EY Cayman
Strength of purpose
It has been a challenging time for the everyone in the world during 2020, but the Cayman captive insurance market has continued to operate in an effective and progressive manner, says Andrew Bellfield of the EY region of the Bahamas, Bermuda, British Virgin Islands and Cayman Islands.
“The longer-term impact from COVID-19 on underwriting is expected to be affected by the social impacts the pandemic has on organisations.”
Andrew Bellfield, EY Cayman
Well, it certainly has been an eventful year. In addition to the traditional threat of the active Atlantic hurricane season, the Cayman Islands experienced a 7.7 magnitude earthquake at the start of 2020, and has been evolving and developing its financial service laws and regulations in order to comply with various EU-led, and other global regulatory, initiatives and requirements.
The continued integration, and revisions to the Guidance Notes, of the Economic Substance Law (2018, as amended); the new Private Funds Law (leading to between 10,000 and 15,000 registrations in Q2 2020); and new anti-money laundering and beneficial ownership laws and considerations, have all been disruptors in the local Cayman financial services industry.
But along with the rest of the world, the COVID-19 pandemic has been one of the most prominent features of local life and business this year, and this article will look to explore some of the related impacts on the Cayman Islands insurance market going forward.
“According to Marsh’s recently published Global Insurance Market Index, global commercial insurances prices rose by an average of 20 percent in Q3 2020.”
General market outlook
In advance of the COVID-19 pandemic, a hardening traditional insurance market paved the way for a trend in the establishment of captives, or growth in existing captives with increased risk and lines of coverage being placed. The impact of COVID-19 has strengthened this trend, and we may see a longer period of a hardening market, leading to captive insurance opportunities and growth.
According to Marsh’s recently published Global Insurance Market Index, global commercial insurances prices rose by an average of 20 percent in Q3 2020, the largest year-on-year increase since Marsh began publishing the index in 2012. In addition, the raft of exclusion wording litigation considerations that has ensued post-pandemic has led to the potential use of captives for difficult-to-place coverages.
Earlier in 2020, a report from the European Federation of Risk Management Associations found that 43 percent of risk managers plan to use a captive in the next two years. This survey was performed in the January to March timeframe, at a time before COVID-19 had started to spread widely in Europe. If we look to the Far East, new and facilitative legislation has been passed in Singapore and Hong Kong that encourages growth in their local captive insurance arenas.
In Cayman in recent years, there has been continued domicile competition, there has been rationalisation post-2017 tax reform in the US, there has been continued consolidation in the healthcare arena, and there has been continued evolution of existing captives leading to their reaching the end of their individual risk lifecycles.
The local domicile saw 33 new licensees registered in 2019, with an increase in premium dollars of almost 17 percent, and data suggests 2020 is following in a similar volume of newly registered captives in Cayman. These numbers support the view that Cayman continues to be very much a domicile of choice and are cause for a high level of optimism over its future.
The Cayman Islands jurisdiction contains a large number of well-established, long-term captive insurance programmes. Consistent with new captives incepting, many of the owners of these existing captives may seek to use their captives further and may supplement coverage that they are not able to obtain or that has been lost/augmented due to the hardening traditional market.
Established captives with excess availability of surplus may seek to explore the opportunities this provides in the wider capital management of their organisations.
“The longer-term impact from COVID-19 on underwriting is expected to be affected by the social impacts the pandemic has on organisations.”
Underwriting trends
When the COVID-19 pandemic took hold across the globe, many organisations did not have the required level of insurance coverage for certain losses they incurred. While pandemic coverage was not widespread in the market, business interruption coverage often required physical damage to trigger a claim and further, organisations often actively downsized operations in advance of any mandatory government restrictions.
In response to the impact from the COVID-19 developments, many organisations have taken steps to develop pandemic, business interruption and other related lines of coverage in the latter part of 2020. With the current appetite for this uncertain in the traditional market, turning to existing captives has been a natural path.
Whether looking to use the captive option for these lines of coverage or exploring opportunities to retroactively add coverages for uncovered losses, close consideration is being taken with the pricing and social impacts evolving from the fallout from the pandemic.
As we start to look forward, the longer-term impact from COVID-19 on underwriting is expected to be affected by the social impacts the pandemic has on organisations. Should the growth of working from home continue we may, for example, see reduced workers’ compensation exposures, but increased cyber risk liability.
“The Cayman Islands is the leading jurisdiction for healthcare captives, with them representing almost one-third of the 600+ captives population in our domicile.”
