Domiciles
The secret formula
As jurisdictions in the US build out their captive insurance efforts, the landscape of onshore versus offshore is beginning to shift. But, despite the rise of the onshore jurisdictions, Cayman is safely maintaining its position as a domicile of choice.
“Cayman retains a deep concentration of professional expertise.” Liam Fleming, Advantage International Management (Cayman)
Turn back the clock 20 years and the captive insurance destinations of choice were mostly offshore, with perhaps the exception of Vermont. Times are changing.
“The onshore versus offshore story has continuously evolved over the last number of years, with onshore evolving more than offshore. Cayman has more than 45 years of experience, Bermuda slightly less, but the US onshore conversation has probably accelerated in the last 15 years,” says Adrian Lynch, executive vice president–North America, Bermuda & Cayman Islands of Artex.
He adds: “Vermont has a significant history but the other US states have enacted captive legislation over the last 10 to 15 years, which has seen them playing a lot of catchup in terms of wanting to offer what offshore jurisdictions offer.”
Liam Fleming, managing director of Advantage International Management (Cayman), believes that the number of US states that have enacted captive statutes has increased directly due to the growing recognition among state legislators of the benefits of and the demand for the use of captive insurers.
“Several onshore domiciles have begun to close the gap on the established offshore jurisdictions in terms of the sophistication of the legislative and regulatory regimes and the levels of expertise available within the domicile to service captives,” he says. According to Fleming, tax reform onshore and requirements arising from the Organisation for Economic Co-operation and Development’s base erosion and profit shifting inclusive framework have impacted the offshore landscape.
“However, established offshore domiciles have a track history of responding very favourably when faced with challenges. In 2020, Cayman enjoyed the most significant annual increase in the formation of new insurance-related entities since 2017, and captive formations for the first half of 2021 are encouraging. Beyond captives, Cayman has established itself as a respected centre for reinsurance and insurance-linked securities,” he adds.
In 2020, the domicile ended the year with 36 new insurance company formations. Cayman finished the year with a total of 630 B licences, 23 C licences and 5 D licences, as well as 36 portfolio insurance company licences.
Colin Robinson, director at Strategic Risks Solutions and chair of Cayman International Insurance, says: “We’re still seeing a good amount of formations. I reckon that at year-end we’ll be near the top of the table for captive formations.
“There are a lot of US domiciles, but you’d probably say that most of them are not mature in terms of how long they’ve had legislation. Cayman is different—we have the longevity of being a domicile that has focused on captives for decades.
“We have the longevity of being a domicile that has focused on captives for decades.” Colin Robinson, Cayman International Insurance
Cayman’s trump card
If the formation statistics for 2020 are anything to go by, it’s clear that Cayman remains extremely attractive to captive owners. But is there a secret formula that helps Cayman stay at the top of the captives game?
“The formula is the same as it’s always been—sound legislation, effective and reasonable regulations, and a community of service providers that are best in class,” says Robinson.
Cayman’s flexible captive legislation is crucial, he says, adding: “It’s not a one-size-fits-all approach where you’re viewed as an open market reinsurer. There’s different supervisions undertaken based on the class of insurance licence you hold.”
Praise is heaped on the regulator by all interviewees, with Lynch noting: “The regulator is very much a trump card for Cayman from a marketing and business perspective. They’re very commercial, facilitative and flexible in terms of wanting to make sure they can meet demands.”
Fleming adds that Cayman offers a “stable and supportive regulatory environment”, in addition to best-in-class infrastructure and “flexibility in terms of captive investment policy design and implementation”.
“Capitalisation and surplus requirements in Cayman remain appropriate and proportionate to the complexity of the insurer’s operations,” he says. “Cayman retains a deep concentration of professional expertise framed within the broader financial services industry that less established captive domiciles may find difficult to replicate.”
In agreement, Lynch says: “History and experience account for an awful lot. There’s a deep well of knowledge within the jurisdiction. It’s tough to compete with the legacy of 45 years of experience we have within service provider offerings, such as lawyers, auditors, actuaries, insurance managers, underwriters and brokers.”
“From a risk management perspective, we need better quality data.” Adrian Lynch, Artex
A catalyst for change
The demand for captives is going to continue growing, says Fleming, as organisations face reduced coverage, rising insurance prices, and stricter conditions.
“The global health crisis has brought the benefits of using a captive insurer into focus as organisations deal with supply chain disruption, business interruption, and lower revenues. The ability to unlock surplus held within a captive and improve cash flow during a pandemic is a clear benefit of captive ownership,” he says.
According to Lynch, the risk appetite of many companies is changing.
“Many are seeing captives as an extension of what it is they are doing. It’s our job to be able to evolve and pre-empt many of those demands. Risk managers and risk management is becoming more sophisticated and thus the demands on captive managers are increasing,” he says.
“I will be very disappointed if the captive landscape remains the same over the next five to 10 years—we need to evolve. From a risk management perspective, we need better quality data.”
Robinson adds: “I don’t even know what the captive landscape will look like in six months. It’s interesting because you look at the numbers of captives for the last several years, and you’ll see a decline in the overall number. This is partly driven by the fact that Cayman has a large book of US-based healthcare clients and we’re seeing a lot of consolidation.”
Despite this consolidation and the resulting downturn in formations, companies in the healthcare space are going to become larger and more sophisticated, offering opportunities to do things they haven’t before, says Robinson. This includes, for example, introducing new coverages to their captive.
“The story of Cayman is a story of growth in line with healthcare captives. We still see new formations, particularly in B3 insurers, cells and portfolio insurance companies,” he adds.
Onshore, Vermont’s success has been the catalyst for other US states to implement captive statutes but, says Fleming, “the long-term success of newer captive domiciles will depend on state legislators’ support and policy continuity at the government level”.
He adds: “Not all US states have grown in terms of the number of captives, and only a handful possess the requisite legislative and regulatory sophistication to be seriously considered.
“Long-standing offshore captive domiciles with first-class infrastructure, sound regulatory environments, and deep industry expertise remain attractive propositions for captive owners.”
Aside from the emergence of competition onshore, Cayman must also keep its eye on offshore jurisdictions vying for captive business.
Lynch says: “Cayman has emerged as not necessarily a competitor to Bermuda, but as a real alternative. Unlike Bermuda, Cayman is not Solvency II equivalent. Approximately 90 percent of our business comes from the US, and they don’t necessarily need Solvency II, so Cayman is a real alternative.”
The key lesson: Cayman is and will remain competitive, against its fellow offshore jurisdictions and the budding growth onshore in the US. The Island’s solid legislation, supportive regulator, depth of service providers and long history are a winning combination. Yes, there will be competition, but Cayman will thrive.
Lynch concludes: “Competition between jurisdictions is inevitable—they all want a piece of the captive insurance business.”
