The Cayman Islands captive insurance industry’s most pertinent issue today is the current global financial crisis. Rounding out the Top 3 pertinent issues to our industry is increased competition and a potentially changing regulatory environment; however these two issues are not necessarily mutually exclusive to the current global economic problems.
Global Economy: Potential Effects on Individual Captives
The majority of the Cayman Islands captives originate from the United States, therefore our industry needs to understand and be sensitive to the challenges United States corporations may face due to the economic climate. Some of the major identifiable challenges that may affect Cayman captives are:
Significant decreases in investment market value, which may cause a significant impairment in the net worth of captives.
The uncertainty that surrounds AIG, since its subsidiary, Lexington Insurance Company, is a significant issuing carrier for medical malpractice captives that require the use of a US insurance carrier to write insurance policies which then reinsures the risk to a captive.
Significant decreases in the investments being used as collateral within reinsurance trusts or being used as collateral to issue letters of credit in reinsurance arrangements. In addition to the decrease in the value of the investments there is a concern that financial institutions will decrease the credit available for various forms of collateral thereby putting strains on the parent corporations to inject additional capital into the captive. Included in the various forms of collateral concerns is an incoming letter of credit issued to a captive from a regional bank within the United States – how financially stable is this bank?
Global Economy: Potential Effects on the Insurance Captive Industry
The insurance industry is a cyclical business. It has its soft market, like the one we are in, where the commercial insurance premiums charged are low relative to the risk assumed by the commercial insurance carrier. It also has its hard market where the commercial insurance premiums charged are high relative to the risk assumed by the commercial insurance carriers. Some of the factors that affect the changing of the cycle are catastrophic insurable events such as hurricanes, and loss of ancillary income such as investment income. With the economic conditions most insurance companies had to take significant investment losses on their investment portfolios, which decreased their available surplus and caused net losses. It is anticipated by many that this will likely cause a hardening of the commercial insurance market in the future. If the insurance market starts to harden, it normally means that many companies look to more economical risk transfer mechanisms, which tends to mean that the captive insurance market activity increases. In other words, the captive industry could potentially benefit. The pessimistic view however is that with less credit available in the market, many companies seeking to form a captive won’t be able to afford the capitalization requirements as they will need that cash flow for other parts of their operations due to the financial constraints caused by the global economy. In addition to fewer formations, existing captive owners may try to strip as much surplus out of their existing captives as possible, which could lead to future capitalisation shortfalls.
Many countries in the world have enacted captive insurance legislation (Bermuda, Guernsey and British Virgin Islands to name a few). Also, over 30 states in the United States have enacted captive legislation. There are several states with strong captive insurance markets such as Vermont, Hawaii and South Carolina, but there are many, many more that have no captives or only a handful. The Cayman Islands captive market continues to be the second largest domicile in the world (as long as you do not aggregate all of the captives in all of the states within the United States) however it must stay actively involved in working to maintain its strong presence in the worldwide market.
One of the key features of the Cayman captive market is its intellectual capital and its regulatory environment. There are many people who have been in this industry for a long time and as an industry we work to share that knowledge to keep our market competitive. The Insurance Managers Association of Cayman is the key component to enhancing the knowledge within the industry to ensure we maintain a high level of service within the industry. The annual Cayman Captive Forum held the week after American Thanksgiving, is the highlight educational event, and demonstrates how well IMAC operates as an association to promote the Cayman Islands captive industry. With attendance at the 2007 event of 861, not only does the industry work to educate the local industry partners, but they also do so for the overseas industry partners and captive owners alike.
In the 2007 Cayman Captive Forum Benchmarking Survey, 176 of more than 700 captives in the Cayman Islands responded to 47 questions pertaining to their Cayman Islands captive. One of those questions was your reasons for locating in Cayman included….. The top three responses to this question in order were regulatory familiarity of our industry, cost of capital and clarity and rapid response from regulatory authority. The response to this question clearly illustrated to IMAC what we already knew, which was that the regulatory environment in the Cayman Islands was a key feature to our competitive advantage.
With the regulatory environment being such a large part of our competitive advantage, our concern is that the various international committees such as the International Monetary Fund, the Organization for Economic Cooperation and Development, the Caribbean Financial Action Task Force and the Financial Action Task Force will once again scrutinise the way in which the Cayman Islands regulates our industry and in turn monitor Cayman Islands legislation whilst looking for change. The overall industry feels that our 30-plus years of successful regulation through a principled, risk-based approach, legislated by the Insurance Law has proven the test of time. However, we are certain that there will be continued international pressure to amend this leading edge approach to adapt to other international forms of regulation. We are confident that any enacted legislation will first be addressed through a consultative committee between the Cayman Islands Government and the Industry, of which the Insurance Managers Association of Cayman will be actively involved.
The Cayman Islands Government has established an Economic Advisory and Monitoring Group to examine all financial services sectors in the context of the global financial situation. The Cayman Islands Monetary Authority and the Central Government are in continuous consultation with the private sector regarding various domestic and international market developments to discuss what the private sector needs to implement any changes in strategic focus.
There are other issues that the Cayman Islands captive insurance industry is dealing with, but at the present time, those listed above are the most pertinent.