The purpose of this article is to provide information on the Cayman Islands as a domicile for captive insurance companies. It is the first of a series of articles which will focus on different aspects of captive insurance from the Cayman Islands point of view, as well as providing an update on any legislative changes or other issues which may influence the captive market. In providing a comprehensive overview it may be necessary to go beyond the confines of captive insurance and describe other features of the Islands' affairs or those of the financial community. Consequently these articles may be of interest to a broader audience than persons concentrating purely on captive insurance matters.

Midland Bank Trust Corporation (Cayman) Limited ("MBTC") is a licensed Insurance Manager under the Insurance Law (Revised) of the Cayman Islands and is the largest independent Insurance Manager providing services to approximately 80 captive companies.

MBTC is a member of the HSBC Group which is one of the world's leading international banking and financial services organisations, with major commercial and investment banking businesses operating under long established names in the Asia-Pacific region, Europe, the Middle East and the Americas. The Group has over 3,000 offices in 70 countries.

1. The Cayman Islands as a Financial Centre

The economy of the Cayman Islands is divided into two parts, - the tourist industry and the financial services industry.

In the former category, over 1 million tourist arrivals were logged during the year 1995 divided approximately 2/3 as cruise ship passengers and 1/3 as air arrivals.

In the latter category, legislation has been introduced to regulate the licensing of banks and trust companies, captive insurance companies and the registration of mutual funds. There are approximately 560 banks and trust companies licensed with more than 80% of this figure being composed of licences granted to the branches or subsidiaries of international banks. 85 of the top 100 banks in the world are represented. 390 captives were licensed at the end of 1995 and over 748 mutual funds have been registered since the passing of the Mutual Funds Law in 1993. There are more than 32,000 companies listed with the Registrar of Companies and although there is no record of the number of Cayman trusts in existence, legislation passed over the last decade has clarified and improved quite considerably the security of Cayman trusts. All these aspects go towards making Cayman one of the largest financial centres in the world.

2. The Cayman Islands - A General Overview

Inevitably the question is asked as to why the Cayman Islands have been so successful in developing the financial services that are now on offer. There is no one single reason to which this success can be attributed, - it is an aggregation of several factors.

The Cayman Islands consist of three islands located approximately 480 miles south of Miami and 200 miles to the west of Montego Bay, Jamaica of which Grand Cayman is by far the largest both in terms of land area and population (32,000 out of an estimated 33,000). They remain a British Dependent Territory although enjoying a significant degree of self government. By exercising prudent fiscal and expenditure policies over the last 15 years, the Islands have avoided becoming a financial burden to Britain which retains responsibility for defence and external affairs.

The Constitution gives executive and legislative power to a Governor, an Executive Council and a Legislative Assembly. The Governor is appointed by the British Crown and is responsible as head of government for the administration of the Islands. The Executive Council, consisting of the Governor, 5 of the elected members of the Legislative Assembly plus the Permanent Secretary, the Financial Secretary and Attorney General (all civil servants), dictates government policy and formulates legislation which is passed by the Legislative Assembly. The Legislative Assembly is composed of a Speaker, the three civil servants who are members of the Executive Council, and 15 elected members. Elections to the Legislative Assembly take place at least every four years with the next election scheduled for November 1996. There are no political parties and none of the 60 or so candidates who stood at the last election advocated independence.

In addition, there are no trade unions and with full employment a very high standard of living is enjoyed by all sectors of the community. The Islands therefore demonstrate a considerable degree of political and economic stability.

A joint approach is adopted by government and the private sector with regard to the development of legislation affecting the financial community. This partnership ensures the appropriateness of any new laws intended for the financial industry and in this area Cayman has been perceived a leader in introducing legislation which encourages but regulates offshore financial activities. Stemming from this there has grown up an excellent infrastructure of lawyers, accountants, banks, trust companies, insurance managers and other service providers.

Communication with the outside world, whether by telephone, fax or aircraft, is good.

Finally, there are no taxes at all.

3. Captive Insurance - The Development and Early Years

In 1976 a crisis occurred in the liability sector of the United States insurance market. It was most acute in the area of hospital liability and professional liability insurance for physicians and was caused by the withdrawal of several insurance companies from writing this particular line of business and the resultant strain placed on those that remained. The much reduced capacity available in the conventional market left many major medical institutions to contemplate either self-insurance or cover at a very high cost coupled with stringent terms and conditions. Alternative methods of securing insurance were reviewed and several of them elected to form reinsurance companies offshore. These reinsurance companies assumed the payment of claims in the primary area, - in other words from the ground up to a specific amount per claim and in the aggregate on an annual basis, - arising from insurance policies issued by licensed carriers within the United States to the respective medical institution. Prior to their establishment, the question arose as to where these particular reinsurance companies might be located and it is largely due to the decision of Harvard College and the medical institutions affiliated to it to domicile their captive in the Cayman Islands, that the Islands are now the second most popular location in the world for captives. Other institutions followed Harvard's lead not only then but also in 1985/86 when an even more severe medical liability crisis developed.

