The insurance market in the Cayman Islands is divided into domestic business, captive insurance, special purpose vehicle (SPV) insurance and commercial reinsurance.
Domestic business is conducted primarily by companies incorporated in the Cayman Islands, although a number of approved external insurers are also permitted to write insurance (e.g., Lloyd’s of London). Some external insurers have manned offices in the Cayman Islands while others operate through local agents.
Captive insurance business may be taken to be all insurance (and reinsurance) business where the premiums originate from the insurer’s related business. The captive market began to develop in the late 1970s and there has been a steady natural growth since then. As of 31 December 2016, the Cayman Islands international insurance market reported total premiums of US$14.6 billion, with US$59.8 billion in total assets.2 The Cayman Islands is the leading jurisdiction for healthcare captives, representing almost half of all captives. Medical malpractice liability continues to be the largest primary line of business in the Cayman Islands with approximately 33 per cent of companies (re)insuring medical malpractice liability.3 The other significant class for captives is workers’ compensation coverage, which is the second-largest primary line of business in the Cayman Islands with 21 per cent of companies assuming this risk.4
SPV insurance is driven principally by the insurance-linked securities market, in particular, the catastrophe bond market. Cayman is the leading market for the formation and licensing of SPV insurers.
The commercial reinsurance market is an area seeing interest and growth. Together with a number of other factors, the introduction of a dedicated reinsurer’s licence (Class D) under the Insurance Law has helped facilitate this.
The body responsible for regulating the insurance and reinsurance business in the Cayman Islands is the Cayman Islands Monetary Authority (the Authority). The Insurance Division of the Authority discharges those responsibilities. The Authority operates independently of the government and meets international standards of supervision, accountability and transparency.
The Insurance Law was first enacted in the Cayman Islands in 1979. Since that time it has been updated periodically to ensure that the jurisdiction maintains a strong regulatory framework. At the end of 2012, the Insurance Law 2010 (as amended) (the Law) came into force, bringing a new insurance regulatory regime into effect. The new regime provides for greater regulatory transparency for existing and prospective licensees, and streamlines the regulation of licensed entities.
There are currently no proposals to achieve Solvency II equivalence for the Cayman Islands regulatory regime.
i Insurance licensing
All persons carrying on or wishing to carry on insurance business, reinsurance business, or business as an insurance agent, insurance broker, or insurance manager in or from within the Cayman Islands need to be licensed by the Authority. Insurers are licensed under one or more of the following categories:
- Class A – for the carrying on of domestic business or limited reinsurance business as approved by the Authority;
- Class B – for the carrying on of insurance business other than domestic business (however, a Class B insurer may carry on domestic business where such business forms less than 5 per cent of net premiums written or where the Authority has otherwise granted approval). Class B insurers are further categorised based on net premiums written, where:
- Class B(i) – at least 95 per cent of the net premiums written will originate from the insurer’s related business;5
- Class B(ii) – over 50 per cent of the net premiums written will originate from the insurer’s related business; or
- Class B(iii) – 50 per cent or less of the net premiums written will originate from the insurer’s related business;
- Class C – for the carrying on of insurance business involving the provision of reinsurance arrangements in respect of which the insurance obligations of the Class C insurer are limited in recourse to and collateralised by the Class C insurer’s funding sources or the proceeds of such funding sources that include the issuance of bonds or other instruments, contracts for differences and such other funding mechanisms approved by the Authority. Typically such licensees would be ‘cat-bond insurers’ or ‘special purpose insurers’; and
- Class D – for the carrying on of reinsurance business and such other business as may be approved in respect of any individual licence by the Authority.
Agents, brokers and managers are required to be licensed as follows:
- ‘insurance agent’ licence, for the soliciting of domestic business on behalf of not more al insurer and one long-term insurer;
- ‘insurance broker’ licence, for arranging or procuring, directly or through representatives, insurance or reinsurance contacts or the continuance of such contracts on behalf of existing or prospective policyholders; and
- ‘insurance manager’ licence, for providing insurance expertise to or for Class B or Class C insurers.
ii Organisation of licensees
Except for domestic business, where external insurers are permitted, only an entity incorporated under the Companies Law (2016 Revision) of the Cayman Islands (the Companies Law) or registered by way of continuation and that has a minimum of two directors (who have been approved by the Authority to be fit and proper persons) may be granted a licence by the Authority.
