Cayman Financial Review invited Cindy Scotland, managing director of the Cayman Islands Monetary Authority, Len Goldberg, managing director of Cayman-based reinsurer Greenlight Re and the chairman of the Insurance Managers Association of Cayman Ron Sulisz to debate the latest regulatory developments and their impact on Cayman’s insurance, reinsurance and captive insurance industry.
What changes will Cayman’s new Insurance Law bring?
Cindy Scotland: Before answering your question we should ask: “What was the purpose of changing the Law?”
There are many reasons for changing a law, but really it comes down to a two simple questions: does the Law meet its current objectives? Will the Law meet future challenges? If either of these questions is no, then a review is often needed.
The new Insurance Law emanates from recommendations made by the Cayman Islands Monetary Authority Insurance Working Group in their report of May 2006 and further from the recommendations of the International Monetary Fund following its assessment of the Cayman Islands in March 2005 and March 2009 respectively.
A comprehensive review of the draft Bill 2010 was conducted by CIMA, the Ministry of Finance, the Insurance Managers Association of Cayman, the Cayman Islands Insurance Association and other interested parties and the final Insurance Bill 2010 seeks to address the weaknesses pinpointed by international standard setters as well as to address the risks identified in the domestic insurance market and the development of future business opportunities.
The key principle underpinning these reviews was that we must recognise that we have two distinct markets: Domestic and international, and that the Laws and Regulations should reflect the appropriate risks inherent in both.
Presently, whilst CIMA’s practice does address this, our Law applies uniform rules to all insurers regardless of risk, ie a Captive, despite a form of self-insurance, needs the same capital, disclosure and risk management as a Domestic Insurance Company. This is clearly disproportionate and requires adjusting.
We also hope that new legislative provisions will establish a framework for the development of a reinsurance industry in the Cayman Islands. However, a mandatory requirement for development is that a robust legislative framework exists for both reinsurers and international standard setters. We believe this Law is modernistic, addresses risk proportionally (ie appropriate to the size, risk and complexity of the licensee) and attains the flexibility to maintain not only our international commitments but also to enhance our insurance business.
Len Goldberg: To the reinsurance sector the new Law is very important. For the first time we will have separate set of rules and regulations for professional reinsurers operating in the global marketplace. It gives existing reinsurers and capital providers a clear picture of how the reinsurance marketplace will be regulated. It therefore is an important step to the formation of a more active reinsurance market here in the Cayman Islands.
Ron Sulisz: From a captive perspective it appears that the proposed new changes are simply enhancements to the wording of the Law, such that it reflects more the method that CIMA uses to regulate captives.
A good example for this, are the new categories of class B licenses (B1, B2 and B3), class C and class D, which segregate the insurance entities by risk categories.
As Cindy mentioned, presently CIMA did this internally, but now the proposed Law provides more guidance. There also appear to be a couple of new requirements on insurance managers but nothing that is considered overly onerous or unreasonable.
What elements in the Insurance Law will ensure that Cayman remains an attractive domicile?
CS: There are a number of changes, some large, some small but if I were to highlight the key item, I would say that the restructuring of different insurers into categories is critical for future business development because it allows stakeholders to design appropriate rules and regulations for each specific category. Our market place is quite diverse and large and includes domestic insurers, reinsurers, captive insurers and reinsurance securitisation contracts. Each sector has different inherent risk and deserves to be treated appropriately and proportionally.
RS: This introduction of new classes of licenses based on a measurement of their risk will allow those unfamiliar with the CIMA method of regulating captives to better understand their requirements based upon whether they will be classified as a class A, B(I), B(II) or B(III) license.
Also the introduction of the class C license will separate cat bonds and other special purpose vehicles into their own class and own regulatory requirements.
What does Cayman need to do to attract more reinsurers to the islands?
CS: Clearly there are some fundamental requirements, from a reinsurer perspective, that are needed in order to domicile in any jurisdiction. These include clear, appropriate legislation, international credibility and access to business support services including both private sector and governmental. I think also that clearly the size of our funds industry, and that fact that Cayman offers a broad range of services, gives us a distinct advantage over other jurisdictions.
From CIMA’s perspective, we are regulators not marketers but if I were to put myself in the place of the private sector, I would say that CIMA promotes confidence by carrying out its conduct in a fair, transparent and consistent manner.
If we adhere to these tenets, which we do, then it provides the necessary stabilisation to attract business.
LG: There was also a task force (the Reinsurance Task force or RTF) that recommended a few things to attract reinsurers.
The first was the new law which gives reinsurers some certainty as to the regulatory environment, so we are making progress. We also suggested there be an inducement package which mainly consists of making the immigration process easier for reinsurers that wished to bring their business here. We suggested an enhanced immigration process including at least 20 “key employee” positions granted to reinsurers that bring a minimum of $250 million of capital.
