Innovative Captive Strategies looks at why the Cayman Islands is such a successful hub for captives and digs deeper to consider whether its position as the world’s third biggest captive domicile is under threat.
As captive professionals from around the globe fly in over the dazzling beaches and beautiful tropics of the Cayman Islands for this year’s world-leading forum, there is a sense of optimism bubbling beneath the surface.
It is testament to the strength of the islands as a hub for captive insurance and reinsurance that so many people – nearly 2,000 – will gather for the Cayman Captive Forum 2022.
Cayman is the third biggest captive domicile in the world with 765 licences under the supervision of the Cayman Islands Monetary Authority at the end of last year. With a handle worth $22 billion in premiums, they are the world’s captive leaders on market share of healthcare.
Although industry leaders acknowledge they cannot be complacent, they believe the Cayman Islands is uniquely positioned to deliver for clients coping with a turbulent global economy, catastrophes, evolving risks and a hard insurance market.
Aon Cayman managing director Howard Byrne outlines how the hard market is creating a two-fold opportunity, firstly with North American companies, and secondly with US insurance firms.
“There’s a lot of pressure on direct rates in the property and casualty market. We’re seeing that across every industry sector,” he says. “If you’re a commercial direct buyer, be it a health system or something else, you’re spending a lot more money than you were before. Terms and conditions are limiting with regard to the coverage available and retentions are increasing. Captives are playing a part in taking over a component of those increased deductibles and excess retentions.
“Also, captives are being used to access facultative reinsurance behind them because reinsurance is now needed to build out programmes. But the problems the direct market is facing, the insurance market is also facing,” Byrne adds.
North American insurtechs, managing general agents and home insurance carriers in the US Gulf states hit by catastrophe all need access to risk transfer, Byrne notes.
“Their reinsurance options and support have been drying up. They’ve been drying up and becoming more expensive in the last two to three years. Primary catastrophe excess of loss policy protections have had market participants reduce considerably. Their attachment points are also moving up.
“Those insurance companies without access to cheap competitive risk transfer into the reinsurance market are having to capitalise large retentions at the bottom of programmes. Alternatively, they form their own reinsurance captives to transfer some of these primary obligations across to. Reinsurance companies have become a tool to manage costs for insurance companies in the US,” he explains.
Artex Risk Solutions executive vice-president for North America, Adrian Lynch, agrees that there is a significant opportunity for captives to help direct insurers, especially in the wake of the devastating catastrophe of Hurricane Ian.
Insurers could face up to $57 billion in losses from Hurricane Ian, which ripped through Florida and South Carolina, according to risk analytics firm Verisk.
Lynch says: “The knock-on effect of the hurricane hit will be a severe testing of reinsurance capacity, one that was already being challenged over the last number of years. Reinsurers are chasing yield and what you will see is a restriction around reinsurance capacity, a constriction of some of the terms that are being offered, with the result that coverage gaps are going to remain on the front-end insurance market.
“This suggests there’s a real opportunity for the captives to step into those gaps. That’s a traditional argument. It’s always been used for captives. I think, jurisdictionally, when you take a more macro view in terms of what captives have done over the last 20 or 30 years versus what they should be doing over the next 10 to 15 years, there are a significant number of opportunities,” he points out.
When drilling down deeper into the sort of insurance companies that need captive assistance, Philip Alexander, partner at RSM Cayman, points to managing general agents. He says: “If you look at the rates in the market at the moment, they are very high. They are increasing all the time.
“Managing general agents have been looking at taking a slice of the business. One way of doing that is to set up a captive down here, which is why they set up a quota share on the business they place with the main carriers. I think this is what a lot of new captives that have started over the last two years have done. They take a slice of the business they’ve been presenting to other insurers. We’ve seen that on a number of occasions,” Alexander notes.
As well as the gaps in the market, evolving products are presenting captives with an opportunity to take on some of the risk management. Traditional products in professional lines, such as directors and officers, and errors and omissions, continue to find a home in Cayman.
Professionals are having numerous conversations during the hard market over how companies can shift the risk onto their own balance sheet with captive assistance. Cyber has especially captured the imagination of US companies, which now see it as an important part of their insurance risk management.
Global cyber premiums are projected to more than double from $9.2 billion in 2022 to $22 billion in 2025, according to numbers run by Munich Re. The US cyber insurance market currently has more than half the market share, enjoying 21% annual growth in 2021.
With the Cayman Islands focusing on the needs of US companies, the domicile will feature heavily as the cyber insurance market continues to grow. Even so, cyber is a tricky product because of a lack of data on claims history, especially on the growing cyber threats like ransomware.
Cyber data must be captured, quantified and presented to clients in an understandable way, which is not always an easy challenge.
Artex’s Lynch says: “I think that the reinsurance companies are being much more selective in terms of the lines they are willing to underwrite. Though the captive might see an opportunity, I think it’s quite a risk at the same time.
