Cayman captives gain complexity

Comparing the number of captives in the Cayman Islands – 711 as of Sept. 30 2016, up from 709 captives 12 months ago – would suggest a flat market. But the pure statistics and consolidation in the industry masks a strong influx of new captives and the increasing complexity and amount of business carried out by insurance managers in Cayman.

In the first nine months of 2016, the Cayman Islands Monetary Authority issued 33 new licenses, a significant jump from 22 for the entirety of 2015 and 23 for all of 2014.

“Given the continued soft insurance market and increased competition from many newer domiciles, we are doing exceptionally well to keep adding on that number of new licensees,” says Kieran O’Mahony, chair of the Insurance Managers Association of Cayman.

“And there are at least another 10 applications in the hopper with CIMA,” he adds. “So we could get to 40 or 45 new licenses being issued this year, which is a tremendous achievement.”

On the surface, the trend toward consolidation in the captive insurance industry continues. The Affordable Care Act and healthcare reform in the United States have forced mergers and acquisition in the sector. This amalgamation at the hospital system level leads to the merging of underlying captives in Cayman, the global leader in healthcare captives.

O’Mahony says even the repeal of Obamacare, proposed by president-elect Donald Trump, is unlikely to stop the trend. “In the immediate future, there will not be any impact because even if Trump changes everything, trains have left the station for a number of those mergers and I expect them to continue.”

Cayman, as a mature domicile for self-insurers since 1976, will also naturally see statistics plateau as a certain number of captives reach the end of their life cycle each year.

Statistics alone neither tell the whole nor the most important part of the story, says O’Mahony, which is: “New shareholders in various guises – as single parent captives, as group captives, as SPCs and as larger third party underwriters – are coming to the island.”

Other than healthcare, Cayman is a major domicile for group captives, aimed at small and medium-sized businesses that instead of each forming their own captive, share their risk and purchasing power.

Group captives can have anything from a dozen to 100 members, which in aggregate results in a significant premium volume.

Cayman is also a well-known center for “cell” companies or segregated portfolio companies (SPCs). With about 613 cells within 146 SPCs, cell companies range from straight, simple pass-through entities used to access reinsurance capital to very large, complex programs.

Both group captives and SPCs compete with and tend to suppress the number of single captives, the IMAC chair says. “We are somewhat a victim of our own success in that regard.”

Portfolio insurance companies (PICs), introduced in 2015, which allow standalone corporate entities to be wholly owned by individual cells within a segregated portfolio company, are also gaining in popularity. Following what was essentially a “build it and they will come” strategy, there are now six portfolio insurance companies up and running and a number in the pipeline.

They can be used in a number of ways, from being a receptacle vehicle for business that is transferring from other jurisdictions to Cayman and on to reaping the benefits of a segregated portfolio company formalizing greater corporate governance and oversight of an individual “cell.”

Because a portfolio insurance company is a separate legal entity, it can have its own board, allowing stakeholders to appoint directors and have more input in its governance.

“It is better from a governance and oversight perspective. And we see it being used as an incubator for a future captive that will eventually spin off and form its own single parent captive,” says O’Mahony. “It’s gaining traction and I see … great potential for it.”

Meanwhile, there is a change in the nature of the insurance business that Cayman attracts, with increasingly complex and larger entities that write unrelated party business for a broader palette of risks, which require more management time and effort.

This includes private equity and hedge fund-backed vehicles that write third-party business using various structures.

“The ownership of these entities is more complex, the business plan is more complex and the governance around it has to be more complex as well,” O’Mahony says.

Moreover, he says, existing captive programs are used to manage different forms of risks, for example, equipment maintenance and medical stop loss.

Hospitals and other large companies that use expensive equipment, from computers to specialist diagnostic equipment, have dozens of warranty and maintenance programs to manage. Putting these programs into an insurance policy reduces a huge number of vendor relationships to just one, brings benefits of scale and manages the inherent volatility better. Medical stop-loss, in turn, is driven by U.S. healthcare reform.

“Changes in lifetime limits and on the medical benefits stop-loss side mean that companies now have to manage that risk differently, and a captive is a fantastic vehicle for that” the IMAC chairman says.