The Rise and Rise of Captive Insurance

In 1979 the Government of the Cayman Islands published its first piece of legislation on the subject of insurance. The purpose of the Insurance Law was to encourage the formation of a captive insurance industry, an initiative which has proved spectacularly successful. Statistics published by the Cayman Islands Monetary Authority in June 2001 show that the islands were by then home to some 527 registered captive insurers, writing more than US$3.7bn in premiums and with assets totalling US$15.7bn. From a standing start, Cayman has grown to become one of the world’s leading jurisdictions for the establishment of captive insurance, second only to Bermuda as the domicile of choice.

With a legislative environment that remains determinedly business-friendly, the Cayman Islands have recently led the way in some of the industry’s more innovative corporate structures. While just a few years ago captive insurance presented a viable solution only to the largest corporations, it is now increasingly seen as an option for smaller players, through the medium of group captives and shared or so called "rent-a-captives". This process has been encouraged in Cayman by amendments to the Companies Law designed to facilitate the formation of "segregated cell companies", a lead which was has since been followed by other jurisdictions, both offshore and onshore.

As for the future, the predictions are that the strong growth in captive insurance will continue. Estimates suggest that alternative insurance solutions now account for some 40% of US premiums and this figure is expected to grow to more than 50% within the next five years. The hardening traditional markets following the events of 11th September have served only to encourage this trend. Much of the new captive business, inevitably, is finding its way to a small number of offshore markets, amongst which Bermuda and the Cayman Islands lead the field.

The Business Environment

The development of insurance business in Cayman has presented an additional dimension to an already booming financial services industry, and serves to compliment the existing dominance of the jurisdiction in other financial sectors. The islands are already home to around 500 banks and trust companies, with almost all of the world’s 50 largest international banks maintaining branches or subsidiaries here. Total banking assets within the jurisdiction have been put at some US$700bn. Similarly, the Cayman Islands Stock Exchange, founded as recently as 1997, has grown to achieve market capitalisation of US$35bn in less than five years. Taking these developments together, the Cayman Islands now rank as the fifth largest financial centre in the world.

There are a few important, and some surprising, reasons why this growth has come about. The common perception amongst onshore commentators is that the development of the financial services industry in the Cayman Islands is attributable largely to its tax advantages, often variously described as "unfair" or "harmful" to other jurisdictions. The charge is substantially wide of the mark. Rarely, in practice, is the case for incorporation in the Cayman Islands made solely, or even primarily, on the basis of fiscal considerations. Indeed, in June 2000, the OECD published an official list of tax havens, naming some 35 countries which, at that time, were said to employ harmful or unfair fiscal policies to the detriment of the onshore world. The list featured some predictable names, such as Jersey, Guernsey, the Isle of Man and the Bahamas, and others perhaps less obvious, including Bahrain. The Cayman Islands, however, did not appear.

Clearly, tax advantages have had a role to play in attracting captive insurance and other financial business to the Cayman Islands, but there is more to it than that. Similar advantages are available in many other offshore jurisdictions, and yet they have not developed to anything like the same extent. In truth, the allure of the Cayman Islands it to be found not only in the absence of direct taxation, but also in the islands’ combination of political stability and legal sophistication. The Cayman authorities have shown a consistent readiness to accommodate the highest onshore regulatory requirements, including, most recently, full compliance with the requirements of the Financial Action Task Force. The government has committed to the exchange of information with onshore jurisdictions on tax matters, pursuant to specific requests made under appropriate bilateral treaties, and Cayman Islands law incorporates comprehensive anti-money laundering legislation. Banking and insurance is regulated to similar standards as those found onshore and it is notable that the Cayman Islands Stock Exchange was the first offshore market to be granted approved organisation status by the London Stock Exchange.

In truth, many a Hollywood myth can be dispelled by taking a closer look at the regulatory environment in place in the Cayman Islands. That regulation represents one of the islands’ essential attractions to respectable businesses, and it is certainly one of the features that sets Cayman apart from other, less developed, offshore jurisdictions.

