Clear Growth of the Cayman Captive Insurance Industry

Over the last four years, the Cayman Islands have witnessed continual growth in the reinsurance industry. This growth has been influenced by several factors including the expanding reinsurance sector in the Cayman Islands, hardening insurance markets in North America, and shifting investment strategies due to the current global interest rate environment.

Expanding Reinsurance Sector

Recent statistics published by the Cayman Islands Monetary Authority (“CIMA”) as of 31 December 2023, show that the Cayman reinsurance industry has experienced steady growth since 2019. The year 2023 concluded with a total of 683 international insurance company licenses, resulting in a net increase of 37 after accounting for licenses issued and cancelled, compared to the 646 recorded in 2019.

The three classes of licenses within the international insurance company license category are as follows: 

• Class B – an exempted insurer carrying on insurance business other than domestic business with net premiums written originating from the insurer’s related business as follows:
  • B (i) at least 95%; 
  • B (ii) more than 50%; or
  • B (iii) 50% or less.
• Class C – an exempted insurer carrying on insurance business involving the provision of reinsurance arrangements in respect of which the insurance obligations are limited in recourse to, and collateralised by, the insurer’s funding sources or the proceeds of such funding sources, which include the issuance of bonds, or other instruments, contracts for differences and such other funding mechanisms approved by CIMA.
• Class D – an insurer carrying on reinsurance business and such other business as may be approved by CIMA.

Class B(iii) reinsurers are managed by an external licensed insurance management firm, while Class D reinsurers are self-managed and have physical operations in the Cayman Islands.

A closer look at the data reveals that Classes B(i), B(iii), and D have been the primary contributors to this growth. Specifically, since 2019 there was a net increase of 2 licenses in Class B(i), 43 licenses in Class B(iii), and 3 licenses in Class D.

As of the fourth quarter of 2023, CIMA reported a total of 84 reinsurance companies. Interestingly, while these reinsurance entities (falling within Classes B(iii) and D licenses) account for only 12% of the total international insurance licenses issued, they are significantly influential, being responsible for 74% of the total premiums written by these licensees. This disproportionate contribution underscores the pivotal role of reinsurance companies in the Cayman Islands market, indicating that the observed growth is not just in quantity, but also of substantial quality.

Below I will explore some of the reasons for this continued growth as well as the potential challenges the Cayman Islands may face as it continues to strengthen its position as a quality global financial hub.

Hardening North American Markets

90% of the risks underwritten by Cayman Islands international insurance companies relate to North American risks. The Cayman Islands insurance market provides innovative solutions, especially at a time when the North American insurance market is hardening. The increasing premiums and reduced capacity in those markets have led many companies to consider the Cayman Islands insurance market for alternative solutions. 

Shifting Investment Strategies 

The current interest rate environment has prompted investors to seek alternative avenues for investment. The financial reinsurance industry in the Cayman Islands presents an attractive option for these investors, offering compelling risk adjusted returns. Given that 90% of all risks covered by the Cayman Islands international insurance industry relate to North America, the Cayman Islands elected not to pursue the EU’s Solvency II framework. Instead, they offer reinsurers a flexible and less prescriptive regulatory regime which allows the adoption of bespoke capital models based on their specific business, while still meeting minimum capital requirements. 

Further Reasons for Continued Growth in the Cayman Islands

Regulatory Framework: The Cayman Islands offer a regulatory landscape that balances robust oversight with flexibility. This environment, overseen by the CIMA, is particularly attractive to captive insurers as it is continuously updated to meet international standards, ensuring a balance between regulatory oversight and business-friendly policies.

Domestic Stability: Domestic stability is another key asset of the Cayman Islands. The islands boast a steady political climate, free from the turbulence that can affect business operations. In June 2023 Moody’s Investors Services provided the Cayman Islands with a credit rating of Aa3, noting a stable economic outlook and its very low debt burden as a result of prudent fiscal management. This rating was reaffirmed in December 2023. This stability provides the peace of mind necessary for businesses to commit to long-term investments and operations.

Tax Neutrality: The absence of direct taxes such as corporate, capital gains, or income taxes, makes it an attractive destination for captive insurance companies. This tax structure allows companies to efficiently manage and allocate capital, an essential factor in the competitive global insurance market. These factors contribute to a conducive environment for captive insurance operations, providing potential advantages over other jurisdictions that might be more effected by international tax reforms like Pillar II.

Expert Workforce and Infrastructure: The islands boast a sophisticated workforce, well-versed in the nuances of financial services, including reinsurance. This expertise is complemented by a strong legal, accounting, and management support structure, vital for the smooth operation of insurance entities.

Challenges for the Cayman Islands and Strategic Responses

Continued Global Regulatory Scrutiny: The Cayman Islands continues to navigate the complexities of international regulatory frameworks, such as the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting (BEPS) project, to maintain their competitive edge while ensuring compliance. 

A recent milestone for the jurisdiction was the 18 January 2024 decision to remove the Cayman Islands from the EU’s list of high-risk countries, being countries identified by the EU as having deficiencies in their anti-money laundering / counter-terrorist financing regimes. The official de-listing will come into effect on 7 February 2024.

Competition from Other Jurisdictions: To retain its leading position, the Cayman Islands must constantly innovate and adapt to stay ahead of other jurisdictions vying for a share of the reinsurance market. 

Conclusion

As the industry continues to evolve, its success will hinge on its ability to leverage these opportunities while effectively addressing the challenges. The Cayman Islands must continue to innovate, ensuring that their captive insurance sector remains resilient, dynamic, and at the forefront of global insurance and financial services.