An insurance broker, an insurance manager, a Class A insurer or a Class D insurer is required to have a place of business in the Cayman Islands while a Class B insurer or a Class C insurer (unless it maintains permanently a place of business approved by the Authority) is required to appoint an insurance manager in the Cayman Islands that has been licensed by the Authority and maintain, at the insurance manager’s place of business (or at another location approved by the Authority), full and proper records of the business activities of the Class B insurer or Class C insurer.
iii Licensing requirements
Every licensee is required to carry on insurance business in accordance with its approved licence application and business plan submitted to the Authority (as modified by any subsequent changes as approved in writing by the Authority). To satisfy the Authority’s licensing requirements, an applicant is required to ensure that:
- the persons carrying on the business to which the application relates are fit and proper to be directors, managers or officers in their respective positions;
- it is able to comply with the Law and the Money Laundering Regulations (2015 Revision) of the Cayman Islands;
- the grant of a licence will not be against the public interest of the Cayman Islands;
- it has personnel with the necessary skills, knowledge and experience, and such facilities and such books and records as the Authority considers appropriate, having regard to the nature and scale of the business;
- the structure of its insurance group, if any, will not hinder effective supervision; and
- its capital complies with the prescribed level.
iv Capital and solvency requirements
Every applicant for an insurer’s licence needs to comply with the prescribed capital and solvency requirements. The prescribed capital and solvency requirements for each category of licence are set out in the relevant insurance regulations.
v Segregated portfolio companies (SPCs)
Since 1998, the Companies Law has provided for the formation of SPCs. An SPC is a single legal entity divided into an unlimited number of portfolios, the assets and liabilities gated from each other. The potential uses are varied and include rent-a-captives, life insurance, reinsurance and composite insurers. An insurer that is not a Class D insurer and not a Class B insurer incorporated as an SPC must be separately licensed for long-term and for general business.
In this context, ‘general business’ is all insurance business other than ‘long-term business’, which means insurance business involving the making of contracts of insurance:
- on human life or contracts to pay annuities on human life, including linked policies, but excluding contracts for credit life insurance and term life insurance other than convertible and renewable term life contracts;
- against risks of the persons insured:
- sustaining injury as the result of an accident or of an accident of a specified class;
- dying as the result of an accident or of an accident of a specified class;
- becoming incapacitated in consequence of disease or diseases of a specified class; or
- being contracts that are expressed to be in effect for a period of not less than five years or without limit of time and either not expressed to be terminable by the insurer before the expiry of five years from the taking effect thereof or expressed to be so terminable before the expiry of that period only in special circumstances therein mentioned; and
- whether by bonds, endowment certificates or otherwise whereby in return for one or more premiums paid to the insurer a sum or series of sums is to become payable to the person insured in the future, not being contracts falling within (a) or (b).
vi Portfolio insurance companies (PICs)
The relevant provisions of the Law allowing SPCs to register subsidiary companies as PICs with the Authority came into force on 16 January 2015. A PIC may be able to write insurance business without the need for a separate insurance licence, provided its SPC parent is licensed. The principal aim of PICs is to provide SPCs with a mechanism that facilitates risk-sharing arrangements between portfolios. The introduction of PICs therefore provides a means by which SPCs can transact insurance business between segregated portfolios. PICs also facilitate the incubation of smaller captives, which might wish, at a later stage, to spin-off as stand-alone captives.
PICs have the express power to contract with the parent SPC, any segregated portfolio of the parent SPC and any other PIC related to the parent SPC. This is of particular importance as it now allows for segregated portfolios within the SPC structure to participate in different portfolio insurance strategies. Each PIC is a separate legal entity from the SPC and any other PIC. This facilitates the drafting of legal documentation as each entity is a distinct legal person, which in turn streamlines compliance with the requirements of the Companies Law.
