Captive Insurance In The Cayman Islands

27 March 2024

By Gary Smith, Partner, Loeb Smith, Cayman Islands
By Robert Farrell, Partner, Loeb Smith, 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 that are looking to be insured by the captive are either non-insurable or priced too high in the current market.

 

Benefits Of a Captive

The potential benefits of having a captive insurance company include:

i. Lower insurance costs.
ii. Tax advantages.
iii. Underwriting profits.
iv. Ability to tailor coverage for hard to insure or emerging risks.
v. Ability to apply alternative strategies to deal with insurance market cycles.
vi. Ability to allocate costs to business units.
vii. Financial incentives for loss control.
viii. Flexibility in managing risk.
ix. Creative insurance solutions, and consolidated risk management.
x. Greater control over coverage.

Captives In Cayman

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 companies and total assets under management. This is a result of 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 which make up over a third of Cayman’s captive industry.

Types Of Captives

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 over 650 captive insurance companies in the Cayman Islands. Single parent captives (commonly known as ‘Pure Captives’), Segregated Portfolio Companies (SPCs), and captives with two or more shareholders (Group Captives) make up the majority of the sector.

SPCs’ growing popularity in the captive insurance industry is partly due to the fact that such structures allow insurers to add additional participants in a reinsurance programme without risk of cross liability. In fact, a distinctive feature of all SPCs 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. 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) while minimising 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, used to insure against the risks of those agents or any of their clients.

Establishing A Captive: Regulatory Framework

As with any other industry, the Cayman Islands is a dynamic jurisdiction and strives 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:
i. 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.

ii. 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 and risk management studies supporting the proposal.

iii. 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.
iv. Three years' financial projections.
v. 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 “other certificate”.
vi. Last two years' audited statements and/or notarised net worth statement of ultimate beneficial owners.
vii. Confirmation of appointment from a Licenced Insurance Manager and Approved Auditor. Insurance management is a large industry in the Cayman Islands with many licenced insurance managers that provide management services for captives. Insurance managers can provide feasibility studies, advisory services, establishment of a captive, ongoing management of the entity, through to the wind-up phase at the end of the captive’s term.
viii. Under the Act, the Class B insurer licence 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 (ie Class B(i) 95 per cent or more, Class B(ii) over 50 per cent, and Class B(iii) equal or less than 50 per cent, 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:

Class of Insurance                                   Minimum Capital Requirement (MCR)               Prescribed Capital Requirement (PCR)

Class B (i)                                                         General: US$100,000                                            General: PCR = MCR

                                                                          Long-term: US$200,000                                         Long-term: PCR = MCR

                                                                          Long-term: PCR = MCR                                         Composite: PCR = MCR

Class B(ii)                                                         General: US$150,000                                            General:

• 10% of Net Earned Premium (NEP) to first US$5,000,000
• 5% of additional NEP up to US$20,000,000
• 2.5% of additional NEP in excess of US$20,000,000

                                                                                      Long-term: US$300,000                                      Long term: PCR=MCR

                                                                                      Composite: US$450,000                                     Composite: amount required to support the general business plus MCR

Class B (iii)                                                          General: US$200,000                                         General:

• 15% of NEP to first US$5,000,000
• 7.5% of additional NEP up to US$20,000,000 
• 5% of additional NEP in excess of US$20,000,000 

                                                                                        Long-term: US$400,000                                     Long-term: PCR = MCR

                                                                                        Composite: US$600,000                                    Composite: amount required to support

                                                                                                                                                                            the general business plus MCR

(b) Prescribed Capital Requirement
Under the Regulations, the PCR, which is described as the total risk-based capital that an insurer must maintain in order to operate in a safe and sound manner, is the same as the MCR when it comes to Class B(i) licensees, however, for Class B(ii) and Class B(iii) licensees, it is determined as a percentage by reference to the net-earned premium, which is the net written premium applicable to the expired part of the policy period or reinsurance agreement period.

(c) Margin Of Solvency
Under the Act, margin of solvency is defined as the excess of the value of prescribed assets over prescribed liabilities. In terms of what the margin of solvency should be for each Class B licensee, the Regulations provide that it must be the same as the PCR for all three Class B sub-groups.

CIMA may impose an additional regulatory capital requirement depending upon the business plan submitted. Given the popularity of SPC structures, it is worth noting that the SPC regulatory regime which, owing to its stratified structure, differs slightly from the above. In fact, under the Act there is no MCR or PCR for cells within an SPC captive. However, the Regulations provide that the margin of solvency requirement for cells is met so long as each cell passes both cashflow and balance sheet solvency tests.

Once the application with all requisite documentation has been submitted, the Insurance Supervision Division of CIMA will review the application and raise questions if necessary, which can be directed to the appointed insurance manager or Cayman legal counsel. Once CIMA is satisfied that the proposal is sound, a letter can be provided, addressed to the Cayman Registrar of Companies, in order for the company to be incorporated. Simultaneously, a submission for licencing will be made to CIMA's Management Committee (MC). If approved by the MC, the licence will be issued subject to confirmation that CIMA has received the final copy of the Memorandum and Articles of Association of the company, the Certificate of Incorporation issued by the Registrar of Companies, evidence that the agreed capital has been received by the insurance manager, and any other documentation previously identified by CIMA as being required.

Post-establishment: Operational Matters

Once the captive is established, its ongoing operations will typically cover: (i) underwriting (ie drafting and issuing contracts between the captive and the insured (where business is being assumed) or reinsurer (where business is being ceded)); (ii) claims management; (iii) treasury (ie cash flow management – managing the excess funds created during the time lag between the receipt of annual premiums and the making of claim payments by making investments of such excess funds); and (iv) administration (ie day-to-day administration of the captive, which includes dealing with regulatory and compliance obligations, ensuring premiums are collected, claims are paid, and cash is available to meet obligations as they fall due).

The above article was first published in the IFC Review in March 2024: Captive Insurance In The Cayman Islands | IFC Review