PIC Legislation

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Market driven

This law is a progressive step for the Cayman Islands captive insurance industry, providing new opportunities for the use of SPCs in the insurance sector. This proposed legislation was inspired by a number of commercial drivers and seeks to address them. First, the market was increasingly demanding that segregated portfolios within the same SPC to be able to contract with each other to facilitate reinsurance and quota sharing, which was not possible with unincorporated segregated portfolios.

The second major driver related to the US tax treatment of offshore segregated portfolio companies. Although there was continuing uncertainty as to how the IRS would regard an unincorporated segregated portfolio of an offshore insurer, an incorporated segregated portfolio appeared to be in a much stronger position to make its own tax election under its own federal tax identification number.

Advantages of the PIC

The particular advantages of a PIC compared to a segregated portfolio of a segregated portfolio company include:

• Ability to contract with other segregated portfolios or PICs within the same SPC to facilitate reinsurance, quota sharing and pooling
• A separate board of directors permitting governance flexibility
• For counterparties unfamiliar with segregated portfolios, a PIC may be more readily accepted than a segregated portfolio
• A PIC can easily transition to a stand-alone captive
• Because a PIC will be indistinguishable from any other company limited by shares, it will likely be recognised as a separate legal entity for US tax purposes, allowing it to make its own tax elections under its own federal tax identification number

Registration and Regulation

A new or existing SPC insurance company will effectively be able to incorporate one or more of its segregated portfolios by establishing a "Portfolio Insurance Company" (PIC) under the segregated portfolio. The Portfolio Insurance Company will then conduct the relevant insurance business instead of the segregated portfolios.

The PIC is regulated by the Cayman Islands Monetary Authority (CIMA), but will not need to be separately licensed as an insurance company and, unlike a traditional segregated portfolio the PIC will be a separate legal entity, i.e. an exempted company limited by shares.

The draft legislation provides for a straightforward registration process for each PIC with CIMA, including the payment of initial and annual registration fees, which are as yet to be determined.

The level of regulatory oversight that CIMA would have over a PIC would be largely the same as for an unincorporated segregated portfolio, including the requirement of filing of annual audited financial statements.

A streamlined process for novation of the assets and liabilities of the existing segregated portfolio programme to the underlying PIC has been considered in the proposed legislation by providing for an automatic novation by operation of law by simply filing with CIMA a straightforward declaration sworn by two directors of the SPC containing certain prescribed particulars.

How Is This Different From Other ICC Structures?

This legislation stands apart from the original model for incorporated cell companies in a few ways. The first is that segregated portfolio incorporation is achieved by a separate company being established by the SPC underlying the relevant segregated portfolio rather than the segregated portfolio itself taking on incorporated status. This is a slightly more conservative solution based on clear and well-established principles of Cayman corporate law.

Only a segregated portfolio – or strictly the SPC acting on behalf of a segregated portfolio – could hold the voting shares in the PIC. However, a PIC could issue non-voting shares (e.g. preferred shares) to another person or entity. In many SPCs, an unincorporated segregated portfolio is owned by the client(s) of the SPC for whom the cell was established and frequently that ownership is created by issuing non-voting preferred shares to the client(s).

If a PIC is established under that segregated portfolio, the business and assets of the segregated portfolio move down to the PIC and we therefore anticipate that in most cases the client(s) would feel much more comfortable having a direct shareholding in the PIC.

The PIC concept came about as a means to achieve the same benefits of cell incorporation without actually incorporating the cell itself. Whilst there are obvious attractions to the PIC being a separate company from the SPC and its segregated portfolios, in terms of liability protection it is very similar to an unincorporated cell. As long as both are set up and operated correctly in accordance with all applicable requirements of Cayman Islands law, they will offer statutory ring-fencing of specific pools of assets and liabilities.

Although the existing SPC and unincorporated segregated portfolio structure will continue to suit some companies well, it is expected that a significant number of SPCs will wish to set up one or more PICs to address the current limiting factors discussed above. For third parties unfamiliar with protected cell companies, a PIC is probably easier to understand than an unincorporated cell. A PIC can more easily transition to a stand-alone captive than an unincorporated cell.

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