Life annuity risks and the appeal of Cayman

Why is Cayman a popular jurisdiction to reinsure/retrocede life annuity risks?

There are two key reasons. The first is Cayman’s regulatory framework. Cayman’s decision to not adopt Solvency II equivalence provides greater flexibility yet enables licensees to develop Solvency II-equivalent capital models if so desired. That’s a fundamental benefit in this space because the Cayman Islands Monetary Authority (CIMA) framework allows managers to develop their own internal capital model for regulatory capital purposes and provides them the ability to structure their regulatory capital using alternative forms of capital and risk transfer mechanisms. This provides greater options on how one holds regulatory capital.

These characteristics permit sponsors looking to set up a reinsurer in Cayman optionality to structure regulatory capital in an efficient manner, allowing them to optimise the use of available capital. This is particular to Cayman and optimising placement of capital is a significant benefit. Establishing a reinsurer requires significant capital, so when sponsors or allocators of capital establish a reinsurer for longevity risks they are able to apply that capital more efficiently, resulting in the Cayman jurisdiction being a very appealing domicile.

The second aspect is around the asset management industry. The Cayman Islands is the largest jurisdiction for the asset management industry with approximately 13,000 mutual funds and approximately 15,000 private funds registered. As the go-to jurisdiction for funds, asset managers are familiar with the Cayman Islands and our regulatory framework. With asset managers increasingly entering this sector, being familiar with the regulatory framework and CIMA enables asset managers to understand what CIMA’s expectations are of licensees.

Additionally, there’s a strong, well established and very experienced service provider network in Cayman that supports these asset managers.

Where does the majority of this business come from?

It’s primarily ceded from the US into Cayman, although there are some reinsurers accepting risk from Canada. However, sponsors are domiciled across the globe including the US, UK, EU and Asia.

How long do you see this continuing?

I’m fortunate because I’ve been at Walkers for just over four years and it started shortly after I joined the firm, so I’d say it’s been going for almost three years. Our reinsurance practice group in Cayman, Bermuda, Guernsey and Ireland has been regularly engaging with a number of clients or sponsors who are entering or looking to enter this space. Our experience shows this interest is definitely gaining more traction and growing, so much so that we are continuing to build our practice group to serve the anticipated growth.

The CIMA statistics show class B(iii) and class D reinsurers growing in Cayman. We worked on the last class D licence and are currently working with clients who are submitting class B(iii) and class D reinsurance licence applications, as well as establishing sidecars and class C special purpose vehicles.

Are the regulators responsive to the needs of those who bring in this business?

Yes—it’s an area that the Cayman Islands as a jurisdiction has been focused on for quite some time. I worked at CIMA from 2010 to 2014 and there were prominent discussions with senior management on how we could develop the reinsurance industry in Cayman. It’s a sector that CIMA, the Cayman Islands government and the jurisdiction as a whole have diligently focused on. All the hard work and collaboration between the government, CIMA and the industry is coming to fruition with many applicants seeking to be licensed and regulated in Cayman.

CIMA understands the benefits that the reinsurance sector brings to the Cayman Islands and for its service providers. It has unified the jurisdiction in working towards a common goal: growing the sector on the island. The Ministry of Financial Services held a roadshow session recently with a breakfast in London, and one of the areas they were promoting was explaining why Cayman is attractive for re/insurance entities.

So it’s important to spread the word about Cayman?

Absolutely! One of the reasons this sector is attractive to us as a jurisdiction is that establishing a class D reinsurer in Cayman requires a physical presence. A class D licensee is required to have an office and staff and CIMA expects that you have executive management based on-island, so you’ll see C-suite or at least a core component of that, here in Cayman. This will include CEOs, CFOs, and chief underwriting/risk/compliance officers being based here in Cayman.

Attracting experienced, knowledgeable and well established thought leaders to the island and having their expertise here enables us not only to build the jurisdiction as a centre of excellence for this sector but also to harness this experience to develop our youth and offer more technical and senior employment on the island.

With Walkers having a long established and steadfast focus on diversity and the development of our island through the engagement and development of our youth, we are thrilled at the continued development of this sector on our shores.

Looking further forward, and we at Walkers have been enthusiastic in our internal discussions on this, we think that this growth and the physical presence aspect will facilitate the Cayman Islands as the jurisdiction you have to be in to be in this business, to be in the know and also to facilitate transactions. That’s a compelling proposition for us at Walkers, a fantastic purpose for the government, and an exciting opportunity for our financial services sector and our community.