Media Centre Comment: Getting the balance right

Linda Haddleton

Getting the balance right

Linda Haddleton explains why the forthcoming amends to Cayman's insurance legislation will serve to reinforce the effectiveness of its regulatory infrastructure

All insurance regulatory structures have the common goal of ensuring that insurers are viable and can keep the promises made to their consumers. A regulatory structure that consistently achieves this goal represents effective regulation.

The Cayman Islands Insurance Law (2010 Revision) strikes the right balance for effective regulation of captive insurance companies. This law will come into effect in the near future, when the regulations to which it defers have been legislated. Cayman has an excellent track record in regulation of captives since the initial Insurance Law was enacted in 1979, and the 2010 Revision does not radically alter Cayman’s regulatory approach to captives.

New classifications

The most notable change is the introduction of new classifications of insurers. Previously the law distinguished between insurers writing domestic business (A licensees) and other insurers (B licensees), including captives. B licensees were differentiated for regulatory purposes by the parameters of their regulatory-approved business plan. The revised law retains the regulatory-approved business plan as a key regulatory tool.

Within the law, non-domestic licensees will now also be distinguished as follows:

Class B(i) - conducting insurance business other than domestic business, in respect of which at least 95% of the net premiums written originate from the insurer's related business.

Class B(ii) - conducting insurance business other than domestic business, in respect of which over 50% of the net premiums written originate from the insurer's related business.

Class B(iii) - conducting insurance business other than domestic business, in respect of which 50% or less of the net premiums written originate from the insurer's related business.

Class C - conducting insurance business involving the provision of reinsurance arrangements in respect of which the obligations of the insurer are limited in recourse to and collateralized by the insurer's funding sources which include the issuance of bonds or other instruments, contracts for differences and other such funding mechanisms approved by the regulatory authority.

Class D - conducting reinsurance business and such other business as may be approved in respect of any individual license by the regulatory authority.

Class C represents special purpose catastrophe reinsurers that generally finance their reinsurance transactions by issuing rated bonds to private investors. Cayman has been the leading domicile for such reinsurers since 1996. This class of license is carefully defined in the revised insurance law to allow for appropriate regulation of such innovative risk financing entities as they continue to evolve.

Class D distinguishes open-market reinsurers from captives, and requires such reinsurers, as with domestic insurers, to maintain a place of business in Cayman.

Class B now formally distinguishes between captives writing different levels of 'related business', recognizing the sophistication of the insured, and the relationship between the insurer and the insured. Importantly, the revised law defines 'related business' as business originating from the insurer's members or the members of any group with which it is related through common ownership or a common risk management plan, or as determined by the regulatory authority. This definition caters astutely to many captive-to-insured relationships, where the value of the captive solution is facilitated by active compliance with common, effective risk management tools across all insureds, that otherwise may be independent of each other. As such, there is no expectation that Cayman captives will face radical changes to solvency and other regulatory requirements when the revised law becomes effective.

A transparent approach

What the revised law and allied regulations will achieve is a transparent demonstration of the Cayman regulatory authority's existing practice of appropriately differentiating between insurers. This move will enable the domicile to ensure that it continues to provide effective regulation of its insurance market.

Linda Haddleton is Managing Director of Kane (Cayman) Limited.
Email: linda.haddleton@kane-group.com