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FAQ

Frequently Asked Questions

Guide to the Captive Insurance Industry in the Cayman Islands:

What is a captive?

In its simplest terms a captive is: "An insurance company that only insures the risks, or parts of the risks, of its parent." "A wholly owned insurance subsidiary of an organisation not in the insurance business whose primary function is to insure some or all of the risks of its parent."

It is generally owned through a common interest which is not engaged primarily in the business of insurance. This interest may be a single-parent shareholder or a group of shareholders.

A significant portion of the risks written are "captive", related in some way to the risks of shareholders, or third-party risks which the shareholders control. In this respect a captive is "an insurer that writes risks whose origins are restricted, or those risks to which it has unique access".

Typical coverage includes:

  • Primary policy - usually assumed by the captive.
  • Excess coverage - purchased in traditional market.
  • An umbrella or stop-loss policy - traditional market.

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How did the captive concept originate?

1970’s
Back in the mid 1970’s, the professional liability markets were in a major crisis. The evolution of a sophisticated legal structure in the United States, and in particular developments in tort law, had let to an unexpected increase in liability claims. The hospital systems were particularly affected, and the health administrators were becoming increasingly disillusioned with the spiraling number of malpractice suits.

Out of this crisis, a prominent U.S. medical college developed the first Cayman Islands captive insurance company to provide coverage for their medical malpractice risks for their physicians. Given the success of this captive, other hospital systems soon jumped on the bandwagon and suddenly…Cayman had become the world’s domicile of choice for healthcare captives!

1980’s and 1990’s
Given the sudden development of this new area of business, it was immediately apparent that a Regulatory framework would need to be developed quickly and in 1980, the Insurance Law was introduced.

The Cayman Islands evolved into the second largest captive insurance domicile, and became known as the leading domicile for health care captives. 35% of all insurance companies were healthcare related, with healthcare no longer being restricted to just medical malpractice but encompassing a broad range of coverages including health, disability, managed care and long-term care.

Today
Business is now spread amongst a diversity of companies ranging from small private shareholders to large public corporations. Types of coverage vary from Workers’ Compensation and Product Liability to Life and Annuity Business.

The newest industry trend is the Segregated Portfolio Company, (“SPC”), known elsewhere as the Protected Cell Company. This concept has developed from the rent-a-captive legislation wherein there is no legal distinction between each member. The SPC provides a facility for the legal segregation of funds. Therefore its obvious use is in the Life and Annuity business where it provides added protection to individual portfolios.

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Are there different types of captives?

There are a number of different types of captives:

  1. Single parent (parent-only or pure captive)
    A wholly owned or controlled company, which is formed to primarily insure the risks of its non-insurance parent or affiliated companies which are related.
  2. Association or industry captive
    An insurance company owned by a trade, industry or profession for the benefit of its members. It includes industry pools where the risks of all members are pooled and then ceded back to participants on a shared basis.
  3. Agency captive
    An insurance company owned by insurance brokers or agents to reinsure a portion of the insurance they sell.
  4. Group captive (Stock or Mutual)
    A company owned by a group of companies created to meet a common insurance need.
  5. Quasi profit center or open market captive
    A subsidiary whose primary business is that of a single parent captive but which also insures the risks of unrelated parties or assumes open market reinsurance business.
  6. Rent-a-captive
    This is where a captive offers its services to others, usually those too small to justify incorporating their own captive insurance company.
  7. Rent-a-captive Segregated Portfolio Companies
    This format allows an insurance company to segregate its assets and liabilities of different participating shareholders and have the segregated cells protected from the liabilities of other such cells within the same company.

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What are the benefits of forming a captive?

Insuring the uninsurable - provision of coverage not readily available in commercial market or for which market rates or conditions are prohibitive.

Cost reductions - the offshore captive can reduce expenses such as administration and settlement of claims, loss control expenses, various state and federal taxes, brokerage commissions, and other acquisition costs and consulting fees.

