Conyers has recently seen a significant increase in the use of trusts in the structuring of insurance transactions entered into by Cayman Islands licensed insurers in addition to their continued use in structuring the ownership of the insurers themselves.
This note will highlight the various ways Cayman Islands trusts are used to facilitate off-balance sheet Special Purpose Vehicle (SPV) structuring aspirations, as well as scenarios where trusts are required to hold underlying policies of insurance for administration, risk management and cost efficiency purposes.
Back to Basics
A trust is a legally binding arrangement whereby a person (known as a settlor) transfers assets to another person (known as a trustee) who is entrusted with legal title to the trust assets, not for his own benefit, but for the benefit of other persons (known as beneficiaries) or for a specified purpose.
The flexibility of the principal legislation governing Cayman Islands trusts, the Trusts Act (2021 Revision), is a prime motivator behind the use of trusts, as well as the fact that matters concerning Cayman law governed trusts have been tried and tested before the Cayman Courts, with English case law also considered of highly persuasive authority in Cayman. This provides comfort and reassurance to clients considering the use of trusts in their Cayman structures.
Ownership Considerations – Off-balance Sheet Structures
Clients will often have off-balance sheet consolidation considerations to take into account in relation to the ownership of Cayman licensed insurers, whereby they will seek to keep the controlling interests in certain assets off their books. A trust is suitable for use in side-car transactions to hold the legal title to the ownership of an SPV such as a Cayman licensed insurer.
How it works in practice: An 'orphan trust' structure can be used where, a corporate trustee (the "Cayman Trustee"), which is independent from the client and the insurer entity, holds the legal title to the voting, non-economic shares in the Cayman insurer, with beneficial title to the shares being held by the Cayman Trustee on the terms of a trust (either a charitable trust or a STAR trust) for the benefit of one or more qualifying charities or for a specified purpose (in the case of a STAR trust). The Cayman Trustee will only be entitled to act in relation to the shares on and subject to the terms of the instrument constituting the declaration of trust, the Cayman Trustee will typically also charge a nominal transaction fee which will also form part of the trust property.
This structure assists to facilitate a client's desire to keep a reinsurer "off-balance sheet" as legally, the insurer entity will be entirely separate (or "orphaned") from the beneficiary/operator, and the third party investors.
Facilitate Holding of Master Insurance Policies
A master insurance policy is a central insurance arrangement that covers multiple subsidiaries, affiliates, or members of an organisation under a single policy. This structure simplifies administration, enhances risk management, and offers cost efficiencies when administering policies to thousands of participants can become burdensome. In light of this, master insurance policies are particularly popular in areas such as travel insurance or life insurance, where the underlying participants are individuals. Many multinational companies use master insurance policies to cover global operations, with a Cayman trust, providing a dual purpose benefit of: (i) serving as a neutral offshore jurisdiction to efficiently manage insurance claims and distributions worldwide; and (ii) creating an important nexus to the Cayman Islands thereby avoiding any potential enquiries from foreign regulators as to the domicile of operations.
How it works in practice: An insurer will issue a master policy of insurance to the trust which governs payment of benefits to participants in the plan of insurance. The trust, or its delegate, will obtain applications from participants pursuant to which such the insurer entity will provide benefits to the trust on behalf of a participant in the plan of insurance.
The structure facilitates client's needs to simplify administration and distribution of policies in a cost efficient manner.
Types of Trusts
The below mentioned trusts can be used to facilitate the holding of master insurance policies.
Charitable Trust:
A charitable trust will have one or more charities as its beneficiaries. The voting interests in the insurer entity will be issued to the trustee of the charitable trust to hold on trust in accordance with the terms of the trust deed.
The advantage of the charitable trust is mainly one of nexus. As a Cayman-based structure, they provide a neutral offshore jurisdiction to efficiently manage insurance claims and distributions.
It could be argued in some circumstances that a trust appearing to be for a certain purpose or purposes is in fact a trust for the benefit of an ascertainable person. This might give rise to a tax liability in the home jurisdiction of such a person.
STAR Trust:
Cayman provides for a unique form of statutory trust known as a "STAR Trust". "STAR" is an acronym for the Special Trusts Alternative Regime. STAR trusts have gained prominence for their flexibility and utility in corporate settings. STAR trusts are a form of trust that is unique to Cayman, and have a wide variety of practical applications (as set out below). STAR trusts can be established with both charitable beneficiaries and/or objects. One of the key features of a STAR trust is that it facilitates separation of the right to benefit under a trust from the right to enforce the terms of the trust. This means that a beneficiary (if any) will not be able to sue the trustee or obtain information concerning the STAR trust. Instead, enforcement is left to a designated "enforcer" (a requirement for a STAR trust). There are no prescribed criteria or qualifications for an enforcer who may be resident anywhere and may be an individual, a committee or a corporate entity. The unique features of a STAR trust provide clients with structuring options that are often not possible with an ordinary trust, and which can be particularly useful in a commercial and transactional context.
STAR trusts are particularly well suited to hold master insurance policies, as they act as an independent and neutral holder of the insurance policy, ensuring that the benefits are administered without conflicts of interest, and due to the fact that being a Cayman-based structure, they provide a neutral offshore jurisdiction to efficiently manage insurance claims and distributions worldwide.
For more information on the suitability and key features of STAR trusts for these structures, please check out this previous article, Cayman STAR Trusts: A Powerful Structure for Employee Benefit Trusts and Master Insurance Policies.
Conclusion
Trusts provide insurers with an efficient and secure mechanism to facilitate ownership structuring requirements and to manage insurance policies. The ability to hold assets for specific purposes, remain unaffected by corporate changes, and maintain confidentiality makes them a preferred vehicle for companies operating in complex international environments.
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.
