Captive insurance managers and the Cayman Islands Monetary Authority agree that the number of locally registered captives has dropped recently, and that overseas competition is growing, particularly in the U.S.
Both groups are confident that Cayman’s proportionate and risk-based regulation and its wealth of managerial and legal expertise ensure the industry’s future.
Ruwan Jayasekera, deputy head of insurance for CIMA, acknowledged that a recent decline of local captive insurers from 765 to 711 is the result of industry consolidation in the wake of the Affordable Care Act in the United States known as “ObamaCare.”
“Increased merger and acquisition activity in the healthcare industry, particularly as a result of the healthcare reforms introduced by … the Affordable Care Act, posed short-term challenges to the growth of the Cayman Islands’ international insurance market,” he told the Journal, “especially the healthcare segment, which accounted for approximately 45 percent of the Cayman-based international insurers.
“Due to these consolidations, Cayman has seen some other healthcare captives merging with each other or merging with captives in other domiciles.”
He particularly named “onshore domiciles in the United States” among Cayman’s chief challenges, citing domestic political pressures and efforts to rewrite and refine regulations “to be more attractive to captive insurance companies.”
In early 2012, for example, Detroit-based weekly Business Insurance – targeting risk and benefits managers, insurers, brokers and other providers of insurance products and services – reported moves by the U.S. state of Oregon to encourage formation of single-parent captives, association captives, branch captives and captive reinsurers, removing premium taxes from captives and charging a $5,000 annual fee instead.
Oklahoma, Tennessee, Hawaii and Florida have all moved to ease creation of captives, while Montana, Delaware and Utah are among the fastest-growing domestic domiciles. Texas opened for business in 2013, and Vermont, with nearly 1,000 captives, registered another 14 in July, and in August won its third annual Top U.S. Domicile award.
As of April this year, according to Business Insurance, Bermuda, with 800 captives, retained the top global spot; Cayman, which last year had 759 companies on its captive books, most of them healthcare, was second.
Oddly, the publication named Vermont as the third largest, numbering its captives at only 587 at the end of 2014, just more than half the state’s claim to have nearly 1,000 companies. Business Insurance named industrial giants MasterCard International, Swiss Re Life & Health America Holding Co. and Union Carbide Corp. among its more recent recruits.
Fourth was the state of Utah, named as the fastest-growing U.S. domicile, adding 80 companies in 2014, bringing its global roster to 422.
Finally, the Caribbean jurisdiction of Anguilla, like Cayman, a British Overseas Territory, is the fastest-growing offshore domicile. Its 379 companies make it fifth globally, up from 295 in 2013.
Elsewhere in the top 10 captive insurance domiciles, Bermuda, Cayman and Anguilla are hotly pursued by the Caribbean’s low-cost Nevis in eighth place, with 281 captives; Barbados, with 271 captives, a particular favorite among Canadian companies, in ninth.
Insurance Managers Association of Cayman Kieren O’Mahony said as a result of the consolidation, the captives that remain are likely to prove larger, better capitalized and ready to write such new lines of business as cyber, nonemployed physicians and employee medical stop-loss risk.
“The captive industry is now more mature and, consequently, corporate entities and service providers are putting their captives to more sophisticated use, particularly for coverage that cannot be purchased on the traditional insurance markets,” Jayasekera said.
“Even though there are several new offshore and onshore captive domiciles now compared to few years ago, [and] therefore increased competition among domiciles for business,” he said, Cayman remains an attractive jurisdiction for top-quality insurers.
Globally, the industry comprises approximately 65 captive domiciles – including 38 U.S. states seeking market share from the offshore jurisdictions – and, as of 2014, approximately 6,876 captive companies.
Still, Jayasekera says, Cayman retains its world-leading position: “In addition to Cayman’s tried and tested [for decades] legal regime and regulatory framework, which is in accordance with international standards, Cayman’s ‘intellectual capital,” that is, its world-class cadre of professionals with considerable international experience and expertise across a number of disciplines including company management, banking, auditing, legal, etc., would be hard to match.
A veteran “professional infrastructure,” with a tested understanding of the captive industry, Jayasekera said, “can react quickly to the needs of the companies.”
The counter, however, is that when a handful of domiciles predominated 20 years ago, industry expertise was concentrated in a half-dozen places, Cayman top among them.
Today, however, those 65 domiciles disperse talent, a more-or-less finite pool, across the globe, proportionately weakening any single jurisdiction.
Jayasekera acknowledged that regulatory regimes need to evolve, but said world-class companies, while attracted to reduced oversight, will continue to rely on long-established international standards to ensure their own integrity and a level playing field.
“Even in the face of increased competition, rather than adopting a less-stringent regulatory framework that would probably attract more insurance operations to the jurisdiction,” Jayasekera said, “CIMA strives to ensure that Cayman’s insurance sector is regulated in accordance with international best practices, while having consideration for the competitiveness and innovation that are required for Cayman to remain among the leading jurisdictions.
“It is CIMA’s view that well-managed companies would welcome robust regulatory environments which provide shareholders, companies and other stakeholders with recognition and confidence that they are being supervised based on international standards.”
He cited “proportionality of regulation,” that could still “encourage innovation and sophistication” while supporting “Cayman’s engagement in the vigorous international cooperation regimes,” while “recognizing the importance of the financial services industry to the Cayman’s economy.
“CIMA,” he said, was obliged to “maintain … its position to be a responsive, pragmatic and accessible regulator.”
Underlining Jayasekera’s point is the fact that, while consolidation may have taken a modest toll on raw numbers of Cayman-registered captives, no one has yet abandoned George Town for a place like Georgia, and promises made by U.S. regulators may not always be what they seem.
Flexibility, he said, remained paramount. One size by no means fits all.
“Cayman’s regulation is based on the principle of proportionality, where the regulatory framework takes into consideration the individual risk profile of the captive, more specifically the nature, scale and complexity of the risks assumed by the captive to ensure that the supervision is adequate and effective and not burdensome,” he said.
He explicitly rejected any sense that CIMA sought to “micro-manage” the industry, saying the regulator had struck a proper balance between regulation and operational freedom “mainly due to the built-in flexibility of its legislation that provide for risk-based, proportionate application of international standards and high levels of expertise and experience in all the relevant areas.
“Captives come in different variet[ies],” he said. “Those offering third-party business have a different risk profile, and so require a higher level of regulation hence the risk-based approach.
“Cayman’s legislation and the regulatory framework expressly recognizes the principle of proportionality and allows CIMA to exercise its discretion to determine the supervision level.”