As the Cayman Islands continues to expand its footprint, Kieran O’Mahony explains why Canada is an unrivalled opportunity for captive business
The Cayman Islands are probably best known as being the leading captive insurance company domicile for both group captives and, of course, medical professional liability captives. While this position is a source of justifiable pride for the jurisdiction, given that we in the captive management industry are ‘joined at the hip’ with the risk management fraternity, it would be completely remiss of Cayman, as a jurisdiction, not to continually seek to diversify our risk, ie, our client base—by industry type, lines of business, licensee type, and of course, geographic location.
It is this latter aspect, geographic location, which drives Cayman to expand upon its existing business footprint in Canada and indeed, elsewhere, as the same could also be said of Europe, Latin, and South America. Cayman has been a domicile of choice for Canadian-owned captive insurance companies going back more than 35 years, meaning that Canadian-owned captives are not in any way new to Cayman, nor is Cayman in any way new to the Canadian market.
The Canadian content, as well as that from Europe, Latin, and South America, of the Cayman captive market has been generally overlooked, due to the predominance of the US as a source of ownership and/or risk location for Cayman-domiciled captives. It is true to say that Cayman, as the world’s second largest domicile, with well over 700 licensees, has historically actually been under-represented from the perspective of Canadian-owned captives. This indeed may be a source of some regret to those of us in the Cayman captive management industry, but it is also, by extension, a source of great opportunity.
As in most developed economies, Canadian corporations, whether a large multinational organisation involved in the financial or extractive industries (mining and energy), or a small- and medium-sized enterprise (SME) involved, for example, in the commercial or transportation industries, both corporation types base their insurance purchasing decisions largely on whether they wish to retain risk or not, and if they choose to retain, to what extent? Decisions about whether to transfer risk to a traditional insurance carrier or retain risk on the corporate balance sheets are made with the goal of reducing financial volatility by protecting the company’s earnings and/or cash flow, balanced against the total cost of risk. Obviously, laws, regulations and contractual requirements are also drivers in this decision tree analysis.
For a number of decades now, the larger and more sophisticated Canadian corporations (especially those in the extractive and commodity industries) have utilised their single parent captives as both a risk financing and/or funding tool and as a risk transfer vehicle. This has been accomplished mainly through the purchase of property and marine reinsurance capacity, behind their captives, in the international facultative markets. In more recent times, associations or groups from a single industry type within, for example, a defined geographic area such as a province or region, have combined to form group captives. Motor dealerships and trucking companies are good examples of this type of usage with a number of existing Canadian-owned Cayman-domiciled captives emanating from this space.
Here, those entrepreneurs with an educated, proportionate risk-taking appetite, based upon proper risk evaluation, funding and capitalisation parameters, retain and mitigate their shared risk, thereby reducing programme costs and capturing profits that would otherwise have been ‘lost’ to the traditional insurance market. It is probably this latter segment, the SME space, which offers the greatest potential for immediate expansion of Canadian-owned captives in Cayman.
As noted, Cayman is the leading domicile for group captives with 125 incorporated within the jurisdiction as of 30 September 2016. In recent years, where appropriate, group captive usage has changed as owners have started to utilise the Cayman segregated portfolio company (SPC) structures. There are currently 146 licensed SPCs in the jurisdiction and they can be used to ‘house’ the group or pooling of risk, within an individual segregated portfolio.
Currently, there are around 613 cells in Cayman. This type of usage can provide for greater flexibility, enabling owners of group captives to segregate the pooling of risk by geographic location in separate cells (subject to risk distribution requirements within each cell), or by pooling different lines of business in separate cells. An example of this option is forming an additional cell to pool employee benefits or medical stop-loss business, separate and apart from the cells that are used to pool the more traditional casualty lines. This allows the group captive to segregate different fronting carriers, (potentially) policyholders, pay-out patterns and limits, all while having the exposures housed and managed/governed separately, yet still underneath the same roof.
For many years, comfort with existing known and proven structures meant that Cayman was not necessarily the ‘go-to’ domicile for Canadian-owned captives. While that is unlikely to change overnight, over more recent years the Insurance Managers Association of Cayman (IMAC) has attended various Canada-focused conferences to raise awareness of Cayman as a domicile, its products and services, and the advantages that Cayman offers. Cayman signed a tax information exchange agreement (TIEA) with Canada in 2010, which became effective in 2011. The TIEA between Cayman and Canada allows for transparent and healthy business relationships between the two countries, as Canadian authorities can request and receive information relating to Canadian-owned Cayman entities, putting Cayman on a par with other leading Canada-focused domiciles.
Cayman has a 40-year plus, proven, successful track record as one of the two leading captive domiciles in the world. Given the very broad nature of financial services that Cayman has to offer—including banking, structured finance, trusts and corporate management—in addition to captive management, international insurance, reinsurance, life and annuity business, Cayman’s platform as a true international financial hub sets it apart from its major captive domicile competitors. This longevity of success as a world-class financial centre and attendant diversity of skill sets/industry proficiencies available within Cayman means that the domicile has hard wired ‘institutional knowledge’ across all of its sophisticated service providers. This includes not just insurance managers, but actuaries, auditors, bankers, lawyers and investment managers based in Cayman. These providers work in tandem to ensure that an optimal and effective captive business ecosystem exists for all of its clients.
Cayman also offers innovative, progressive, and leading edge legislation, developed in a consultative approach with industry stakeholders, the Cayman government and the Cayman regulator. This means Cayman has sensible, proportionate and risk-based captive regulation and legislation. A strong, deeply embedded compliance culture and robust framework, coupled with a stable and business-orientated government, further enhances Cayman’s advantages as a domicile of choice for Canadian-owned captives. Finally, the Cayman regulator offers considered, practical and efficient turnaround times to captive formations and business plan amendments.
In summary, Cayman is an important domicile for Canadian companies to consider when forming or reviewing existing captive insurance company operations because of the domicile’s strength, depth and history as a world-class financial centre. Cayman is a stable, reliable, and transparent domicile that provides the highest quality service and international cooperation.
The executing of the TIEA between Canada and Cayman further evidences Cayman’s standing in this regard.
