Kevin Poole, general manager at the Insurance Manager Association of Cayman, on the wide range of alternative risk transfer solutions offered by the Cayman captive market
Alternative risk transfer (ART) is a broad term used to describe a range of risk transfer, risk financing and retention solutions that do not fi t the conventional insurance model.
ART solutions include parametric, capital solutions, retention financing and/or structured (re)insurance. The Cayman Islands excels in all these areas and can provide meaningful solutions.
Insurance market conditions
A prolonged soft market with low price commercial rates started to increase from 2018 across most market segments and regions, resulting in rates hardening.
This was caused by a number of factors, including an increase in losses, particularly catastrophe losses, claims inflation and a low interest rate environment, which was compounded by the Covid-19 pandemic bringing an additional strain on insurers’ performance.
This has led to the commercial market introducing limitations in coverage as terms and conditions become more stringent and capacity has reduced for some risks.
These changes in the market have created ideal conditions that allow captive insurers to flourish as their owners look at alternative and additional risk financing solutions.
Over the last few years, risk managers have been turning to new solutions to manage current and emerging risks.
These include structured fi nance solutions that provide longer-term certainty of price and capacity, flexible solutions that can fill gaps in traditional programmes, and cost-effective solutions to manage and improve self-insured retentions.
During and following the Covid-19 pandemic, risk managers have focused their attention on emerging and other risks that can impact their business such as supply chain, cyber risk, terrorism risk, environmental liability, high-severity risks and employee benefits.
Captives may be able to cover emerging risks using advanced analytical capabilities and are often best positioned to move much faster than the traditional insurance markets when designing programmes to meet the needs of their owners.
Cayman captive and reinsurance market
The Cayman Islands is a popular domicile for captive insurance companies due to its highly developed captive industry, transparency, integrity, professional yet flexible risk-based regulation and accessible business-focused regulators.
Cayman has had an active 2023 so far in terms of new captive formations, including a number of B(i) and B(iii) licensees across a variety of industry sectors.
Activity in the B(i) space ranges from healthcare to the energy sectors, along with group captives for small and medium-sized enterprises. In addition, the market for portfolio insurance companies (incorporated cells) has seen some impressive growth.
The B(iii) licensees include third-party property and casualty (re)insurers owned by insurtech, managing general agents/ managing general underwriters and domestic US startups, a number with the use of sidecars and/or access to the ‘traditional’ insurance-linked securities markets continued in 2023.
The Cayman Islands is viewed positively as a domicile of choice by these entities due to the nexus that many of the reinsurer owners have with the jurisdiction via investment vehicles, the Islands’ advanced infrastructure and broad suite of best-in-class service providers.
There is continued interest in the long-term reinsurance sector with interest in utilising the B(iii) licence class for both affiliated and non-affiliated business. Options have been sought include forming segregated portfolio companies (SPCs) and also using portfolio insurance companies with Cell A to be used for affiliated business and Cell B for non-affiliated business.
It is expected that the interest in the long-term reinsurance sector will continue to grow in 2024. In addition, it has been reported that traditional property and casualty reinsurers are looking more closely at the Cayman Islands as a jurisdiction.
The growth in reinsurance is part of the evolution of the Cayman Islands. Cayman is indeed recognised as one of the world’s major financial centres and has a thriving, large and diverse financial services sector.
Recognised as a top international banking centre, the world’s leading domicile for alternative investment funds, the second largest captive domicile and a world leader in structured finance, the jurisdiction stands as the only offshore international financial centre to possess such breadth and depth in financial services.
While achieving its commercial success, the Cayman Islands continues to attract business to its shores with its professional infrastructure, business-friendly approach, flexibility, an English common law framework, stability, a well-regulated regime and tax neutrality.
More recently we have seen the formation of the Cayman International Reinsurance Companies Association (CIRCA) which represents self-managed entities and is dedicated to promoting the Cayman Islands’ thriving reinsurance sector in close collaboration with the Insurance Managers Association of Cayman (IMAC).
Cayman regulator
The Cayman Islands Monetary Authority (CIMA) regulates and supervises financial services and is renowned globally for its high level of reinsurance expertise.
The Cayman Islands has created a streamlined licensing process and an efficient regulatory framework for insurance and reinsurance companies, which means the Cayman Islands stands out from other successful domiciles as it has not committed to aligning its regulatory regime with Solvency II.
This is appealing to US carriers and non-EU reinsurance companies seeking a regulatory framework not defined by EU market requirements.
CIMA’s robust principles-based approach has been welcomed by insurance, reinsurance entrants and ceding carriers.
CIMA’s positive approach to innovation has been demonstrated over the last few years by increased activity in sectors such as digital assets, cryptocurrency and the blockchain space.
Such developments include using a captive for indemnification of the custodial entity at certain limits within the required insurance programme, as a captive can participate in the risk and obtain more favourable terms with the commercial market.
Such programmes require a regulator that understands these developments, and with the recent enactment of the Virtual Asset Service Provider Law it is evident CIMA is well-versed in the intricacies of the industry.
Why Cayman?
The Cayman Islands has consistently been a hub of innovation, being among the first to recognise the potential of insurance-linked securities structures, cell companies and, more recently, incorporated cells known as portfolio insurance companies.
Currently, Cayman is witnessing increased interest from commercial reinsurance entrants, as well as the development of innovative insurance and reinsurance structures that leverage the latest technological advancements.
Keeping current with changes in existing sectors will be a challenge that neither government, CIMA, nor the industry can achieve alone.
They must work together to create a legal and regulatory regime that supports innovation to fuel successful development, while incorporating the commitment to transparency and cross-border sharing of information with tax and law enforcement authorities.
Global reputation
The Cayman Islands’ global reputation was recently further enhanced by its removal from the Financial Action Task Force (FATF) ‘grey list’, a critical step that will help safeguard the Cayman Islands’ continued success.
This decision was announced in October at the closing of the FATF’s plenary meetings in Paris, France and confirmed that the Cayman Islands has both implemented and maintains a robust and effective anti-money laundering/counter terrorist financing monitoring regime.
This included the enforcement of anti-money laundering/counter terrorist financing requirements in a timely and effective manner, with the introduction of administrative penalties for proven breaches of essential anti-money laundering/counter terrorist financing monitoring elements.
Additionally, sanctions have been imposed to ensure obliged Cayman Islands entities submit accurate, sufficient and up-to-date beneficial ownership information.
The Cayman Islands’ authorities have also demonstrated their commitment to prosecuting money laundering cases with significant penalties, further supporting the FATF’s decision.
This FATF decision is a welcome recognition of the Cayman Islands as a jurisdiction which is fully committed to implementing and maintaining international anti-money laundering/counter terrorist financing compliance standards.
ART market future
The alternative risk transfer market continues to evolve, whether it’s captives, reinsurance carriers, insurance-linked securities, side cars or even catastrophe bonds, insurance buyers continue to seek out risk-financing solutions that afford better control of insurance costs.
The Cayman Islands government, regulators and industry are ready to work together to help clients in this increasingly complex environment to find meaningful solutions.
