Cayman Islands: The New Financial Reinsurance Frontier

GROWING TREND IN THE CAYMAN ISLANDS

The Cayman Islands has recently experienced tremendous growth in the financial reinsurance ("FinRe") sector. Within the last 12-18 months a number of FinRe carriers have been licensed and, with word spreading fast, there are a significant number of additional start-ups in the pipeline. Having identified the opportunity in this sector some time ago, the Cayman Islands is now embracing real growth on the ground. There are a variety of reasons for this increased activity in the Cayman Islands, which we will touch on in this article, but a general propensity to facilitate a more NAIC focused model (US model) as opposed to Solvency II (European model) is certainly high among the primary drivers.

GLOBAL DRIVERS

FinRe transactions are underwritten with financial management rather than risk transfer as the primary driver. Traditionally, primary insurers have entered into such transactions to either improve solvency ratios, strengthen their rating or boost return on capital. Recent global changes in the regulatory landscape have caused a capital strain on many international pension, life and annuity insurance companies. FinRe is becoming a more popular way to access capital relief for these strains which has stimulated growth in the formation of FinRe companies both globally and locally in the Cayman Islands. As an example, the US retirement market has grown from $11tn from 2000 to over $25tn in 2016. Similar pressures from US pension regulators have caused a growth in pension risk transfer transactions in the United States.

INVESTORS

Investment returns from pension, life and annuity reinsurance companies range from moderate to high as a result of the favourable economics involved. Liabilities are high in persistency and have long average durations. A well matched high-grade investment portfolio can produce higher yields because of longer duration. Though the net spread of yield over cost of liabilities can range from 1.0%-1.5%, the asset-to-capital requirements of between 12x-15x results in a high teen or low twenty return for investors, thus making FinRe companies very attractive to the capital markets. With initial capitalisation for FinRe entities starting in excess of $250m, and billion dollar books of business being reinsured, the returns are not immaterial.

SOLVENCY AND CAPITAL FRAMEWORKS

To achieve appropriate capital levels and yet sustain credibility, it is critical to the reinsurer to reside in a jurisdiction where there is a high quality but sensible regulatory regime. For example, the EU Solvency II framework requires higher risk weights for longer duration assets and therefore can be punitive, even if the reinsurance company has well-matched liability to asset durations.

The NAIC model in contrast is more favourable. There is little appetite in the Cayman Islands to pursue Solvency II equivalency.

Across all areas of the Cayman Islands financial services sector the jurisdiction is predominantly US facing, indeed 90% of all risks insured by the Cayman Islands international insurance industry are North America based.

Accordingly, Solvency II would simply not be a match for the jurisdiction.

It is no surprise therefore that the Cayman Islands Monetary Authority has shown a willingness to facilitate a more NAIC focused model which, for potential start-ups with prospective US cedants, has been a significant factor in determining that the Cayman Islands is the most appropriate jurisdiction for their new platform.

CAYMAN BUSINESS ENVIRONMENT

The Cayman Islands is one of the world's most efficient and well-recognised international financial centres. Given the breadth of its financial services sector and expansive net of stakeholders it is a familiar, trusted and respected domicile. Its infrastructure supports high-calibre international finance transactions, a commitment to stability, integrity and professionalism, and highly talented industry professionals.

For executives of FinRe carriers, a number of softer benefits in the Cayman Islands have also been broadly welcomed.

These include:

  1. the ability to secure a 25 year work permit which means immediate security of tenure in the Cayman Islands;
  2. the ability to acquire or build a home without restriction;
  3. the ability to own a number of vehicles if required;
  4. lower on-going operating costs when compared to competitor jurisdictions; and
  5. no income or payroll taxes.

David Towriss, CEO of Aureum Re which primarily reinsures fixed annuities from US carriers, commented: "We are seeing significant opportunities in the asset-intensive reinsurance space and a continued demand for offshore reinsurance solutions. Our shareholders recognised several advantages in choosing to license Aureum Re in Cayman including the strength of the local infrastructure, a deep and talented employee pool, as well as a strong regulatory authority with a vision to grow Cayman's reinsurance market.

Our target market is US annuity writers and there are material benefits from Cayman not seeking Solvency II equivalency given that our clients are more aligned with the NAIC regulatory regime and risk based capital.

This has helped us offer a compelling reinsurance solution which is flexible in its approach and seeks to increase capital, reduce concentration of risk and reduce volatility of financial results for our clients.

We are delighted to have all of our management team and operations based in Cayman and appreciate the support which our local stakeholders have provided as we seek to grow our business."

REGULATION

The Cayman Islands operates a business friendly and well-regulated financial system reinforced by the philosophy of integrity and transparency, and a belief that appropriate regulation and international cooperation drive commercial success.

The Cayman Islands is a strong proponent of proportionate, risk-based regulation.

LEGAL FRAMEWORK

The Cayman Islands has a sophisticated legal regime that is based on English Common Law, with the final court of appeal being the Privy Council in London. In addition, a highly efficient and respected court system upholds the jurisdiction's framework of legislation.

Cayman Islands law maintains a legitimate right to privacy, but its confidentiality statute provides a clear gateway for tax transparency and there are no inhibitors for the effective operation of its many international cooperation agreements.

SERVICE PROVIDERS

The Cayman Islands also has a global client base of major international companies, financial institutions and governments.

This success is due to the insurance managers, lawyers, auditors, actuaries and investment service providers who choose to work in the Cayman Islands because of the high quality of work and lifestyle.

CONTINUED GROWTH

The aforementioned reasons, coupled with the Cayman Islands government's firm commitment and support to grow the reinsurance sector, have firmly established the Cayman Islands as an attractive domicile for FinRe carriers.

Given the global drivers we anticipate this growth to continue its upward trajectory and that the Cayman Islands will remain at the forefront of the FinRe frontier.

ABOUT THE AUTHORS

Derek Stenson is based in Walkers' Cayman Islands office where he specialises in insurance and structured products, he has extensive experience advising a wide range of international financial and insurance institutions on all aspects of insurance and reinsurance law and regulation.

Adrian Lynch has overall management responsibilities for Aon's captive insurance operations in the Caribbean including offices in the Cayman Islands, and Puerto Rico. Prior to joining Aon Cayman, Adrian spent seven years as the CEO of a Private Client Advisory group, offering Private Placement Life Insurance structures.

Dara Keogh is a Managing Partner at Grant Thornton in the Cayman Islands. He moved to Grant Thornton earlier in 2017 because of the opportunity to use his vast re/insurance experience and entrepreneurial passion to grow the business, and avail of the opportunity to help his clients, particularly in the re/insurance sector. Dara has prior experience as CFO of a reinsurance company, Corporate Risk Manager for a public life and pensions company.

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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