What’s captive insurance?
Did you know that the Cayman Islands is the second largest centre for captive insurance management in the world, after Bermuda?
A captive insurance company is one which has been set up primarily to insure the risks of its parent company. In other words, it’s like having your very own insurance company, so that when you pay the insurance premiums, you’re paying yourself rather than somebody else. The obvious benefit of this is that if you don’t have any losses then you keep all the premium. Captives usually buy their own wholesale insurance or reinsurance to protect themselves, which is cheaper than you or I would pay.
The captives belonging to organisations that have good control over their claims, ie those that have good risk management processes in place, are more likely to be profitable than those that don’t. A profitable captive in turn is able to retain more risk, which in turn reduces the organisation’s reliance on the traditional insurance market.
The rate of growth of captive formation is directly related to the underwriting cycle in the insurance market. In other words, when the traditional insurance industry is profitable, there is a lot of competition for your business, and insurance rates fall. This is known as a “soft market”. However, when insurers incur greater than expected losses and lose money, they start to increase their insurance rates. This is known as a “hard market”.
However, for the captive industry, “hard is good”. When the traditional insurance market decides to increase its rates people start to consider alternatives like captive insurance. A captive is really a sophisticated way to reduce the amount of insurance you pay to somebody else and build up a fund for a rainy day. Having said that, a properly registered and regulated captive insurance company may also offer a number of important tax advantages to which the rest of us are not entitled.
What’s this got to do with Cayman? Captives can only operate in those states or countries that have the necessary legislation in place that allows it. In most countries you are simply not allowed to set up your own insurance company. You can certainly put your money under your mattress, but not in your own company, and call it insurance. In fact, the Cayman government will not allow Cayman based risks to be insured locally unless it is through a ‘real’ insurance company, specially set up to write third or other party business.
In 1979, the Cayman government had the foresight to introduce specific insurance legislation which allowed foreign organisations to set up insurance companies in Cayman to insure their own risks. As more and more of these companies arrived in Cayman, the local expertise grew and continues to do so to this day.
What does the captive insurance industry do for Cayman?
In February 2009, Oxford Economics published a report on the Economic Benefits of the Financial Services Industry in the Cayman Islands. This report was commissioned by a number of the professional associations in Cayman which included the Insurance Managers’ Association of Cayman (IMAC). The findings were based on the figures for the year ended 2007 and some of the main highlights were:
- Direct and indirect financial services generated CI$1.2 billion or 55 per cent of Cayman’s GDP.
- Financial services were responsible for the generation of 12,600 jobs in Cayman.
- Over 31,000 visitors came to Cayman as a result of the financial services industry.
In other words, the financial services industry has been the single largest contributor to Cayman’s revenue, helping Cayman to grow and succeed as well as it has.
The insurance industry, both domestic and captive, is a major contributor to the finance industry pot. At the end of 2009, there were 780 separate captive insurance companies registered in Cayman. The total annual premiums paid to these companies amounted to US$7.5 billion and the total assets under management came to nearly US$45 billion. The economic impact on Cayman’s GDP from the captive sector alone is estimated to be approximately CI$78 million and is made up from the following sources:
The Cayman Islands authorities
Between CIMA’s insurance licence fees and the Registrar of Companies return fees, the total annual amount paid by each company comes to approximately CI$11,000. In other words, the total annual fees are in the region of CI$8.6 million.
The service providers in Cayman
These service providers include the captive company managers, auditors, lawyers and bankers. A rough estimate of these fees would come to CI$75,000 per company. For 780 companies, this produces fees of nearly CI$58.5 million.
The hospitality industry
Being conservative and assuming that 75 per cent of the captive companies come to Cayman for annual meetings, each involving say three directors and three consultants, for three nights, we are already up to 10,500 room staying nights per year. As most of the meetings happen during the high season in order to avoid possible hurricane related delays, a competitive room rate in Cayman, inclusive of taxes and gratuities, is about CI$350. This produces a basic hotel charge of over CI$3.6 million.
Some of Cayman’s larger captives with many directors and shareholders sometimes take over a complete hotel, with many of their party electing to stay on in Cayman with their families for a few extra days. Many of these visitors will also fly with Cayman Airways. All this, including the cost of meeting rooms, restaurant visits, taxi rides and tips, easily increases the total revenue to the hospitality industry to somewhere in the region of CI$7 million.
One of the single largest financial related events to be held in Cayman every year is IMAC’s Captive Forum at the Ritz-Carlton in December. The estimated number of delegates for 2010 is 865, with the majority of these coming from overseas. Needless to say, this event alone generates a considerable amount of additional revenue for the Islands, and is a wonderful showcase for the Cayman Islands tourist finance industry.
Oxford Economics reports that in 2007 the insurance industry in Cayman generated direct revenue of CI$64 million and indirect of CI$25 million, producing a total of nearly CI$90 million to Cayman’s GDP. At the same time it directly employed 310 full time staff. In comparison, banking, the largest industry in the financial services sector, contributed a total of over CI$375 million and employed 2,000 staff (N.B much of this revenue comes from domestic banks and not from overseas like captive revenues).
Interestingly, out of all those involved in the finance sector such as banking, law, insurance, accounting, funds and estate and trusts, it was insurance that produced the highest average annual revenue per employee of approximately $205,000 while banking generated $129,000. In other words, per head employed, Insurance would appear to generate more funds for Cayman than banking or law or accountancy.
Due to the specialist nature of captive insurance management where there is daily interaction between manager and client, often involving the hosting and running of director and shareholder meetings, personal relationships are very important. Furthermore, a high proportion of captive managers are qualified accountants who have to be recruited from other countries such as UK and Canada because of the shortage of accountants locally.
One of the ongoing headaches of the twenty three full members of IMAC is that many of their experienced account managers are not given key employee status, so have to leave the island. Clients find this constant change of account managers unsatisfactory. Future numbers of captives in Cayman are expected to fall in 2010 partially as a result of this high staff turnover.
With the funds that IMAC earns from its annual membership fees and from the Captive Forum in December, it has been able to make donations to a number of local charities such as Cayman Hospice Care, the Cancer Society, the National Trust and the Women’s Resource Centre. In addition to these worthy causes, IMAC is also proud of its education scholarship fund.
The Educational Scholarship Trust Fund of the Insurance Managers’ Association of Cayman was formed in 1994 to assist with the post high school education of young Caymanians.
Contributions are derived from IMAC, the individual insurance management firms and the captive insurance companies themselves.
Since its inception, the fund has raised over US$1.4 million. More than US$0.74 million has already been paid out and some US$0.49 million has been set aside to fund ongoing scholarship commitments. So far IMAC’s Education Scholarship Fund has helped over twenty Caymanian youngsters, with ten of these currently studying overseas. Full details of the fund, the students being sponsored and the courses they are following can be found on IMAC’s website.
In conclusion, with a staff of only about 300, the Cayman Islands insurance industry punches way above its weight regarding the benefits it brings to Cayman. It has made Cayman a major global captive insurance centre, it produces high quality and high value services and actively contributes to the Cayman community.
IMAC, working closely with CIMA, recognises that in order to maintain this position, the captive industry in Cayman needs to continually develop. Recent examples of the actions taken to remain competitive include the updating of the Insurance Law, which is to be passed shortly, and the establishment of a new Research & Development Committee within IMAC. As the name suggests, this new committee will analyse Cayman’s resources and services to see that they meet the changing needs of our existing and new clients and, where necessary, will recommend the introduction of new and innovative products.
Cayman’s continued captive contribution is in safe hands.
For more information about the Insurance Managers Association of Cayman (IMAC) please visit our website at: www.caymancaptive.ky