Why is the Cayman Islands considered the perfect location for Captive Insurance?
The Cayman Islands is one of the most business-friendly, tax-neutral locations in the world. The tax-neutrality coupled with the transparency, simplicity, anti-money laundering legislation provides a safe and secure environment for the global investment flow plus financing without violating other laws in other countries.
Offshore companies and individuals operating in the Cayman Islands need to pay taxes in their home countries. However, the transactions conducted by them within the Cayman Islands are not subject to taxation. CIMA’s (Cayman Islands Monetary Authority) statistics will shed light on why this Caribbean island offers a fertile business environment for Cayman Captive Insurance.
1. Almost 11,000 mutual funds have been registered in the Cayman Islands with combined assets of USD 7 trillion.
2. Investors from 107 countries own at least 10% of funds domiciled in the Cayman Islands.
3. Over 770 insurance licenses — 92 and 678 are related to the domestic and international insurance markets.
4. 27 insurers licensed to push their services into the domestic market, backed by 70 insurance intermediaries.
In addition to the above, the total number of companies falling under the B, C, and D categories reached 770 in 2021. Out of these total companies, the two major categories were pure captives and group natives, numbering 279 and 125.
20% of the total companies falling under the B, C, and D categories of insurance companies were established as segregated portfolio companies, consisting of over 6,000 segregated portfolios.
No wonder the Cayman Islands is the second largest domicile worldwide for captive insurance. Simultaneously, it is also the foremost domicile for health insurance captives. Do you know that 657 international insurance companies in the Cayman Islands manage over $64 billion of total assets plus $17.5 billion in total premiums?
More than 90% of these premiums are located in North America, while the rest are spread worldwide. Group captive insurance makes up 18.4%, while pure captive comprises 44.6% of all licenses.
With captive insurance, shareholders can insure themselves against future losses while augmenting their cash flow and managing insurance cost instead of opting for third-party insurance providers’ services.
Significance of tax neutrality for captive insurance companies
Back in the day, captive insurance was thought of as a risk management strategy for Fortune 500 companies only. Since the last decade and a half, things have changed dramatically, with many middle-market companies and smaller employers turning to self-insurance through captive insurance companies. Such a strategy is part of an overall approach to control rising insurance costs.
Tax-neutrality provides a golden opportunity for Cayman domiciled insurers and reinsurers to make formation and operations cost-effective. Most Cayman Captive Insurance companies have parent companies based in the United States of America. These companies require a certain degree of tax reporting to the US tax authorities.
In such a situation, Cayman’s tax-neutral environment eradicates the need for double taxation while ensuring better tax compliance and utilisation of resources spent on global tax compliance. Besides, tax-neutrality allows business entities (whose mother companies are tax-exempt) to function in a manner that can meet their parent company’s core business objectives.
Thanks to Cayman’s tax neutrality, transparency, and enterprise-friendly atmosphere, it reigns as the number one choice to conduct captive insurance business-related activities.
What kind of businesses choose to form captive insurance companies?
The largest and the principal line of business is Malpractice Liability (MedMal). Approximately 24% of the companies specialised in reissuing MedMal, while the worker’s compensation category bagged the second spot, with 22% of companies bearing this risk.
Many healthcare captive’s parent companies are tax-exempt or non-profit companies, thus relieving them of the burden. Such companies have a presence in the Cayman Islands because they want to take advantage of its interdisciplinary expertise, sophisticated & well-established regulatory environment, robust legal foundation, advanced infrastructure, and political/economic stability.
Apart from the above, numerous Fortune 1000 companies, small & medium-sized enterprises, managing general agents (MGAs), managing general underwriters (MGUs) plus insurer/reinsurers hailing from class B (iii) that would typically be subject to the IRC section 953(d) for payable federal income tax. As captive insurance formations, their tax-liability would be equivalent to US domestic corporations only.
What kind of support does the Cayman Islands extend towards captive insurance companies with relevant tax reporting?
As mentioned above, Cayman Island’s environment is conducive for business and finance-related activities. Hence, you have numerous companies providing Cayman Corporate Services out there. These companies possess the required captive-specific knowledge and enable captives to comply with tax-reporting requirements.
Depending on the nature of your business, companies may require corporate service providers or tax advisors. The primary responsibility of these tax advisors is to file tax returns on behalf of their captive clients. Tax advisors get a clear understanding of their captive clients’ financial performance/standing by analysing their financial statements drafted by the company’s insurance manager and thoroughly audited by its auditors.
Benefits of choosing the Cayman Islands as a domicile for a captive insurance company
Benefits of choosing Cayman as a domicile to set up a captive insurance company.
