Since Premier McKeeva Bush announced in December that the government is seeking to actively persuade reinsurance businesses to relocate to Cayman, the reaction in Bermuda, traditional home to the offshore insurance industry, has ranged from dismissive criticism of Cayman to soul-searching. The latest salvo in the battle was fired at the Insurance Linked Securities Summit in Cayman in February.
Premier Bush used the event to reiterate government efforts to attract the reinsurance industry and named specifically the recently proposed changes to the Immigration Law, which introduce new categories for foreigners who have a ‘substantial business presence’ in Cayman and visiting business people as part of the initiative.
Calling for talent without borders, he contrasted Cayman’s position to that of Bermuda, saying that “we have shown that we can grow, without the malice, without the inhibitions of race, without the inhibitions of transport”.
Added to that, he noted, Cayman has “zero payroll taxes” and a lack of restrictions on foreigners purchasing property in Cayman.
Bush’s announcement that the Cayman Islands government was prepared to offer financial concessions, which will dramatically reduce operational costs compared with other financial centres, stands in sharp contrast to Bermuda, where the government, in the face of financial difficulties, decided to slash the funding of Business Bermuda and the Insurance Development Council; two of the Island’s promotional groups tasked with attracting international business.
Yet the question remains whether Cayman’s favourable attributes in terms of regulation, immigration rules, property rights, taxation and arguably greater business friendliness will be sufficient to woo reinsurance business from Bermuda.
Jeff Mulholland, managing director and head of insurance and pension solutions for the Americas with Societe Generale, thinks it is and argues that the European Solvency II regulatory capital regime is the main reason. By “kowtowing to the Europeans” and seeking third-country equivalence with Solvency II “Bermuda has made itself obsolete”, Mulholland said at the ILS Summit.
He noted that any regulatory capital regime will by definition not be based on economics and create arbitrage opportunities and stressed that firms are constantly evaluating the best jurisdictions for structures and arbitrages from a tax, regulatory and capital needs basis.
This was not about escaping the regulatory capital regime or light regulation but about sophisticated and appropriate regulation that understands the risks of policyholders and shareholders.
“It does not really mean that Solvency II has the highest capital charges. It means that they are just not right economically, so there are cases where Solvency II, as an example, charges less capital than an economic view of the risk and there are cases where the opposite is true,” Mulholland said.
Specifically in the life reinsurance and longevity space Solvency II is so inefficient that he believes a lot of this business will potentially relocate from Bermuda. The need for capital efficiency in the life reinsurance industry, which traditionally sought to provide capital relief to onshore companies in North America and Europe will lead to more transactions involving Cayman, he predicted.
“In the advisory work we do right now this is not a controversial statement,” he added. “This is a majority view and a view that has changed over the last year.”
Innovation will be one of the main driving forces, Mulholland said, and noted that synthetic longevity, risk transfer transactions based on how long a pool of people live against pension pools or against insurance policy pools of risk are in the process of becoming more mainstream.
Pressed whether there are no jurisdictions other than Bermuda and Cayman that could attract reinsurance business, Mulholland noted that Ireland and Malta are beefing up their reinsurance regulatory expertise. Depending on the objectives and types of entities that are involved he said he “would buy Maltese real estate in the EU” because it has the expertise of Ireland but is more efficient.
“But personally the big winner globally for what I call the ILS business and the capital markets related reinsurance business, I absolutely believe that is Cayman.”
Expanding Cayman’s product offering with the longevity business would come in addition to Cayman’s dominant role in catastrophe bonds.
The Cayman Islands Stock Exchange announced recently it has reached 100 catastrophe bond programme and series listings, with a total face value of approximately $8.5 billion. The CSX listed its first cat bond Ajax Re Ltd in 2007. The specialist listing rules of the Cayman Islands Stock Exchange are specifically tailored to support the approach of the of the Cayman Islands financial services industry in its drive to attract insurance linked and other captive reinsurance business.
Concern over the costly treatment of captive insurers by Solvency II was one of the reasons for Cayman not to adopt the capital regulatory regime so far. In 2011 the Cayman Islands had 739 captives collecting an all-time high of $11.76 billion in annual premiums with total assets growing to $68.5 billion.
In Bermuda, Cayman’s position on Solvency II is labelled as “isolationist” by Premier Paula Cox and politicians and the industry cling to the hope that the proposed system will ultimately not apply to captive insurers.
Andre Perez, CEO of Bermudan firm Horseshoe, said the implementation of Solvency II in Bermuda was “mostly driven by international reinsurance companies that actually needed Solvency II equivalency in order to make their model and their presence in Bermuda is still sustainable”.
However, he agreed that the new capital model has “penalised life reinsurers” and that specific segments of the market where Solvency II is not needed represent an opportunity for Cayman.
What is needed?
Bermuda still enjoys certain advantages compared to Cayman. Besides the density of the underwriting another key benefit for Bermuda is the short flight to New York combined with US customs clearance that is done locally on Island.
Perez sees access to the Cayman Islands as a major downside that is difficult to remove. But the process of attracting international business is multi-faceted and most of the elements are in place for Cayman, he said.
“Corporations are like people. They need to feel wanted and appreciated.”
What is missing is advertising, Perez said. “There has been a great improvement over the past two years in the Insurance Linked Securities market, but the outside world needs to know about it.”
Aon’s Daniel MacLean agreed that the pieces are in play but Cayman still needs the dialogue with the c-suite level people who can bring the capital. “That capital, be it private equity or hedge funds, they already trust the jurisdiction,” he said.
Clayton Price, the chairman of the Insurance Managers Association of Cayman, said he would like to see “that Cayman just forgets about Bermuda”. He believes there is a lot more going for Cayman than for Bermuda and the mission to attract reinsurance business can be led without worrying about what is going on in Bermuda.
He agrees that having a short route to New York is attractive and for investment bankers the preferred location traditionally has been Bermuda. “That is really not going to change.”
Price acknowledged Bermuda had to adopt Solvency II but said Cayman does not necessarily need to focus on the same market.
Robert Pires, head of Bermudan investment firm BIAS, in turn welcomes the competition from Cayman because it represents an effective check on the Bermudan government. “From my perspective the Bermuda government needs to be given a run for their money, because they have not been as constructive in dealing with business as Cayman has.”
A Bermudian himself he said Bermuda and Cayman have the problem that “they are spoilt”.
“I am concerned that the international business sector has had enough of self-centred islanders and that if they are going to leave Bermuda, they are more likely to go to Luxembourg or Switzerland or a low-tax jurisdiction such as Ireland where they have a number of well-educated people that do not have to be imported, that do not have to worry about term-limits, that do not have to worry about whether they are going to get long-term residence rights.”
Pires believes the fundamental value proposition both in Bermuda and Cayman needs to be reassessed with respect to the permanency and the retention of intellectual capital. “So I applaud the Cayman government for setting up the processes and procedures that intellectual capital can be retained here, because wealth does not exist without intellectual capital.”
The fact that running a business is very difficult when people have to leave after six or seven years also shows that all the comparisons between Cayman and Bermuda do not really matter, if intellectual capital is not first attracted and then encouraged to stay, as it is common practice elsewhere in the world.
This process may be more advanced in Cayman than in Bermuda but it is still ongoing. As Premier Bush rightly pointed out at the ILS Summit: “These Islands depend on people from outside to do business. It is where we get our money from.”
However, he also said that it is a pity that in this modern age a politicians still has to explain it because “some people are not learning fast enough”.