“If we take cyber as an example, there are certain types of coverages that you put into a captive, and then there are the ones that are highly quantifiable, very data driven. There is an intangibility to some of the cyber exposures that exist and, as well as a hyperconnectivity, one of the main challenges we have is trying to articulate to many of our client boards how we actually capture all that risk without blowing up the captive.”
Aon’s Byrne says the challenge is quantifying cyber risk, putting a dollar value on the risk and identifying where the cyber risk lies within an organisation. Once all that is accomplished, you can articulate it to clients and transfer the risk across to the captive.
The upside to cyber, like some other intangible risks, is that insurance and risk firms are getting better at capturing the data. It offers a huge opportunity for insurance managers to create a more intimate and valuable relationship at the highest executive level within companies.
Lynch says: “We, as managers and risk advisers, can offer far more data around the underwriting approach with the consequence that some of our clients are retaining far more risk than they used to within the captive.
“The captive then plays a real role at the C-suite table because the board is generally populated by the CEO and CFO, the risk manager and the general counsel. We, as insurance managers, use what is called a ‘stewardship relationship’ to try and steward that relationship in a way that brings to the clients’ peer review data.
“We bring them market data, benchmarking information; we challenge them on what they should and could be doing, and we tell them about what some of their peers are doing. I like to think that we play a role in helping steer them in terms of where opportunity may be and what to avoid,” Lynch adds.
US state challenge
It’s clear there is an abundance of opportunity for Cayman. But can anything rock the boat and diminish its status as a world-leading captive domicile? One threat is US states developing their own domiciles, backed up by attractive state legislation and governance.
RSM’s Alexander says: “There has been a move on this, and we’ve seen one or two of our clients where there’s pressure from the States saying ‘Why are you domiciled in the Cayman Islands when we’ve got captive locations in states like Delaware, Hawaii and other places?’ I think that is where the competition is going to come from. For us, it’s about making sure we have a good infrastructure to deal with those sorts of things.”
Clayton Price, managing director and general manager at Beecher Carlson Cayman, Ltd, believes that the Cayman Islands is showing its strength in the mid-market, finding new solutions for products and helping clients meet challenges in the commercial property market. But he also acknowledges that for all the good work, there is a threat from the US states.
“With recent events in the commercial property market, the desirability of utilising a captive to fill gaps or hold the line on rates has captives back in favour for these exposures.
“Cayman, however, remains diligent not resting on its laurels and is well aware of threats, principally from the number of states in the US that now have captive legislation whereby these states are continually seeking to make it more attractive to remain in the home state rather than incorporating or remaining in a proven jurisdiction such as Cayman.”
Byrne says that on a federal basis he can’t see there being a push to create favourable legislation for domestic captives.
At the state level, he says: “There are 50 states in the US and they all do their own thing. Some of them currently have more protectionist rules and legislation. Many of them have enacted their own captive legislation and are strong providers of a captive product in their own right.
“There was a bit of a proliferation a few years ago, I think there is between 20 and 30 states now that have their own captive legislation. There’s not enough scale to go round, though. It’s expensive to support a regulator, a regulator-competent team and then for the providers to invest in a jurisdiction. Some states came in really hot and haven’t really succeeded, but Vermont and other states are still doing really well.
“I would suggest that there is more competition than before from a jurisdictional perspective. Is that a threat? Yes, but it’s a good reminder to us to keep on our toes and make sure that we, as an industry, are not sitting back and getting fat from the spoils of yesteryear,” Byrne adds.
Alexander says the big plus about the Cayman Islands, as opposed to the US states that have their own captive setups, is the rich blend of expertise on offer. Professionals are always within close distance of each other.
There are similarities to the Lloyd’s of London market where many insurance firms and service providers are close together, making it an attractive destination for placing risk.
“There is a clustering advantage. There are so many captives here, all very close together. There is a highly skilled population all working within a very small area. People move within the insurance managers. It encourages growth, and the people that are brought in are generally high-quality people. So that’s the advantage. It’s a bit like a mini-City of London,” Alexander explains.
Emphasising this point, John Dykstra, partner of Maples and Calder’s finance team in the Cayman Islands office, says there is expertise that stretches beyond captive insurance which helps it stand out against competitor domiciles.
He says: “The expertise within the local insurance industry extends well beyond captive insurance. The Cayman Islands has extensive experience with insurance-linked securities going back to the very first 144A deals.
For many years the Cayman Islands was the dominant jurisdiction for catastrophe bonds and similar insurance-linked security products. The leading sponsors in these markets continue to set up transactions in the Cayman Islands.
“Cayman also has a growing reinsurance sector, with a number of new reinsurers establishing a physical presence in there in recent years. Special immigration concessions are in place for senior insurance executives to facilitate the growth of reinsurance industry, and the insurance industry works closely with government to ensure the insurance regime continues to evolve so as to remain at the forefront of international developments.”
There may be a threat from the US states, but the message from the Cayman Islands captive and reinsurance community is a confident one: the domicile will continue to prosper as a world leader in helping companies and insurance firms manage their risk.