Cayman Islands: Captives And Beyond: How Cayman's Legislation Caters The Global Insurance Business

The Cayman Islands, widely known and recognised as a well-established captive domicile, has been home for decades to a number of insurance- licensed entities other than captive insurers. The simplicity, openness and integrity of the insurance legislation, dating from 1979, have allowed Cayman to welcome innovation in the field of risk transfer.

To facilitate additional growth and accommodate new innovative business models in this market, Cayman introduced a new insurance law in 2010. When the Cayman Insurance Law was updated, two important goals were achieved: (1) the measure of regulation applied to each class of licensee was made more transparent and in line with each licensee's particular risk profile; and (2) Cayman's legacy of innovation was continued, paving the way for enterprising licensees. A brief introduction to the non- captive classes demonstrates the diversity of Cayman's client base and its attractiveness to the global (re)insurance industries and capital markets.

The Class C Insurer's licence caters to insurance-linked securities (ILS). Home to the very first catastrophe bonds, Cayman remains a leader in this sector of the reinsurance market, facilitating both large catastrophe bond transactions and more recently, smaller transformer transactions in 'cell companies'. These inventive uses bring the benefits of ILS to a wider audience, with opportunities for individual investors to influence structure design so as to fit their preferred risk/return profile.

The Class D Insurer's licence caters to the larger, open-market reinsurance company. Greenlight Reinsurance, Ltd., was the first company of this kind to be based in Cayman and the first Class D licensed reinsurer. Established in 2004, with full underwriting operations established in 2006, Greenlight Reinsurance has an innovative business model for the reinsurance sector, accepting asset and liability risk to produce the best book-value growth for its shareholders.

Bart Hedges, CEO of Greenlight Reinsurance, explains: "When considering a domicile for our business, there were some core issues for us to consider, some of which are standard requirements such as stability of the jurisdiction, legal environment, proximity to our main market (North America), robust regulation and sustainability in terms of our ability to attract and keep talent. Clearly, the Cayman Islands scored well in all of these categories. However, given our business model, we had one further requirement for the domicile: a reputation for innovation in financial markets. Our business model was groundbreaking for our industry and we needed a domicile that had a reputation for being ahead of others in terms of market developments, taking the time to understand the model itself and being supportive of our goals".

Further proof that the Cayman regulator supports innovation can be seen in the efforts of other companies and regulators to replicate this business model in recent times. The introduction of dedicated (re)insurance regulations, including the new licence types, is a great step in the right direction for the financial sector in Cayman. It solidifies what is already a robust and pragmatic regulatory environment. Not only will this support further development of the reinsurance sector in Cayman, it also supports Cayman's position as an innovator in the risk-transfer industry.

The Class B Insurer's licence caters to captive insurance companies, with sub-categories segregating risk profile by the amount of third-party business conducted by the licensee. Of particular interest, in terms of innovation, are the proposed creation of the Portfolio Insurance Company (PIC) and the Class B(iv) licence. The PIC amendment to the Insurance Law will allow a Segregated Portfolio Company (SPC or cell company) to establish a subsidiary of a Segregated Portfolio (SP or cell) as a separate legal entity -- a PIC -- with the SPC, SP(s) and PIC(s) all sharing a single Class B licence. This ingenious adaptation of Cayman SPC legislation overcomes certain limitations of the original, not least in providing the ability for PICs to contract with each other within an SPC structure, including pooling, quota sharing and reinsurance contracts.

In an effort to further support the incubation of open-market reinsurers, the new Insurance Law includes new categories of Class B licences. The Class B(iii) licence is applicable for an insurer writing non-domestic insurance business, where 50% or less of the net written premiums will originate from the insurer's related business and annual net earned premiums are less than US$20 million. The proposed Class B(iv) licence applies to similar insurers where net earned premiums are equal to or greater than US$20 million.

Cayman's insurance laws and regulations, decades of experience and deep expertise in risk transfer, combined with Cayman's prominent position in the hedge fund and banking industries make Cayman clearly better for business for those bringing innovative risk-transfer and financial products to market. About the Author

Linda Haddleton is Managing Director of Kane (Cayman) Limited. She has been involved in the formation and management of a broad range of Cayman-based insurance and reinsurance entities for over 25 years, and instrumental in numerous industry initiatives to maintain and enhance Cayman's leading position as an insurance and reinsurance domicile.

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.

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