Captive Insurance



	Captive Insurance The Cayman Islands boast a burgeoning insurance industry. In particular, there has been significant growth in the captive insurance industry and the number of licences issued has increased by over 50% from 361 in 1994 to 543 at December 31, 2001. Licensing Questionnaire Captive Insurance News and Information The Cayman Islands are ranked a world leader with an industry net income of US$451,465,909 at June 30, 2002. The offshore insurance industry is primarily composed of companies from the United States, the Caribbean and Latin America and Europe. Part of the growth can be attributed to the following attributes of the Cayman Islands: Less restrictive insurance regulation Freedom from exchange control Excellent telephone, telefax and internet communications Modern insurance laws Abundance of banking, legal and accounting expertise together with high ethical standards The following illustrates the contribution to net income by reference to the categories of captive companies. Alternative Financing Vehicle Association 5% Association 4% Group Captive 1% Open Market Insurer 3% Pure Captive 87% Reasons for Forming a Captive Some of the reasons for forming a captive insurance company are:- To minimise costs by the elimination of a large percentage of traditional insurance company overhead. To retain profits that would otherwise have to be paid to commercial insurers in the form of premiums in excess of the amounts repaid to cover losses. To have freedom over investment into which the premiums of the captive may be made. To reduce risk by selecting only quality insureds known to each other (as in the case of some medical malpractice association captives). · To insure risks which would otherwise be uninsurable or cost prohibitive and to design custom policies. · Access to the re-insurance market. · The reduction of Government regulations and restrictions by seeking out a favorable jurisdiction for the registration of the company. · The reduction of taxes by domiciling the company in a low tax jurisdiction. · Cash flow planning as the captive has the use and benefit of the premiums. Timing of premium can be determined to suit the parent’s cash flow requirements. Formation of Cayman Insurance Companies An insurance company is formed in the same way as an exempted company, apart from the fact that the objects in the Memorandum of Association should be specifically related to the insurance business to be undertaken. Prior to incorporation the promoters of the company must apply for and receive approval from the Head of Insurance Supervision for the name and the issue of the appropriate insurance licence. The holder of an insurance licence may not issue shares in bearer form. In 1998 the Cayman Islands introduced legislation which allowed for the formation of Segregated Portfolio Companies (SPC’s). An SPC is a single legal entity divided into an unlimited number of cells whose assets and liabilities are legally separated from each other. The potential uses of such companies include rent-a-captives, life assurance, reinsurance, composites and conglomerates. An SPC may issue shares attributable to specific portfolios. The proceeds of the issue of any shares become an asset of the relevant portfolio, known as “Segregated Portfolio Assets”. Types of Licences The governing legislation is the Insurance Law together with its subsidiary regulations. In order to carry on insurance business, either in or from within the jurisdiction, an application has to be made for one of the following licences: Class “A’ Insurer’s Licence Unrestricted Class “B” Insurer’s Licence Restricted Class “B” Insurer’s Licence Insurance Agent’s Licence Insurance Broker’s Licence Insurance Sub-Agent’s Licence Insurance Manager’s Licence and Principal Representative’s (Insurance) Licence. The following distinctions should be noted in relation to these categories of Insurance licences: Class “A” Insurance Licence applies to companies insuring domestic risks from within the Cayman Islands Unrestricted Class “B” Insurance Licence allows a licensee to carry on all types of insurance business with any insured other than domestic business from within the Cayman Islands. Restricted Class “B” Insurance Licence restricts the licensee to carrying on business with its parent or such persons as are allowed by the Governor-in-Council. This type of licence generally applies to pure captive situations where the insurance company writes policies only for its parent or for members of a closely held group. Insurance Agent’s Licence is required by a person (not being an insurer) who negotiates directly, or through representatives, advertising or other means, domestic business on behalf of not more than one insurer. Insurance Broker’s Licence is required by a person (not being an insurer) who negotiates directly, or through representatives or other means, contracts of insurance or of reinsurance on behalf of more than one insurer, or for placement with insurers or reinsurers. Insurance Sub-Agent’s Licence is required by a person (not being an insurer, insurance agent or insurance broker) who solicits directly or through advertising or other