Why would anyone want to start a reinsurance company in the Cayman Islands?

What do most people do there anyway?

When I joined Greenlight Capital Re in 2005, I heard many variations on these questions. Most came from John Grisham fans who knew very little about the Cayman Islands. Mr Grisham never misses a chance to take a stab at this verdant isle.

The truth is, we couldn’t think of a better place to operate a reinsurance company.

Let me give you a bit of background and history on Greenlight Capital Re, the reasons we picked the Cayman Islands as our headquarters and a brief list of the local business and government partners that have helped make us a success. I will also provide a snapshot of our future goals and explain why we expect more reinsurers will be operating out of the Cayman Islands in a few year’s time.

Greenlight Capital Re

In August of 2005, two of us were operating out of the Café Del Sol. Our company infrastructure included a couple of laptops, two pay-by-the-minute cell phones and a few bucks in the bank, courtesy of a number of private investors. Within a few months, we had great office space, complete IT infrastructure, and, yes, a proper cell phone plan. We also began establishing a great rapport with the Cayman Islands Monetary Authority and Immigration.

By 2006, we had hired additional staff including two other members of our management team. Bart Hedges joined as President and Chief Underwriting Officer from Platinum’s Bermuda operation and Tim Courtis joined as Chief Financial Officer from Swiss Re’s Barbados companies. We began underwriting business in 2006, and by August of that year, we had achieved an “A-” (Excellent) financial rating from AM Best and ended the year with CI$74m of gross written premium.

In 2007, we continued to expand our workforce and our client list. As people began to believe in our story, and with the support of our board of directors, we went public in May 2007 (NASDAQ:GLRE) and raised additional capital. By the end of 2008, we were fully staffed and had generated gross premium of CIS$162m for the year. More importantly, we established ourselves as a key player in the worldwide reinsurance industry. Our clients are from the UK and the rest of Europe, the US, Bermuda and the Cayman Islands. We see business from all of the major and not-so-major brokers in the world.

So, what exactly does Greenlight Capital Re do? As a reinsurer, we are the insurance companies’ insurer. When a company becomes concerned with the amount of risk it has on its balance sheet, it calls on a reinsurer to help transfer some of that risk for a premium. The risk can manifest in many ways: too many workers in an earthquake zone; too many houses in a hurricane zone; the possibility of large lawsuits; or the potential for a rash of medical claims, work-related injuries or car accidents.

We take a hands-on approach to our business. We thoroughly analyse every account. This starts with a review of the historical profitability of a particular client’s business. We then look at the market environment for the business.

Has competition increased or decreased? Have insurance laws in the jurisdiction changed? How has our client responded to these challenges? What might happen next year?

As a part of our due diligence, we critically analyse the client’s management team as well as its history and success in the business. We audit our clients and potential clients to make certain their processes and controls are robust. If both sides are still happy to continue, the final step of the process is to construct a reinsurance contract that both parties agree is effective in mitigating the client’s risk and is fair in price and structure. It is a time-consuming process that can take six months from initial client submission to a final bound contract.

In addition, at Greenlight Capital Re, we take more of a retroactive approach to the business. Most reinsurers write hundreds or thousands of contracts in a year – we write dozens. Each contract is significant in size and is important to our client and to us. We believe in meeting with our clients face-to-face and couldn’t think of a better place to have these interactions than the Cayman Islands where the climate and people are beautiful and there is so much to do. We believe our location has been an important part of differentiating our company and has aided our success.

The most critical asset of a reinsurer is its human capital. Without the right people to market, analyse and negotiate the contracts, we could easily make poor decisions that would lead to financial difficulties for our shareholders and clients alike. We are fortunate at Greenlight Capital Re to have one of the best teams in the industry. Our experienced staff provides us with the appropriate risk management, accounting, financing and operating environment. We have attracted people from all over the world who joined because they were interested in being part of something new. But we also rely on a spectrum of individuals, companies and government agencies to help ensure our success.

Supportive partners

As the first global reinsurance company to operate in the Cayman Islands, we did wonder how we would be embraced when we started up in 2005. However, we quickly found that Cayman is awash in reinsurance capital and expertise. At the end of 2008, we had 777 active captives generating CI$7.8b premium and US$36.9b in assets that essentially all act as reinsurance companies. In addition, Cayman is one of the leading jurisdictions for sidecar and catastrophe bond activity. While describing all of the support we have received would not be feasible, below is a quick rundown:

The Cayman Islands Monetary Authority – Over the course of my career, I have worked at and run (re)insurance companies in the UK, the US and the Cayman Islands. I believe CIMA understands our business better than its opposite numbers in other jurisdictions have. While this is partially due to the size of the insurance community on the island, it is also a function of CIMA’s regulatory style, which is hands-on and responsive. We see CIMA analysts in our office usually twice a year and interact with them on a regular basis. It has quickly handled all regulatory requests we have made and is a facilitator rather than an obstacle. Under the leadership of managing director Cindy Scotland, the authority has welcomed us and is excited about expanding the number of reinsurers operating from the Cayman Islands.

Immigration – Within three months of arriving, we had successfully concluded a business staffing plan with Immigration. With an approved plan, it became quite simple to bring in the expertise we needed to run Greenlight Capital Re. While we are always looking for (and have found) bright, energetic talent on the Cayman Islands, we need specific actuarial, underwriting, claims and financial expertise that we were able to bring to Cayman without burdensome red tape.

Legal/Audit – There is a wealth of law firms, large and small, on the Cayman Islands with local and international expertise. Every major audit firm is well-represented on the island. The talent is deep and knowledgeable.

We have great partners that help us with IT infrastructure, telecommunications, marketing and office supplies. Last but not least, we have found local schools, real estate, restaurants, entertainment and sporting facilities in the Cayman Islands to be top notch. Variety abounds and prices are very reasonable. Our staff and their families are very happy to be part of the community and our clients love to visit.

The future

We are in a time of severe worldwide economic turmoil. One of the direct results of this has been significant destruction in value for many insurers and reinsurers. We believe that once some stability returns to the market, there will be a need for new capital formation in the reinsurance industry to support insurance companies throughout the world. The Cayman Islands is prepared for what’s to come.

As this article goes to press, Cayman is completing a rewrite of its Insurance Laws to clarify the regulatory environment for international reinsurers operating in the Cayman Islands. True to form, the laws are clear and concise and offer flexibility for reinsurers that are responsible players. The laws will give any prospective reinsurer a clear idea of the regulatory environment, significantly reducing operational risk.

The Cayman Islands has strong franchises in funds, banking and captive insurers. We are working towards reinsurance becoming the fourth leg of our financial services base. To that end, the Government has developed a set of inducements to bring reinsurance operations to the Cayman Islands. These inducements are available for a limited time to relocating reinsurers that operate with more than CI$250m in capital and house their underwriting operations in the Cayman Islands.

In the past three eventful years, we went from two people working out of a coffee shop to a publicly traded reinsurer – with much help from our partners along the way. The next logical step is to create a vibrant reinsurance marketplace in the Cayman Islands. We can’t wait to see you here.

 

Greenlight