The influx of medical malpractice captives in 1976/77 also attracted the attention of other companies and groups which were considering forming captives insurance companies at that time. The reasons for these other organisations entering the captive field were usually economic. It was a way in which to recoup some of the profit being generated by insurers on well run and relatively claim free business.

This rapid development in the number of captives (and it was thought there may have been as many as 400 operating in the Cayman Islands at the end of 1970's) led to the introduction of the Insurance Law 1979 to regulate the activities of not only captives but also the other insurance entities operating in the domestic market. The Law came into effect in the middle of 1980 following the appointment of a Superintendent of Insurance. This move enhanced the Island's reputation significantly since Cayman became the first of the offshore centres to implement legislation specifically designed to control captives and to appoint a market specialist to regulate them.

The table below gives details of the number of licences surrendered and the number of new licences issued for each year between 1990 and 1995 inclusive plus the total number of captive licences in issue at each year-end. The licensing activity for the first three years was relatively stable with the last three years showing a rapid increase as the American economy came of out of recession and more problems hit the health care market. With the exception of 1995 this increased activity is not really reflected in the total number of licences in issue due to certain housekeeping measures undertaken by the insurance regulator in 1993 and 1994. Those captives that had ceased doing business and had paid off their liabilities but had not surrendered their licence, were asked to do so.


                       1990   1991   1992   1993   1994   1995

Total Licences 1.1      360    360    367    372    352    361

Surrenders               20     24     19     58     36     20

New                      20     31     24     38     45     49

Total Licences 31.12    360    367    372    352    361    390

Nearly 90% of the captives licensed in the Cayman Islands have U.S. parents or the risks assumed are located in the U.S. and therefore the development of captive business has been dictated by the insurance and economic cycles of that country. A delegation consisting of both government and private interests held seminars in New York, London and Hong Kong in February 1995 to advertise the Cayman Islands as an offshore financial centre, part of the purpose of which was to encourage organisations from elsewhere in the world to form captives in Cayman Islands. The proximity of the country to Central and South America, where restrictive insurance laws in place for many years have been or are in the process of being relaxed, opens up new opportunities for future growth. However, the development of captives from these countries is likely to be slow; it will take time for risk managers and CFO's to appreciate and come to terms with the new flexibility they may now enjoy in structuring insurance programmes, but it is likely to occur more quickly in those countries subject to significant premium rate increases or shrinking capacity. Companies located in areas prone to catastrophic events, e.g. windstorm and earthquake, are likely to be the first captive insurance company owners in their country.

4. Statistical Information

The Financial Services Supervision Department of the Cayman Islands Government which is responsible for regulating the insurance industry (as well as banks, trust companies and mutual funds) has produced some comprehensive statistics on captives for the years 1993 and 1994. Some of these statistics are given below and will give the reader a better idea of the size and distribution of the captive business.


                        1994                        1993

Gross Prems:       US$1,536.1 million          US$1,259.2 million

Net Income:        US$  326.8 million          US$  246.2 million

Net Worth:         US$1,577.1 million          US$1,420.5 million

Total Assets:      US$5,159.7 million          US$4,552.1 million

Total Captives:         361                         352
consisting of

o   Pure captive        215                         194
o   Association          69                          67
o   Open Market          49                          69
o   Group Captive        23                          19
o   Rent-A-Captive        5                           3

5. Future Articles

Future articles will cover the structure of the Insurance Law as it applies to captives, the licensing process and in particular what sort of information the regulators are looking for in a Business Plan. The impact of other Cayman Islands laws on a captive will be reviewed as well as some thoughts on whether the writing of third party risks by a captive may or may not be a good move. In addition, any recent events relating to captive insurance in the Cayman Islands will be included.

For further information on captive insurance in the Cayman Islands write to or call

Anthony Stelling or Thomas Clark
Midland Bank Trust Corporation (Cayman) Ltd.
P.O. Box 1109
Grand Cayman

Tel: (809) 949-7755
Fax: (809) 949-7634

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.