Risk retention, risk management and loss control - when a company has a better loss history than its industry average, the retention of its own risk can result in a lower premium.

Cash flow benefits - through investment income and flexible premium payment plans.

Tax minimization or deferral - premiums payments by insureds to properly structured, adequately capitalized captive insurance arrangements are deductible for U.S. Federal income tax purposes.

Access to the reinsurance market - direct access can result in reinsurance that is less expensive than conventional direct excess and umbrella coverage. There is also the opportunity to reduce costs by combining two or more lines of risk.

Diversification into a profit centre - a captive is able to diversify into open market insurance operations and operate as a separate commercial profit centre. The captive can also generate profits from third party unrelated business.

"Unbundling" of services - when a company is not satisfied with the technical services provided by its conventional insurer and wishes to "unbundle" risk control and claim handling services from the actual purchase of insurance cover.

Reduction of government regulations and restrictions - includes a professional, yet flexible regulatory environment, widening investment opportunities and the facilitation of legitimate international movement of funds.

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Why choose Cayman?

  1. Highly developed captive support industry
  2. Professional, yet flexible regulation
  3. Freedom of investment management.
  4. Less onerous capital requirements
  5. Freedom from various state regulations.
  6. Political and economic stability.
  7. An established and flexible legal and regulatory system.
  8. Effective crime legislation.
  9. Possible tax benefits.
  10. The absence of exchange controls, and the opportunity to transact business in any major currency.
  11. Local availability of experienced insurance managers, lawyers, bankers and accountants.
  12. Absence of income or other taxes in the foreign domicile.
  13. Access to the reinsurance markets either locally or in major insurance centers.
  14. Good communications and frequent air service.

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Tell me about regulation of Captives in Cayman?

The Financial industry in the Cayman Islands is regulated by the Cayman Islands Monetary Authority ("CIMA") which consists of 9 divisions:

  1. Administration
  2. Currency Operations
  3. Banking Division
  4. Insurance Division
  5. Investment Services Division
  6. Policy & Research
  7. Fiduciary Services
  8. Compliance
  9. Legal Division

The Insurance Division is granted powers to regulate the insurance industry under the Insurance Law (2001 Revision) (link to: www.caymanfinance.gov.ky). The Insurance Division is responsible for the supervision of all insurance companies in the Islands, whether they operate domestically as Class "A" companies or are Class "B" insurance companies accepting overseas risks.

The Insurance Division CIMA has four regulatory objectives:

  1. Understand the insurer and its business environment
  2. Detect solvency problems
  3. Detect non-compliance with legislation
  4. Resolve detected problems early

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How do I form a captive?

  1. Determine what insurance program will be placed with the proposed Captive.
  2. Contract with an Insurance Manager in the Cayman Islands.
  3. Negotiate fronting and reinsurance arrangements (as necessary)
  4. Prepare the Licence Application with assistance from the Insurance Manager.
  5. Meet with the Insurance Division of the Cayman Islands Monetary Authority (“Insurance Division”) to discuss the proposed Captive.
  6. Submit the completed Application to the Insurance Division.
  7. The Captive can be licenced in 4 – 6 weeks.

The Application should include:

  1. Completed licence Application form
  2. Business Plan which should include: rationale for formation; ownership and management structure; details of fronting and reinsurance arrangements and claims administration; description of loss reserving methodology; description of investment and dividend policy, due diligence procedures
  3. Financial projections for a three-year period
  4. Acceptance letters from an Insurance Manager and Auditor in the Cayman Islands
  5. Letter of undertaking as to minimum capital (usually from shareholder)
  6. Personal questionnaire, references, and police clearance certificates or equivalent for managers, shareholders, directors and officers.

For more information on Captives in the Cayman Islands visit the Cayman Islands Monetary Authority's website at www.cimoney.com.ky and view the Insurance Guidelines under the Policy & Research tab.

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