Cayman Islands: Cayman Islands - The Ne Plus Ultra Captive Domicile?

Being in first place certainly has its advantages. First place means you have won the race, reached the pinnacle, accomplished the objective. But, despite being one of the top financial centres in the world, the Cayman Islands is ranked as only the second-largest captive insurance domicile.

Perhaps, then, it is because of this second place ranking that the Cayman Islands continues to innovate, streamline and enhance efficiencies in the captive business. With a robust and sound regulatory environment, the Cayman Islands provides an ideal platform on which to conduct business within the captive insurance industry.

Pillars of this platform include:

Legislative Innovations

The new Insurance Law, 2010 of the Cayman Islands enhanced the application of a risk-based approach to the regulation of different types of captives. This common sense and practical method allows factors such as the amount and degree of third party risk to be taken into consideration by the regulator when setting capital requirements for captive insurers.

As a further innovation in the Cayman Islands' insurance industry, in March 2013, the Insurance (Amendment) Law was enacted which provided for Segregated Portfolio Companies (SPCs) to incorporate their individual cells for the first time as Portfolio Insurance Companies (PICs). Because each PIC has a separate legal identity and a separate board of directors, the new legislation will make it possible for PICs in a SPC to transact business in their own right and even contract among themselves.

A PIC will continue to be regulated by the Cayman Islands Monetary Authority (CIMA) but will not need its own insurance licence for so long as it remains a PIC. Instead, it will operate under the umbrella of the licence held by the SPC insurer which controls it. The legislation provides for a straightforward registration process with CIMA for each PIC. The PIC legislation is anticipated to be brought into force once necessary amendments have been made to the Insurance Regulations.

Regulatory Streamlines

The European Union's Solvency II Directive was introduced in an effort to manage the risk of insolvency by insurers by providing for mandated minimum levels of required capital. Solvency II has been criticised by think tanks such as the World Pensions Council, which argued that by adopting the Solvency II recommendations, European legislators actually forced insurance companies and their regulators to rely more on assessments of credit risk by private rating agencies. Thus, part of the public regulatory authority was abdicated in favour of private rating agencies. Additionally, the calibration of the standard formula for assessing equity risk has been criticised as unreliable.

The Cayman Islands has currently opted not to adopt Solvency II equivalency. Instead, it has maintained a 'wait and see' approach and is carefully assessing beforehand the implications for Cayman licensed insurers.

FATCA – Taming the 800-Pound Gorilla

The spectre of the US Foreign Account Tax Compliance Act (FATCA) has been looming over the international financial community for a number of years now. Although FATCA is actually US domestic legislation implementing a new tax information regime, the legislation will have a decidedly extra-territorial effect on foreign financial institutions, potentially including captive insurers. However, in order to limit FATCA's adverse impacts and provide certainty, the Cayman Islands government recently concluded negotiations on a Model 1 intergovernmental agreement (IGA), and a new tax information exchange agreement (TIEA) to supplant the current one signed in November 2001. This IGA will eliminate the burden for each foreign entity to comply with FATCA or face a 30% withholding tax on US source payments. Under the terms of the IGA, certain Cayman Islands financial entities will report the required tax information directly to the Cayman Islands Tax Information Authority, which will then automatically exchange this information with the US Internal Revenue Service.

Tax Transparency

In addition, the Cayman Islands have executed TIEAs with 31 different sovereign nations. To demonstrate its continuing commitment to tax transparency, the Cayman Islands government formally asked the United Kingdom to extend its membership in the Organisation for Economic Co- Operation and Development's (OECD). The Islands' transparency was acknowledged by the OECD's latest Global Forum Peer Review report in April 2013. Cayman was hailed for a "robust and transparent" legal and regulatory regime. Its financial industry was lauded as having a "clear and efficient system" for releasing information, with a "well- organised, well-resourced and adequately staffed" process for exchanging information. UK Prime Minister David Cameron recently acknowledged the Cayman Islands' progress in moving beyond its 'tax haven' reputation saying: "I do not think it is fair any longer to refer to any of the overseas territories or crown dependencies as tax havens. They have taken action to make sure that they have fair and open tax systems."

Conclusion

The Cayman Islands appears well placed to continue its growth in the captive insurance space. The jurisdiction has become quite adept at learning what clients want and has demonstrated its willingness to adopt innovative legislation designed to meet those needs. Taken together with a robust yet flexible approach to regulating its captive insurance industry, combined with high levels of transparency, the Cayman Islands is unlikely to remain in second place very long.

About the Authors

Samuel Banks is an associate at Appleby and a member of the Insurance and Corporate Finance teams. His practice includes banking, corporate finance, insurance, asset finance, and mergers and acquisitions. Samuel is actively engaged in all aspects of Insurance Law and has advised on some of the largest insurance transactions in the jurisdiction

Simon Raftopoulos is a partner at Appleby and a member of the Insurance and Corporate Finance teams. He represents clients on large insurance transactions as well as private equity and fund finance, joint ventures, mergers, acquisitions, leveraged buyouts, initial and secondary public offerings, structured finance, asset securitisations and private placements of equity and debt securities.

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