A Place to Litigate

Cayman’s other main advantage over many of its competitors is to be found in its sound legal infrastructure. As a British Overseas Territory, the legal system is based on common law. Decisions of the English courts have strongly persuasive authority, not only on matters of common law and equity, but also with regard to the interpretation of statutes in those cases where the local legislation is drafted in similar terms to that in the UK (as it very often is). In this way, Cayman benefits from a ready-made and sophisticated jurisprudence.

The judiciary comprising the Grand Court of the Cayman Islands and the Court of Appeal are drawn from England and other commonwealth jurisdictions. The local judiciary is scrupulously impartial and ultimate rights of appeal still lie to the Privy Council in London. The majority of attorneys practising in Cayman are also qualified in other jurisdictions, and many are drawn from leading City of London firms or the English bar. They bring to the islands a depth of commercial experience and a professionalism comparable to other major financial centres. Barristers at the English bar can be readily admitted to appear before the Cayman courts, and specialist counsel are frequently brought from London to advocate in the Cayman Islands where this is required. The three leading Cayman Island law firms each maintain offices in London.

Cayman civil litigation procedure closely follows that of the Rules of the Supreme Court, being the procedure in force in the English High Court before the implementation of the Woolf reforms. In general, the Cayman courts recognise the same causes of action and are able to award the same remedies as those in England. Injunctive relief, for example, is available in Cayman on the same basis as in England.

In the particular case of insurance and reinsurance, local variations from the English law are relatively minor, since much of the law in the field is still based on common law rules. The concepts of utmost good faith and contractual interpretation apply in the Cayman Islands in the same way as in England. Similarly, conflict of law issues as to jurisdiction and governing law are dealt with in Cayman in the same way as they were under the English common law rules, before the coming into force of the Brussels and Rome Conventions respectively. Foreign judgments are readily enforceable by means of a summary procedure to convert them to a judgment of the Cayman Islands court.

As in other jurisdictions, arbitration has also increasingly become an option for the resolution of disputes in the Cayman Islands, whether under the auspices of the ICC, LCIA or on an ad hoc basis. The Arbitration Law (2001 Revision), originally enacted in 1974, provides a framework for arbitration, in similar terms to UK legislation. Cayman Islands statute also gives effect to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

All of these factors have made Cayman an attractive choice of jurisdiction in which to litigate commercial disputes. In many commercial contracts, the Cayman Islands are increasingly chosen by the parties as a neutral jurisdiction and choice of law, in cases where neither party has any real connection to Cayman at all. In most instances, the Cayman courts will give effect to such provisions, under the principle that the parties’ express choice of law and jurisdiction is paramount. The Cayman Islands can prove particularly valuable as a compromise jurisdiction where South American counterparties are involved, since it provides them with the comfort of geographical proximity, without sacrificing the certainty and judicial sophistication that comes with an essentially English law based system.

Equally, those insurers who are less familiar with Cayman law, but who find themselves involved in disputes in this jurisdiction, can rest assured that they are unlikely to encounter the sort of unwelcome surprises they might have experienced in the course of litigation elsewhere. The civil jury trial has no place in the Cayman Islands, nor the concept of bad faith and multiple damages, factors which will resonate particularly with European insurers who have experienced to their cost the pitfalls of insurance litigation in the United States.

In summary, litigants in the Cayman courts have come to expect sound and predictable judgments of a quality comparable to the English High Court, from a judiciary which is accustomed to handling all manner of commercial cases, including heavyweight insurance and reinsurance disputes.

The Future

Looking ahead, there is every reason to expect the growth of the Cayman insurance industry to continue apace. Whilst Bermuda currently remains ahead in the captive insurance market, it does so with the advantage of a thirty year head start, and that lead is by no means an unassailable one in the longer term. Cayman has continued to consolidate its position as the world’s number two in offshore insurance, and with the benefit of a sound legal and regulatory environment, there is every reason to expect that development to continue in the years to come.

Hunter & Hunter is the longest established law firm in the Cayman Islands and is now one of the largest. The firm has the leading litigation department in Cayman, including the most experienced insurance and reinsurance law practice on the island. For further information on any matters concerning insurance or reinsurance in the Cayman Islands, please click on our firm link at the top of this page.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.