Current state of the Cayman captive industry

A note of condolence and a sincere thank you

Statistics as of 30 June 2009

The Cayman captive industry continues to be a stable line of business for the country, and Cayman as a captive domicile is one of the market leaders in the industry. In terms of number of captives, Cayman is the second largest domicile in the world.

Why Cayman as a captive industry leader?
The question often asked is why is Cayman a leader in this industry? Individuals will provide various responses to this question. However, the two prevalent themes are regulation and industry expertise. The Cayman Islands first created the Insurance Law in 1979 and since that time has continued to offer an innovative and evolving regulatory environment. At the present time work is under way for a bill for the Insurance Law 2009, which illustrates the Cayman Islands Government’s continued commitment to the industries highly regarded regulatory environment. In terms of industry expertise, there is a broad base of professional expertise including auditors, bankers, investment managers, lawyers, regulatory staff and most importantly, although I may be biased here, insurance managers. These industry specialists have developed an exceptional amount of experience which has made Cayman a leader in such captive sectors as healthcare, group and association captives and catastrophe bonds; and the industry continues to evolve in other specialised industries including finance, construction, manufacturing, retail and transportation.

Economic and political challenges
Even though the Cayman industry remains stable, the current economic and political environment in the United States makes for challenging times for the industry. The majority of Cayman captives come from risk locations in North America, 90 per cent as of 30 June 2009, with the majority of the North American risk locations located in the United States. From an economic perspective the worldwide captive industry has been affected by very few new formations. In Cayman, there have only been 17 new licences issued for 2009, as of June 30, 2009, which is low in comparison to the domicile’s experience in the past number of years as illustrated in the chart below. In addition to fewer new formations many of the industry’s existing captives have revisited their strategic planning models. Some have reduced their investment risk exposure by liquidating higher risk investment securities and purchasing lower risk investment securities such as term deposits, government securities or corporate fixed income securities.
In the case of single parent captives, many have evaluated their capitalisation in the captive and have transferred any available excess back to the parent corporation, depending on their business plan structure, either by means of dividends or through retrospective premium credits to help the financial status of the parent corporation. From a political perspective, many Cayman captive owners are required to justify why they are doing business in the Cayman Islands. In particular, when a remark by a politician or international association regarding offshore jurisdictions, or specifically the Cayman Islands, results in the captive owner having to explain why they chose to establish their captive in the Cayman Islands and why it continues to be a good business decision. In this regard, the 14 August 2009 announcement by the Cayman Islands Government that the OECD had placed Cayman on the White List of jurisdictions that substantially implemented international tax standards was important to this industry.
Spirit of co-operation
An often noticeable differentiating factor in the Cayman captive industry sector is the spirit of co-operation. This cooperative environment is noticeable not only between the public and private industry, but also within the private industry competitors. The co-operation between the Cayman Islands Government, the Cayman Islands Monetary Authority and the private industry is best illustrated by the private sector consultation that occurs before any change is implemented and also by the coordinated marketing efforts that occur at such industry conferences as the Risk and Insurance Management Society and the American Society for Healthcare Risk Management.
At the RIMS Annual Conference and Exhibition in Orlando, Florida this year from 19-23 April 2009 the Cayman Islands Financial Services sponsored an exhibition booth at which a delegation of approximately 30 Insurance Management Association of Cayman members participated at their own financial cost. At the ASHRMs Annual Conference and Exhibition in Denver, Colorado this year from 22-25 October 2009, again the Cayman Islands Financial Services are sponsoring a booth, and there are approximately 30 IMAC members who have committed to participating at their own financial cost.
The private industry spirit of co-operation amongst competitors is astounding and highly visible to any outsider. It has been stated more than once by outsiders that unlike any other captive domicile Cayman is the best at working holistically to promote itself. This can be seen by all the volunteer work performed by the various insurance management firms that make up the voting membership of IMAC, the Cayman industry association. Two achievements that IMAC is extremely proud of and highlight the result of its cooperative environment are its annual Cayman Captive Forum and the IMAC Scholarship Fund. The annual Cayman Captive Forum started 16 years ago to help educate and promote the industry.
By working as an effective industry association, and promoting this conference in a coordinated effort, IMAC has managed to achieve high attendance each year. At the 2008 conference there were 861 attendees. For the 2009 conference there are already over 400 attendees registered as of 31 August 2009, and there are still three months until the conference which is scheduled for 1-3 December 2009 at The Ritz-Carlton. The IMAC Scholarship Fund was established many years ago, and although fund raising was slow at inception, the fund is proud of the fact that as of June 30, 2009 it has managed to raise CI$1.25m since inception and help 20 Caymanians achieve their dream of higher education.
Why is this spirit of co-operation so important to the industry? Although not as important as regulation or industry expertise, it is a contributing factor to the success of the industry. How? Co-operation promotes stability. Since many captives are established in Cayman because an overseas consultant has recommended Cayman to their client, it is fair to say that without that consultant feeling comfortable with the stability of the industry it is highly unlikely such a recommendation would have been made.
The future
It is difficult to predict the future of any industry. However with the established track record that the Cayman captive industry has managed to establish, with its continued innovative and evolving regulatory environment, with its industry expertise and with its internal co-operation, it is well positioned to continue to have success in the future.