CSI International Underwriting (Cayman) Ltd.
Price increases in commercial insurance have encouraged long-term care facilities to consider captives, as CSI International Underwriting’s JS de Jager tells CIT
Price increases in commercial insurance have encouraged long-term care facilities to consider captives, as CSI International Underwriting’s JS de Jager tells CIT
What is it about long-term care that suits the use of a captive vehicle for insurance needs?
Our experience at CSI, especially in the last couple of years, is that very visible price increases in standard commercial insurance lines have encouraged these types of facilities to seriously consider taking greater control over their insurance and risk needs. Either as a single parent captive or a group captive, this has become a must-have for many long-term care facilities and associated service providers. The risk management, risk sharing and claims management techniques available to captive owners and policy holders, together with financing techniques through a captive vehicle, can make for more effective risk control and management of the insurance needs of a long-term care facility.
How high are the capital requirements for a captive in the Cayman Islands?
The Insurance Law in the Cayman Islands provides for the following minimum capitalisation, which must be maintained as net worth at all times:
The below is the minimum capital required (MCR) to operate under the law, but the law also sets out, in addition to that, the prescribed capital requirement (PCR), which is the minimum capital required under the law to operate in a sound and prudent manner. This, of course, does not affect a Class B(i) in practice as the MCR equals the PCR but becomes more relevant in the case of a Class B(ii) and Class B (iii) as prescribed in Schedule 1 of the Insurance (Capital and Solvency)(Classes B, C and D Insurers) Regulations of 2012. As insurance manager, CSI will assist the prospective client in calculating its PCR should it fall in the Class B(ii) or Class B(iii) bracket.
The law does not provide for specific net written premium to net equity ratios, but unless there are exceptional circumstances, the Cayman Islands Monetary Authority (CIMA) will expect a maximum starting ratio of 5:1, in the expectation that this will reduce to 3:1 or better over time as the company develops.
The typical captive will need to be licensed under the law as a Class B insurer and an application for a Class B insurance licence has to be made accordingly, for business other than domestic business in respect of which:
Class B(i): at least 95 percent of the net premiums written will originate from the insurer’s related business;
Class B(ii): over 50 percent of the net premiums written will originate from the insurer’s related business; or
Class B(iii): 50 percent or less of the net premiums written will originate from the insurer’s related business and annual net earned premiums are less than $16,400,000. Class B(iii) was amended in 2013 to introduce a new sub-category, Class B (iv), and it is expected that supporting regulations will be amended for full implementation by the end of Q1 2014.
What can long-term care providers do to meet these?
Upon registration and licensing of a new captive insurance company say, for example, a Class B(i) insurance company, CIMA requires proof of funds deposited into the company’s bank account to meet the minimum capital requirement. This can be by funds raised from the shares and premium on shares issued on registration of the company, as issued to the shareholder (single parent captive for full capitalisation) or shareholders (group or association captive combining to meet the requirements). Thereafter, there are various financial instruments, referred to as admissible assets, that will be taken into account by CIMA when calculating the PCR for reporting and regulating purposes, and they include but are not limited to the following:
Class 1 assets:
(i) Cash and cash equivalents including time deposits and money market funds rated “AA” or higher;
(ii) Investment grade obligations of government or central banks rated “AA” or above;
(iii) Incoming irrevocable letters of credit where acceptable by CIMA;
(iv) Loans or notes receivable where supported by irrevocable letters of credit acceptable by CIMA;
(v) Income tax receivables; or
(vi) installment premiums not yet due.
Class 2 assets:
(i) High investment grade bonds or paper rated “AA” or higher;
(ii) Exchange rate derivative contracts, designated and accounted for as hedging, with a maturity of one year or less and interest rate derivative contracts, designated and accounted for hedging, regardless of the maturity date;
(iii) Receivables from insurers or highly rated reinsurers;
(iv) Unearned premiums recoverable from insurers or highly rated reinsurers;
(v) Unpaid claims and adjustment expenses recoverable from insurers or highly rated reinsurers outstanding for less than one year; or
(vi) Gold and other commodities acceptable to CIMA.
There are various further classes of admissible assets (Class 3 assets to Class 8 assets) and CSI (www.csi.ky) and/or CIMA (www.cimoney.com.ky) is always on hand and willing to discuss any questions the client or prospective client have regarding the classing of assets to meet the capital requirements.
If capital requirements are too much, what else can long-term care providers do to get their own captive?
The specific use of a captive for long-term care facilities creates a structure whereby individual facilities have found that they can share risk within a defined layer of exposure when reviewing premiums and their access to the reinsurance market, and also further close the gap to greater predictability. CSI creates and sets up group or association captive insurance companies whereby various long-term care providers group together to form a captive, thus sharing the initial cost and capital requirements.
With the recent amendment to the law that introduced the portfolio insurance company (PIC), captive prospects can also consider the option of establishing a PIC under a segregated portfolio within a new or existing segregated portfolio company (SPC) structure, given the advantages unique to PICs such as the ability to contract with other PICs within the same SPC to facilitate reinsurance, quota share and risk pooling, etc. Supporting regulations are still being drafted to implement the new PIC legislation, but it is an option that prospective clients can bear in mind.
What tax advantages are there for a long-term care provider using a captive?
While the risk management benefits of captives are primary, the real draw to Cayman is due to regulatory purposes such as minimum capital requirements, ease of set-up and the advantages of not having to deal with the various individual state regulations and taxes as well as not having to deal with the National Association of Insurance Commissioners. Although a company would get the same tax deduction for paying premiums to a captive as to a regular insurer, US ownership of the captive means either it or the shareholders will still be subject to US tax on a current basis.
A simple tax example is where under a self-insurance programme, a corporation will deduct casualty losses incurred as they are paid. However, a captive may be able to accelerate casualty loss deductions, because an insurance company deducts not only paid losses, but also the present value (PV) of its loss reserves, which are provisions for future payments on incurred losses.
As the captive programme adds additional years, policies and programmes, the potential tax savings will become even more significant.
All of the above depends on whether or not the captive is considered ‘insurance’ for US tax purposes. A single parent not-for-profit captive will not get this deduction for tax as it will not be considered ‘insurance’ for US tax purposes, but, on the other hand, they do not care because as a not-for-profit, they are tax-exempt.
Captives considered ‘insurance’ are getting a deduction for the movement of the PV of their loss reserves subject to some IRS discounts. As the loss reserves increase, so does the deduction
Each state in the US, for example, will have its own insurance law that will cover taxes payable (procurement taxes, premium taxes, etc). Working closely with tax consultants during the captive insurance company set-up and licensing process is encouraged by CSI and by CIMA. Appropriate tax advice is a key element in the successful operation of any captive.
