A sleepy Caribbean island 40 short years ago, Grand Cayman has established itself as a mature, sophisticated international financial services centre, providing institutionally focused, specialized expertise to a global client base. Cayman is the 5th largest financial center in the world; home to 425 banks and trust companies, 765 insurance companies, 9,000+ mutual funds, the preferred shipping registry for the world’s mega-yachts, and a stock exchange with over a 1,000 listings. In support of this industry, Cayman has developed a highly qualified financial services infrastructure of lawyers, accountants, bankers, insurance managers, company managers, fund and investment managers, and other financial specialists. Additionally, the regulatory body, the Cayman Islands Monetary Authority (“CIMA”), provides a very professional, proactive and client-focused regulatory environment, widening investment opportunities and the facilitation of legitimate international movement of funds. As a result, Cayman offers a veritable one-stop shop for all your financial services needs, while remaining flexible and nimble enough to react to new products and initiatives, and has achieved this at the same time as meeting or exceeding all international standards in the areas of anti-money laundering, know your customer, proceeds of criminal conduct legislation, and complying with all international regulatory standards.

In support of this industry, Cayman has developed a highly qualified financial services infrastructure of lawyers, accountants, bankers, insurance managers, company managers, fund and investment managers, and other financial specialists

The above success is no better evidenced than in the area of captive insurance, where Cayman is the leading domicile for healthcare related captive business and the second largest overall captive domicile – only Bermuda has more. From humble beginnings in the late 1970’s, Cayman is now home to 765 captives writing more than $7.5Billion in annual premium and having total assets in excess of $30Billion. Within that number are 126 segregated portfolio companies having over 500 cells in total.

So what fuels the continued success of the Cayman Islands as a leading captive domicile ? Well, this can be simply attributed to the unique partnership of a sound and business-focused regulatory regime, together with the unwavering support of the Cayman Islands Government and the Insurance Managers Association to promote, maintain and protect the reputation of Cayman as the domicile of choice for captive insurance. This only goes to show what can be done when a domicile truly works together towards a common goal. Further information on the regulatory environment can be found on CIMA’s website – www.cimoney.com.ky

The annual Cayman Captive Forum, organized by the Insurance Managers Association, attracted over 800 delegates in December 2007 and featured a wide range of speakers and educational presentations on all aspects of the captive and insurance industry. The 2008 event is scheduled from December 2nd to 4th at the Ritz Carlton, Grand Cayman. Further information can be obtained at www.caymancaptive.ky.

Traditionally, when people think of captive insurance companies, they first think of “single parent” structures in which a captive insures or reinsures the risks of its parent or affiliates, but more and more businesses are now discovering the benefits of group or association captives, as well as segregated portfolio (also known as protected cell) captives (“SPC”). An SPC is a single corporate legal entity with the benefit of statutory segregation of assets and liabilities between segregated portfolios established within the company. This allows for one entity to cater for a number of insureds without the risk of cross liability.

There are many benefits from establishing your own captive insurance vehicle, or joining an existing one, including such aspects as coverage and program design flexibility, insulation from market fluctuations, control of costs, improved cash flow and an improved negotiating position. These benefits are generally acknowledged at the feasibility stage, however, there are others that may not be foreseen at the time of establishing the captive, but which soon take on increasing importance, as follows:

Safety Culture

The most significant is the development of an enhanced safety and claims management “culture” throughout the organization. When insured in the traditional marketplace, most entities will balance the health and safety regulatory requirements with the cost benefit of their implementation, and the establishment of quality control initiatives (in whatever field) with the downside risk of an insurance claim that ultimately gets spread to thousands of other policy holders. However, once in the captive insurance arena, the scenario changes dramatically. With premiums more closely tied to your own loss experience, and every amount saved potentially flowing to the bottom line of the captive and ultimately its owner(s), the incentive to focus on reducing incurred claims by enhancing the emphasis on safety takes on an entirely new importance.
Whereas before, insurance was usually handled by the HR or Finance departments as a “necessary evil”, and rarely came to the attention of senior management, now the latter can sit on the captive’s Board of Directors and have the opportunity to interact with external professionals and captive advisors, who bring to the table a wealth of knowledge that might otherwise never reach them. Additionally, in a group captive environment, they have the ability to exchange success stories with other shareholder companies, whether or not in related industries. As a result, and most importantly, the culture shift permeates from the top down….incentive programs can be initiated, modified duty/return to work programs are implemented, risk management studies are carried out – often with grants from the captive’s budget, and claims and case management programs are put into place. So now, instead of being a “necessary evil”, the insurance program can have a significant beneficial impact to the bottom line, as well as being a positive influence on employee recruitment and retention.

Investment Opportunities

Over a relatively short period of time, captives can accumulate significant amounts of investable assets (representing loss reserves and shareholder’s equity) and one of the benefits of a captive is that the investment returns remain with the captive, rather than with the policy issuing carrier under the traditional market scenario. Opportunities for investment by offshore captives are quite diversified, as long as they meet the approval of the local regulatory body, which has an obvious interest to ensure that the captive’s assets will be available to pay claims. So as long as the regulators are comfortable with the captive’s investment policy, the parent has potential access to funds that would otherwise be earning income for the traditional policy issuing carrier.

Structuring Shareholdings

The potential for structuring the captive’s shareholding will obviously depend on the nature of the captive’s ultimate parent i.e. publicly traded entities will have much less flexibility than privately held “family” concerns, but there may still be opportunities not previously considered. Obviously, any captive shareholding structure should always be fully reviewed and agreed by appropriate legal and tax advisors.
The use of different classes of shares and/or fractional shares, or having shareholder obligations rest with one type of share, while dividends flow to another type, are just a couple of examples of options potentially available that can have a very beneficial impact on the parent entity’s overall tax planning abilities.

Mike Gibbs

Should you wish to learn more about the Cayman Islands and/or the captive concept, and how they may be able to benefit you or your organisation, please contact Mike Gibbs, the President of Kensington Management Group, Ltd, the largest independent captive manager in the Cayman Islands.

Mike Gibbs, President of Kensington, and past Chairman of the Insurance Managers Association of Cayman can be reached at 345 814 7000, via email at mgibbs@kensington.ky or at www.kensingtonmanagement.ky .