Claim development and future market trends
There are a number of factors impacting claim and reserving considerations, with the effects on each captive being dependent on its own unique fact patterns, ranging from line of coverage, the industry sector of the parent, the ultimate insureds and the geographical location of risk and claims settlement.
Many captives, with the reduction in economic activity during lockdowns, will see reduced risk exposure in certain lines of coverage, with businesses closing for periods, employees working from home, reduced activity on the roads and cancellation of non-essential medical procedures.
On claim settlements, one of the early implications noted from the pandemic was a decrease in the settlement of claims with reduced court time availability, but conversely, some claimants have become more open to negotiating settlements out of court rather than opting to wait a long time until their case is scheduled. Those claims that work through the legal system are increasingly becoming subject to potential social inflation costs which will impact settlement levels.
The Cayman Islands is the leading jurisdiction for healthcare captives, with them representing almost one-third of the 600+ captives population in our domicile. These healthcare systems have been on the front line of the pandemic. Many healthcare systems have operated in unprecedented circumstances in 2020, and although in certain US states there were favourable COVID-19 updates to legislation surrounding potential claim activity, increased numbers of claims directly attributable to COVID-19 factors are still expected to be made, and there is continued uncertainty surrounding settlement trends for claims in the post-COVID times. These factors will continue to ensure captives focus on risk management and risk evaluation with their actuarial specialists.
Another impact from the pandemic that we see is the advanced use of technology in the claims recognition and settlement processes. The insurance industry has been moving forward rapidly in recent years in the use of the digital solutions and artificial intelligence, and with some of the challenges faced during the pandemic, organisations are looking to evolve related technology solutions earlier than planned.
“The challenge presented by the ongoing reduction in interest rate environments is leading to captive investment strategies exploring a greater participation in equity securities.”
Investment impact
The COVID-19 pandemic is piling pressure on financial markets around the globe, with many businesses experiencing declines in market capitalisation as a result of the unprecedented impact of, and market reaction to, the pandemic. Most captives’ investment strategies look to adhere to liquidity and preservation of capital requirements for daily operating cash and claims payment requirements and, as such, captives’ investment holdings are typically maintained in conservative portfolios.
Captives will look to maintain steady portfolios to match claim payment patterns, but returns and potential exposure on certain positions may be a consideration in the immediate aftermath of the pandemic. In addition, the challenge presented by the ongoing reduction in interest rate environments is leading to captive investment strategies exploring a greater participation in equity securities. Given these ongoing economic challenges, there remains higher than usual inherent volatility in those markets, and captive insurer boards will need to be very diligent in any significant investment strategy decisions.
“Captive insurer boards will need to be very diligent in any significant investment strategy decisions.”
Meetings and conferences
As a result of the pandemic and travel restrictions in place, the Cayman Captive Conference was forced to cancel in 2020, preventing the on-average 1,500 industry participants converging on the Cayman Islands in early December. The conference has become synonymous to the end of year celebration of the industry in Cayman that allowed captive owners, prospective captive owners, service providers and industry specialists to come together in order to reflect, learn and strategise for the years ahead.
Each captive has developed its own approach to the process of regularly connecting in board meeting forums, informational meetings and shareholder meetings. Since the pandemic, and the logistical issues inherent in international and domestic travel, these events have been managed in a virtual manner, with the holding of Cayman proxy meetings for decisions required to be taken at board level.
Boards have, however, maintained regular contact and interaction with their service providers and their stakeholders in this new virtual world, and have therefore been able to maintain their essential corporate governance requirements.
Moving forward, although boards and service providers will look to re-establish regular in-person meetings when viable to do so, the ability demonstrated during 2020 to operate from a virtual environment may lead to increased flexibility and options for captives to consider. However, Cayman insurance managers will be cognisant of the local economic substance requirements as well as the relevant laws overseas, and will instruct their clients accordingly.
It has been a challenging time for the everyone in the world during 2020; but the Cayman captive insurance market has continued to operate in an effective and progressive manner. While the industry is adapting to the new challenges brought on by COVID-19, there is an overriding sense of opportunity and transformation that can impact the next chapter of both the global and the Cayman insurance landscape.
Andrew Bellfield is an associate partner in the EY region of the Bahamas, Bermuda, British Virgin Islands and Cayman Islands. He is based in the Cayman Islands and can be contacted at: andrew.bellfield@ky.ey.com
Share this page
Video: Envato Elements / forrestbro
Image: Shutterstock.com / Lunx