The Law also provides an option for the automatic novation and vesting with the PIC of all assets and liabilities of a segregated portfolio either at the time of registration of the PIC with the Authority or within 30 days after registration – all of which makes it easy for existing SPC insurers to incorporate a PIC and to move the insurance business from a segregated portfolio to a PIC.
It is expected that implementation of the PIC provisions will give SPCs greater appeal to smaller captive users and captive programme providers. A captive can be established on an SPC platform using a PIC and, as and when the programme grows to the point of justifying its existence on a stand-alone basis, the PIC can simply be spun-off from the SPC and apply for its own insurance licence.
vii Share issuances and transfers
A licensee cannot issue shares totalling more than 10 per cent of its authorised share capital without the prior approval of the Authority. In addition, a licensee cannot transfer shares totalling more than 10 per cent of the issued share capital, or total voting rights, without the prior approval of the Authority.
viii Annual requirements
Every insurer is required to pay the prescribed annual fee on or before 15 January every year after the first grant of its insurance licence. A licensee who fails to pay the prescribed annual fee on time may be subject to penalty fees.
Every licensee is required to comply with continuing requirements under the Law. As such, all licensees are required to appoint auditors approved by the Authority. In addition, and subject to certain exceptions, all insurers are required to submit by way of annual return to the Authority audited financial statements; an actuarial valuation of their assets and liabilities; a certification of solvency; written confirmation that the information set out in the application for the licence (including the business plan), as modified by any subsequent changes approved by the Authority, remains correct; and such other information as may be prescribed by the Authority.
ix The position of unlicensed insurers
An unlicensed insurer carrying on insurance business in the Cayman Islands would be guilty of an offence and liable on summary conviction to a fine of CI$100,000 or to imprisonment for a term of five years, or to both.6 In the case of domestic business, insurance brokers can be permitted by the Authority to place limited amounts of such business with unlicensed foreign insurers. Accordingly, an unlicensed insurer with whom a broker can place insurance business pursuant to any such dispensation would not be considered as carrying on insurance business.7
For the purposes of the Law, a person would not be considered as carrying on insurance business solely by reason of the fact that the person effects or carries out a contract of reinsurance with an insurer in the Cayman Islands, unless that person’s principal place of business is in the Cayman Islands.
x Intermediaries and the role of the broker
As noted above, the Authority may grant a special dispensation to an insurance broker to place a contract of domestic business with one or more insurers that are not licensed under the Law. Such dispensations are granted on a case-by-case basis only, and are subject to review at such intervals as the Authority may specify. An insurance broker who has not been granted a special dispensation shall be personally liable to the insured on all contracts of insurance placed with insurers not licensed under the Law in the same manner as if the insurance broker were the insurer.
In addition, an insurance broker is prohibited from entering into a binding authority with an insurer other than a Class D insurer.8 However, the Authority may grant a dispensation to an insurance broker for a fixed period (despite the duty of the insurance broker to act for the prospective insured) to enter into a binding authority with an insurer if it is satisfied that the insurance broker needs (in terms of additional capacity, policy coverage, cost savings or otherwise) the binding authority to be permitted. Such a dispensation granted by the Authority would be subject to any conditions that the Authority prescribes, including restrictions to lines of business, specific contracts, types of client and requirements for disclosure, and review at such intervals as the Authority may specify.
Under the Law, an insurance broker shall maintain in force, and comply with the conditions of cover of, professional indemnity insurance placed with an insurer licensed to carry on domestic business (or an insurer accorded special dispensation by the Authority) and provide for an indemnity of not less than US$1 million for any one loss, or such other figure as may be prescribed by the Authority. The professional indemnity insurance shall extend to include the activities conducted on behalf of the insurance broker and be subject to review by the Authority. In the event that the professional indemnity insurance is invalidated, becomes voidable or is withdrawn, cancelled or not renewed, the broker shall immediately notify the Authority and shall forthwith cease to solicit further insurance business until the professional indemnity insurance has been reinstated or replaced.9
News source: Mondaq