If we can make companies actually feel that we want them, we might be able to convince a few to locate here, as some jurisdictions are less welcoming.
I think this dovetails nicely with some of the other government initiatives. If the first reinsurance company comes and they have a great experience getting all of their underwriters and actuaries here and working, word will spread very quickly about the Cayman Islands as a domicile.
I’d also like to add that we, both Greenlight Re and the insurance industry in general, have an excellent working relationship with CIMA and government, which really helps us in developing the Cayman Islands as a vibrant insurance and reinsurance marketplace.
RS: The first step is to enhance the legislation particular for these large reinsurance companies, which is what the class D license is attempting to do in the proposed Law.
The second step is to let the domicile decision makers know that the Cayman Islands is interested in obtaining more of the business. Therefore the Cayman Islands should consider a road show in New York to promote this new legislation to these decision makers.
How will the US healthcare reform impact the insurance industry in Cayman?
CS: Here is another large piece of legislation which is a bit of a misnomer. In reality, this is Health Insurance Reform not Health Care Reform.
Effected in late March this year, it is a quite expansive reform to health insurance which, amongst other things, prohibits lifetime limits on health insurance policies, exclusion based on pre-existing conditions and further mandates coverage for preventative medicine.
Further, it offers the employee the option of joining their Employer Plan or opting into an individual plan. How will this affect captives? Well, three possibilities:
It will affect your clients whether health care or not, through increased responsibility and paperwork, but more importantly Captives reinsuring employee benefits under stop-loss coverage, will need to evaluate pricing because of the increase in costs from removing lifetime limits and pre-existing condition clauses, and finally:
Captive reinsuring workers compensation will likely see a reduction in claim costs due to the shifting of medical costs from the workers comp programme to the Employer/Employee health plan.
Ultimately, these can have an effect on any international jurisdiction offering captive or reinsurance options.
RS: It is hard to speculate what the US healthcare reform impact will be. However, in attempting to do so, it would appear that it should be business as usual for the healthcare medical malpractice captive industry, as well as the medical malpractice reinsurance industry.
What is the effect of the US financial reform (ie the Dodd-Frank Act)?
CS: At over 2,700 pages, this legislation is long and rather complex with the ultimate aim of strengthening consumer protection.
Essentially, there are many reforms covering consumer protection, credit card companies, limits on trading, new regulatory bodies and the regulation of derivative trading. How does this affect insurance?
Referring to Title 5 of the Act, five key areas stand out:
- The Office of Thrift Supervision is abolished and moved to the Treasury.
- The Treasury must report to Congress on the modernisation of the US Insurance Industry including the Federalisation of Insurance.
- Empowers state reform on non-admitted assets, and
- Places massive restrictions on derivative trading and credit (the Volcker rule)
- Requires the state regulators to impose reform in the areas of non-admitted insurance and reinsurance.
Interestingly, the Act itself exempts auto dealers from the requirements. What does this all mean? It’s very difficult to say as yet because a number of the initiatives require reports to Congress but it will mean change. Now I realise that change brings discomfort but also, change can bring massive opportunity and it is these opportunities that the private sector should seek to capitalise.
RS: The Act is considered the most sweeping change in financial regulation in the United States since the Great Depression. In terms of the insurance industry it appears that there has been the establishment of a Federal Insurance Office. However, this FIO does not have the pre-emption powers over state regulation. It therefore appears that for the insurance industry, which has been a stable industry throughout this financial crisis, that this Act should not have a major impact.
LG: The biggest direct effect is the establishment of a Federal Office of Insurance that would have jurisdiction over some national insurance issues. It might make it easier for non-domiciled reinsurers to operate in the United States.
The federal office could also work on some existing contentious issues in the industry. For example, all non-US reinsurers must post collateral for their US clients regardless of financial strength.
The rest of the world has seen this as restraint of trade (especially Lloyds which is not happy to post collateral given its financial strength).
The federal office could work towards a more risk-based approach to providing security to US insurers and level the playing field.
There is another bill that could have a larger effect, the Neal Bill. It would reduce the ability of US-based subsidiaries of non-US parent companies to reinsure to their parent, thus reducing their US tax bill.
This bill could be approved this year or be a part of the 2011 US federal budget. If that happens, a number of reinsurers might have to change their strategy by writing more business directly from their non-US companies into the US. This will require the addition of large amounts of staff. This could create an opportunity for Cayman. Even if a reinsurer doesn’t set up a new company in Cayman, they could form a service company here to work on the business they write into Bermuda or some another country.
This would be beneficial to Cayman as it would bring a number of reinsurance professionals which will add to the fees that government collects through work permits, and add to the economy as these professionals purchase goods and services.
It would also diversify our financial base here in Cayman. So even if new capital doesn’t come to Cayman to form new reinsurers, we could benefit.