1. Political stability and robust economic system
2. Powerful insurance regulatory environment
3. Second largest captive insurance domicile in the world
4. Treasure trove of knowledge related to captive insurance
5. Large pool of talent including captive managers, law firms, insurance managers, auditors, actuaries, bankers, lawyers, investment managers, etc.
6. Proximity to North America
7. Legal system based on English law
8. English speaking population
Be it cedant insurers, reinsurer carriers, and global industry service providers, including reinsurance brokers, reinsurance consultants, lawyers, banks, financial institutions, investment bankers, investment managers, and others have strong industry connections plus a detailed understanding of the local Cayman laws & regulations.
The Cayman Islands is a preferred domicile for healthcare captives, group captives, managing general underwriters, managing general agents, etc. What is the reason? The cross-disciplinary expertise ranging from property, marine, liability, and ART (alternative risk transfer) gives them the cutting edge to carry out their activities.
The equivalence of Cayman’s Non-Qualified Jurisdiction Status and Non-Solvency II is an obvious indication of one thing — there is only one insurance regulator, i.e., CIMA (Cayman Islands Monetary Authority). These developments ensure increased authority and ownership of Cayman’s regulatory future, one of the main reasons for Cayman’s glorious reputation and success as an offshore jurisdiction.
Due to such favourable measures, the Cayman Islands stands out from other offshore domiciles. It offers unique advantages of dynamic, consistent, and well-established regulation that has played a pivotal role in attracting premium business worldwide.
What benefits do Cayman captives offer to their owners and groups?
The first and foremost benefit to parent companies is lower premiums determined from risk experience. Captive insurance companies/insurers double up as risk-financers and risk-managers. Both these roles require individuals to take high risks while keeping losses to a minimum. Ultimately, policyholders don’t have to pay large sums of money as premiums, as people do in the commercial market.
Captives provide insurance coverage that is not available elsewhere. Sister concerns of companies based outside Cayman, off-shore corporations, or high-risk businesses that don’t find insurance options elsewhere are covered by captives. The salient feature of such insurance plans being personalised insurance at highly competitive prices.
A Cayman captive insurer/reinsurer is a lot more than a risk transfer vehicle. They can provide you with wholesale capital, i.e., reinsurance/retrocession capacity, which you can’t access in the retail market. Such a risk vehicle is highly effective, simply as a standalone vehicle or even when used in conjunction with a more customised, flexible, and receptive reinsurance market can deliver increased or specialised coverage, unavailable in other markets.
In layman’s terms, Cayman captives provide an exceptional structure, enabling them to control losses and manage risks while making it a profitable & productive affair.
Another crucial benefit is that Cayman captives open up doors to the global reinsurance market. Most Cayman reinsurers and insurers access overseas markets like Britain, America, and others to acquire financial and intellectual capital and deliver optimal solutions to their policyholders or the insured parties. Non-profit hospitals and healthcare institutions can avail of lower premiums, which in turn will enable them to provide reasonably priced services to US patients plus hire/retain well-qualified medical professionals.
Calculating risk premium for a particular business entity or an individual requires extensive experience and in-depth knowledge of the captive insurance market. A well-functioning and established risk management program can offer way more benefits than a third-party insurer/firm from the regular market, not to mention the reduced overheads.
With Cayman captives, the mother company or the headquarters don’t have to shoulder the entire cost of risk. This is a huge plus, considering that insurance spend is a considerable expense for most organisations. Moreover, any surplus amount earned by the captives can be repaid to the insured party/parent company by way of dividends.
Instead of a captive insurer, if an organisation entrusts the same responsibility to a third-party insurer, the benefits would not be as significant. Moreover, there are zero chances of the parent company receiving a profit share.
An experienced and accomplished captive insurance company can yield valuable dividends. The same dividends can be pumped into the mother company’s operations or be utilised for risk-control/loss reduction strategies. In the long run, such measures will further enhance risk management and minimise insurance costs.
Conclusion
It’s been more than 50 years since the Cayman Islands carved a name for itself as a reliable financial centre and a preferred choice for captive insurance companies. This reputation has been further strengthened by sensible and robust legislation. The past five years have witnessed a great diversity of insurance companies being formed in the Cayman Islands.
Blockchain technology has also made inroads into the reinsurance and captive insurance space, especially in smart contracts. The Cayman Islands’ relaxed working environment and effective measures to control malpractices like anti-money laundering legislation etc., open new avenues for professional and business growth.
The best part is that the government works closely with the local service providers to boost this industry’s growth. Captive insurers or companies providing fiduciary services in the Cayman Islands can provide valuable guidance for a wide range of topics like insurance structuring, licensing, and finance-related transactions. Over and above that, clients can also expect detailed advice regarding regulatory and ongoing legal matters faced post-formation and licensing.
