire should be provided in respect of ALL proposed Directors, Officers and Managers. A “police clearance certificate” is also required, but CIMA will accept a sworn Affidavit as an acceptable “other certificate”.

Last two (2) years’ audited statements and/or notarised net worth statement of ultimate beneficial owners.

Confirmation of appointment from a Licensed Insurance Manager and Approved Auditor.

Under the Act, the Class B insurer license is reserved to Captives and is sub-divided into three sub-groups, each relating to a different percentage of the insurer’s related business underwritten by it by reference to net premiums (i.e. Class B(i) 95% or more, Class B(ii) over 50%, and Class B(iii) equal or less than 50%, respectively).

These subdivisions allow CIMA to provide for different thresholds as to (a) Minimum Capital Requirement (“MCR”), (b) Prescribed Capital Requirement (“PCR”) and, consequently, (c) margin of solvency, under The Insurance (Capital and Solvency) (Classes B, C And D Insurers) Regulations, 2012 (the “Regulations”).

(a) Minimum Capital Requirement

Under the Regulations, the MCR, which is described as the minimum capital that an insurer must maintain in order to operate in accordance with the Act, for each Class B licensee is as follows: