By Paul Scrivener, Solomon Harris

Introduction

The Cayman Islands Insurance Law, 2010 (the Law) came into force on 1 November 2012. The purpose of this memorandum is to provide a brief overview of those provisions which are of particular relevance to captives and their owners. This memorandum is obviously not intended to outline all aspects of the Law and is not a substitute for professional advice in the context of particular facts.

Reasons for the Law

The Law, derived from significant public and private sector consultation, represents a comprehensive modernization of the prior Insurance Law in alignment with international standards. Principally, the Law strengthens the regulatory powers of the Cayman Islands Monetary Authority (CIMA), enhances protection for policyholders in Cayman’s domestic market and facilitates Cayman’s further development of reinsurance and insurance linked securities (ILS) business. The practical impact of the new Law on the captive insurance industry will not be significant because many of the new provisions simply introduce into law existing practice of CIMA that was not previously enshrined in legislation.

Sub-Division of the Class B Licence

The most significant change for captives is the fact that the Class B licence is no longer divided into restricted and unrestricted sub-divisions. That distinction has been eliminated. Instead, a Class B licence is now sub-divided into a Class B(i), a Class B(ii) and a Class B(iii) . Which sub-class applies depends upon the percentage of related business that the captive writes. Related business is business originating from the captive’s members or the members of any group with which the captive is related through common ownership or a common risk management plan, or as determined by CIMA. The applicable sub-classes are as follows:-

• Class B(i) – a captive which writes 95% or more related business by reference to net premiums.
• Class B(ii) – a captive which writes more than 50% related business by reference to net premiums.
• Class B(iii) – a captive which writes 50% or less related business by reference to net premiums.

Clearly, most single parent captives will fall within Class B(i).

The reason for the sub-classes is to enable CIMA to differentiate between different categories of captives with regard to minimum capital, prescribed capital and margin of solvency requirements. Under the old Insurance Law the minimum capital for all captives was the same irrespective of how much third party business was written (i.e. US$120,000 for general business and US$240,000 for life and annuity business) and the old Insurance Law did not address prescribed capital or margin of solvency. Under the Law, minimum capital (i.e., the minimum statutory capital that a captive must maintain in order to operate in accordance with the Law), prescribed capital (i.e., total risk based capital that an insurer must maintain in order to operate in a safe and sound manner) and margin of solvency (i.e., excess of the value of prescribed assets over prescribed liabilities) are not stipulated in the Law itself but are stipulated in implementing regulations, The Insurance Law (Capital and Solvency)(Classes B, C and D Insurers) Regulations (the Regulations) which are now in force. Under the Regulations the minimum capital requirement for each Class B licensee writing general business is as follows:-

• Class B(i) – US$100,000
• Class B(ii) – US$150,000
• Class B(iii) – US$200,000

For a Class B(i) licensee, the prescribed capital requirement is the same as the minimum capital requirement and for a Class B(ii) and Class B(iii) licensee is determined by reference to net earned premium in each case. The margin of solvency requirement for a captive, irrespective of which sub-class it falls into is the same as the prescribed capital requirement.

Under the Law, there is no minimum capital requirement or prescribed capital requirement for a segregated portfolio of a segregated portfolio company insurer. However, under the Regulations the margin of solvency requirement for a segregated portfolio is that the segregated portfolio is solvent both on a going concern basis and a balance sheet (book value) basis.

How does an existing captive transition from a Class B licence to a Class B(i), B(ii) or B(iii) licence?

Under transitional provisions in the Law, each captive must by 30 April 2014 (i.e., within 18 months of when the Law came into force on 1 November 2012) make an application to CIMA indicating into which sub-class it believes it falls having regard to the level of related business which it writes. Upon approval by CIMA, the captive will be validly relicensed. If a captive fails to make an application during this 18 month period, its old licence will expire, it will cease to be licensed and it will no longer be able to conduct insurance business.

New general obligations on captives

The Law imposes a number of new obligations on captives, some of which CIMA required adherence to previously as a matter of practice but which were not in the Insurance Law:-

1. Not to open outside the Cayman Islands, a subsidiary, branch, agency or representative office without prior CIMA approval.
2. Not to change its name without prior CIMA approval.
3. Maintain capital in accordance with the specified capital requirements (please see above).
4. Meet the applicable margin of solvency requirement (please see above).
5. Maintain adequate arrangements for the management of risk, including reinsurance of those risks where appropriate.
6. Maintain an effective system of governance as approved by CIMA.
7. A segregated portfolio company insurer must:-
a. in respect of each of its segregated portfolios, maintain the prescribed margin of solvency;
b. in respect of each of its segregated portfolios, file audited financial statements within 6 months of its year end; and
c. have the same year end for all of its segregated portfolios.

New/Revised filing obligations on captives

Audited financial statements filed with CIMA must be prepared in accordance with internationally recognised accounting standards and must include a copy of the management letter issued by the auditor.

New annual return forms will be included in separate regulations.

There is a new specific obligation on a Class B(iii) licensee to make its audited financial statements available to insureds, third party beneficiaries and such other persons as may be prescribed on request. These statements, however, will not be open to public inspection.

Captive’s records to be kept by insurance manager

The Law clarifies the records that must be kept by a captive manager for the captives which they manage. Such records must be sufficient to explain the transactions of the captive, to disclose with reasonable accuracy the state of affairs of the captive and to enable the captive to prepare its annual financial statements.

Change of Control Provisions

The Law introduces minor modifications to the statutory requirement to seek CIMA approval where there is a material change in ownership of a captive. Under the old Insurance Law, CIMA approval was required when there was a proposed issuance of shares amounting to more than 5% of the captive’s authorised share capital or a proposed transfer of shares amounting to more than 5% of the captive’s issued share capital. Under the new Law the 5% threshold has been modified in both cases to 10% and in the case of a transfer of shares the approval requirement is also triggered if the shares to be transferred amount to 10% of the total voting share capital even if those shares do not represent 10% of the total issued share capital.

Increased Obligations on Captive Managers and Auditors

Captives and their owners should be aware that the Law imposes various additional obligations on captive managers and auditors.

Professional indemnity insurance is now mandatory for all captive managers with coverage to be at a minimum of US$1 million per loss. Captive managers are subject to an enhanced “whistle-blowing” obligation to CIMA with regard to the captives which they manage. Examples of circumstances where the obligation would be triggered include concerns as to fitness and probity or as to solvency, knowledge or suspicion of criminality or the captive operating contrary to the Insurance Law or Insurance Regulations, the Monetary Authority Law, the Money Laundering Regulations or any condition of its licence and, in the case of a Class B(i) or B (ii) licensee, knowledge that limits on unrelated business have been exceeded.

In the case of auditors of captives, the Law introduces for the first time a “whistle-blowing” obligation to CIMA bringing the Insurance Law into line with other regulatory laws in the Cayman Islands. If an auditor in the course of conducting an audit has knowledge or suspicion of any of the following they must immediately notify CIMA:

• insolvency;
• the captive conducting its business or being wound up in a manner prejudicial to policyholders or creditors;
• the captive having no or insufficient accounting records;
• there being fraud or criminality; or
• the captive operating contrary to the Insurance Law or Insurance Regulations, the Monetary Authority Law, the Money Laundering Regulations or any condition of its licence.

Enhanced Powers for CIMA

The Law enhances CIMA’s regulatory and oversight powers in a number of respects in order to ensure that the Cayman Islands continues to meet best international standards. Examples of such enhanced powers include the following:

• the right at all reasonable times to have access to the books and records of a licensee;
• CIMA’s power to give directions with regard to unsafe/unsound practices can now be made in relation to a particular policy or line of business and not just the entire business;
• various fines have been increased and prison terms applied;
• the triggers for CIMA’s enforcement powers have been broadened (e.g., a contravention of the Money Laundering Regulations now empowers CIMA to take enforcement action) and those enforcement powers have been broadened (e.g., the right to remove, rather than just substitute, a director, manager or officer of a captive and the right to appoint a receiver);
• CIMA can now take enforcement action against a specific segregated portfolio without having to take such against the segregated portfolio company as a whole; and
• on a surrender of a licence, CIMA must now be satisfied not only that the licensee has ceased to carry on business but also that its liabilities have been extinguished to CIMA’s satisfaction.

We believe that the Law represents a very positive development for Cayman’s captive insurance industry, in particular because of the ability for CIMA to tailor its regulatory approach to different categories of captive. The new Law should serve to enhance the jurisdiction’s reputation globally whilst at the same time not imposing significant regulatory burdens on captives and their owners.

Further Developments

For segregated portfolio company captives, a further proposed amendment to the Insurance Law is well-developed and expected to be passed shortly which will allow for a segregated portfolio company to incorporate one or more of its segregated portfolios. The particular advantages of being able to incorporate segregated portfolios are the capacity for segregated portfolios within the same captive to be able to enter into reinsurance and risk pooling arrangements with each other – currently not possible under Cayman Islands law – and the likelihood that the segregated portfolio will be treated as a separate taxpayer by U.S. tax authorities, thus allowing it to make its own tax elections under its own federal tax identification number.