Moving and choosing: Cayman offers options

Taking the decision to create a captive insurance company is not one that is ever taken lightly. Neither is choosing a domicile for that captive. So, what drives a company to take the decision to redomicile a captive entirely?

For most organisations, geographic proximity and ease of travel have made the decision of where to domicile their captive more straightforward.

However, there is a range of factors that should also be given careful consideration when selecting the most appropriate domicile, including solvency, capitalisation and surplus requirements; the approach, responsiveness and efficiency of the regulator; the stability of regulatory and business environment; legislation: company and insurance law and the availability of cell legislation; the maturity and quality of local financial services infrastructure; the availability of high-quality expertise and the convenience of travel to and from domicile.

Other elements to bear in mind include operational costs, taxation and accounting requirements, the compatibility of language, currency and culture, the convenience of time zone of the domicile, political stability and redomiciliation agreements.

If your organisation conducts the majority of its business in a territory other than the one in which the business is headquartered, it may be beneficial to establish the captive in a domicile close to that business.

And as everyone in the market is becoming increasingly aware, the number of domiciles grows with every passing year. In the US the number of states that have changed their laws to try and follow the example set by Vermont, which is now a leading captive domicile, grows with every passing year.

Even Canada has joined in, with the Province of Alberta enacting captive-friendly insurance regulations this year.

Cayman therefore has a lot of competition.

According to a report in March 2022 by SRS Cayman had 37 new captive formations and 28 closures in 2021, which was consistent with 2020 experience. Cayman has stopped tracking segregated portfolios (cells) although we believe there are more than 600 active cells in Cayman. The domicile also has a portfolio insurance company (PIC) structure which allows a segregated portfolio company to incorporate one or more of its cells.

Introduced in 2015, Cayman has 43 PICs with six licensed in 2021. Total premium increased by 11 percent from $20.6 to $23.1 billion. Cayman reports seeing less pure captive formations and more commercially oriented ventures, including interest from managing general agent (MGAs) setting up operations to leverage their client base.

Mike Scott, senior vice president–captive & insurance management, global risk consulting, commercial risk solutions at Aon, told Captive International that the predominant reason for owners looking to redomicile their captives in Cayman is going to be circumstance—dependent from captive to captive.

In terms of redomiciliations as a whole that Scott has recently worked on, probably the number one reason behind this would be along the lines of Cayman having a regulatory regime, particularly with respect to capital requirements, that’s attractive as compared with many other domiciles. The capital requirements that are in place here afford captive owners considerably more flexibility that you might see elsewhere in terms of the way they can deploy their capital and how they ultimately put their captive’s funds to work, while ensuring sufficiency of reserves to fund ongoing liabilities, he said.

“We have a well-established regulatory function here,” said Scott. “Captives have been present in Cayman since the mid-1970s, which gives captive owners some confidence that the regulatory regime is mature and that policyholder interests are well served.”

Asked how responsive the regulatory regime in Cayman is to captive needs, Scott described it as very responsive.

“We have a very good working relationship with the regulator, we find that when they challenge a proposal from a particular applicant or client, that challenge is appropriate,” he said. “There is a good understanding of the commercial needs of applicants for business and existing captive owners.”

According to Scott, the regulator demonstrates flexibility in working with captive owners to help them achieve their goals, and they’re very open and approachable. When you go to Cayman for an event such as November’s Captive Forum there is a highly visible presence from the Cayman Islands Monetary Authority (CIMA) on site at the conference.

Scott said that over the three days that the Forum takes place the regulators can be seen to be engaged in meetings with both current captive owners and prospects; they make themselves readily available for these meetings with the directors and owners of captives and this two-way dialogue is useful for all concerned.

“Outside of the Forum itself we regularly see captive owners meet with CIMA for face-to-face meetings when they visit Cayman for their board meetings,” Scott told Captive International. “All told, CIMA is well engaged with the licensee base and that’s certainly one good reason we’re going to continue to see a healthy flow of inbound traffic here in Cayman in terms of both redomiciliations and brand new captive formations.”

One sign of the interest in redomiciling captives into Cayman is the fact that this year’s Cayman Captive Forum will include a session on the first day about this very subject.

Looking at the state of the Cayman captive market at the moment, Scott said that from an Aon perspective the company is looking at a record year in its Cayman office in terms of new captive formations. He said that Aon had a very good year in 2021 but 2022 is likely to surpass that in terms of the number of new licensees.

The prevailing hard market conditions in the US, where much of Aon’s business originates, are causing businesses across the country to consider alternative options for managing their risks, and captives are almost invariably featuring in their conversations internally and with their brokers. In the current inflationary environment, Scott continues to anticipate rate increases and, as and when businesses come up to their annual insurance renewals, the likelihood is that they’re going be looking at cost increases; in those circumstances, utilising a captive may well begin to make sense for these businesses.

“The captive insurance industry here in Cayman is world-leading and our experienced, capable service providers are ready to engage and advise prospects and clients accordingly,” Scott said. “Industry trends here in Cayman often mirror life and commerce in the US. Increasingly, we are seeing interest in captive formations from US insurtechs, where new market entrants are looking to differentiate themselves from traditional insurers and are innovating technology-driven solutions in terms of underwriting and reporting, handling and settling claims.”

Scott said that Aon has recently worked with a number of insurtech companies to advise them on setting up affiliated captive reinsurance entities, so that they can participate in the profitability of their own books of business. Aon is also seeing an increasing number of enquiries in the life reinsurance space, where the domicile’s regulatory capital requirements are viewed favourably to many other jurisdictions. This, coupled with the availability of quality service providers in Cayman, is causing entities that may historically have set up elsewhere to consider coming to the domicile.