The attraction of innovation

Innovation has been linked to captive insurance for some time—after all, the invention of captives was in itself an innovative use of insurance.

However, in recent years innovation has increasingly been flagged up as something that will become increasingly important for captives, especially as the insurtech sector continues to evolve and captives’ parents embrace new technology if they want to stay ahead of the competition.

In 2017 the late Linda Haddleton, then chair of Insurance Managers of Cayman, specifically singled out innovation as a vitally important area for Cayman if it was to keep growing as a captive domicile. It was a message that was listened to.

This year a panel discussion at the Vermont Captive Insurance Association (VCIA) annual conference agreed that companies that innovate are usually able to gain a competitive advantage over their rivals and innovation continued to be a topic of conversation at other conferences and events over the course of 2022.

Innovation can of course come in a number of different guises, varying from the use of technology to funding insurance. Much therefore depends on the attitude of regulators to innovation.

Marcus Schmalbach, chief executive of Ryskex, told Captive International that one of the main reasons, other than to take advantage of tax laws, for captives to be set up on Cayman is that the regulators have a very open mind on innovation.

“Cayman offers the opportunity of being as innovative as you can and optimising the use of your captive due to tax,” Schmalbach told Captive International, highlighting insurtech as a particular area of interest in terms of innovation in Cayman.

“This has resulted in insurtechs wanting to assist captives, making it an interesting spot to work. Because of the regulation there, there are opportunities in Cayman for innovations, such as in the space of digital transformation for example or using the captive for a new kind of risk.”

Optimising processes

According to Schmalbach, the insurtechs that are currently operating in Cayman vary a great deal—there are some who want to act like a carrier but most insurtechs linked with the captive space are interested in optimising the processes that they use, for example by using things like blockchain technology, bringing smart contracts in for optimising the operating business of a captive.

Schmalbach said that some captives he has seen going to Cayman are working with artificial intelligence solutions, big data, offering better data to the captive and making better decisions in pricing for example.

“For them Cayman is a very interesting domicile especially as they are perhaps focusing on captives or reinsurance, as there are lot of reinsurance companies in that space,” Schmalbach said. “About 600 captives are based there in Cayman, so insurtechs are trying to bring in new solutions for that market. Insurtechs need a regulator that gives them the opportunity to be innovative and bring new solutions into a market. The more restrictive a domicile is, the harder it is for insurtechs to grow or bring new solutions.”

According to Schmalbach, Cayman’s regulators are allowing insurtechs a lot of leeway due to a perceived need to stay innovative and bring new ideas to the market.

He added that it’s clear that the initiative has been with insurtechs, many of which identified captives in Cayman as an opportunity. As a result, it’s been the insurtechs themselves that have been getting in touch with the captives and offering their solutions to them.

“Frankly, after not seeing too many captives that are progressively searching for new solutions or starting to talk to insurtechs themselves, it’s more likely the insurtechs used the regulation of Cayman Islands and used the opportunity of having a wide range of objectives over there and trying to get in touch with the insurance of the markets or the captives themselves to offer their solutions there—and the regulation framework of Cayman allows this in a much better way.

“For example, there are captive domiciles in Europe which are linked to Solvency II or some hard regulations, which therefore just don’t offer the same opportunities as Cayman or Bermuda.”

However, Schmalbach added, growth in this area has not been quite as much as some people had predicted.

“I would say that insurtechs in the captive space are not growing as fast as some people expected five to six years ago but it’s steady growth,” he said. “The attention of the captive managers is increasing due to some of the circumstances of the market itself. They need solutions, they need new capacity for example or they need to optimise their operating business. Cayman has always been on top of the heap in terms of creating new solutions and offering those new solutions to the captive market.”

Schmalbach added that the Cayman regulators fully understand that the startups for insurtechs can make Cayman attractive not just to the captives already there, but also to those captives that could decide to move to Cayman, especially because some insurtechs are coming up with some really disruptive solutions that could have a real impact on the captive business itself.

“It’s very important for Cayman to be in front of the pack and to be attractive—they have to be welcome to new solutions,” he said. “I think that one big innovation needed for the captive industry is capacity. I see a growing potential in the insurance-linked securities market or for alternative investments within the captive industry to assist with this, especially for emerging risks such as cyber or the climate change risks, which are as we have seen for example with Hurricane Ian coming more and more.

“I see there a link between alternative risk investments and insurtechs who could maybe deliver the technology to link those parties together, of non traditional capital providers and traditional captives.”

The importance of innovation in Cayman cannot be stressed more highly when looking at the importance of financial services as a whole to the economy of Cayman—the latter is dependent on the services it provides. As the world starts to reopen fully after the quarantines and restrictions imposed by COVID-19, it’s vital that Cayman stays at the cutting edge of all of the financial services, captives included, that it offers.

Other domiciles, with equally responsive regulators, are always trying to try and grow their share of the international business that makes use of them, such as Bermuda. Cayman cannot afford to be seen as a place where innovation is not taken seriously.