means, domestic business on behalf of an insurance agent or on behalf of an insurance broker. Insurance Manager’s Licence applies to a company operating in, or from within, the Cayman Islands which provides insurance expertise to or for insurers and which has, in its bona fide employment, a person who: (a) is qualified by examination as a fellow or associate of the Chartered Insurance Institute of London, or who is a member of either the Society of Chartered Property and Casualty Underwriters of the American Society of Chartered Life Underwriters both of the United States of America; and who is either a current member of good standing of the applicable professional body or of some other professional insurance association recognised by the Governor for the purpose of this Law; or (b) is of good standing with such insurance expertise as has been approved by the Governor. Principal Representative’s (Insurance) Licence is required by a person who is operating in, or from within, Cayman who, not being a bona fide employee, maintains for an insurer full and proper records of the business activities of that insurer. Government Fees The currently prescribed licensing fees are: Insurance Managers (1-10 licensed insurers) CI$15,000 (US$18,292.68) Insurance Managers (11-50 licensed insurers) CI$20,000 (US$24,390.24 ) Insurance Managers (51-100 licensed insurers) CI$25,000 (US$30,487.80) Insurance Managers (100+ licensed insurers) CI$30,000 (US$36,585.37) Class A CI$30,000 (US$36,585.37) Class B CI$7,000 (US$8,536.59) Class B (Restricted) CI$7,000 (US$8,536.59) Brokers CI$4,500 (US$5,487.80) Agents CI$400 (US$487.80) Principal Representative (Insurance) for each insurer represented (but subject to a maximum of $25,000) CI$1,500 (US$1,829.27) Should the application be refused, the licensing fee is refundable. In addition, on or before January 15 of each year, an annual licence fee has to be paid. Particulars of this may also be accessed via CIMA’s website. For all categories, except Insurance Managers, these are flat fees. In the case of Insurance Managers, the amount is dependent on the number of licensed insurers within their portfolios. Net Worth Requirements “Net worth” minimums are required for an insurer’s licence (other than a Restricted Class “B” Licence). General Business but not long term business Minimum CI$100,000 / US$.120,000 Long Term Business but not general business Minimum CI$200,000 / US$240,000 Long Term and General Business Minimum CI$300,000 / US$360,000 “Net worth” means excess of assets (including any contingent or reserve fund secured to the satisfaction of the Governor) over liabilities other than liabilities to partners or shareholders. Application Documents required to be submitted on application for a licence are as follows:- Proposed Memorandum and Articles of Association (by-laws) for the company. The Articles of Association must state that the company is not empowered to issue shares in bearer form. The Memorandum of Association must define the Insurance Objects for which the company is to be formed and may conduct business. Bank references on the promoters and proposed owners of the company, together. with evidence that insurance expertise is available, to the company. Evidence that the applicant is fit and proper and has the personnel that have the necessary skills, knowledge and experience and that none of the shareholders, directors or officers of the company has a criminal record. Personal details and references for proposed directors and shareholders are required. A sound and viable business plan. This states the proposed business activity of the company, stating the make-up of ownership and management, the type and expected volume of business to be written, details of any re-insurance agreements to be entered into, as well as financial projections for three years. The business plan provides a yard-stick for the annual "statement of operations", which is a statement filed with the Head of Insurance Supervision by the managers of the company and provides updated details of current activities of the company. The business plan will also normally include , as an appendix, an analysis of the past loss history of the nature of the business to be written, demonstrating that the proposed business is financially viable. In the case of an SPC a business plan must be submitted for each portfolio which will be subject to regulatory approval as if it were a standalone captive. The name of the company must include the words “Segregated Portfolio Company” or “SPC”. Each cell must have its own distinct name or designation including the words “Segregated Portfolio”. It is important that the segregated assets be kept separate from the general assets of the company. Evidence that capitalisation is available. The law defines a minimum capitalisation for companies doing "General Business" (business which is not long term business such as health or life) as the equivalent of US$122,000. However, the Head of Insurance Supervision will require a higher figure (generally US$200,000 to US$250,000) as a minimum for any new company, and may require an even higher minimum depending on the proposed premium volume and the level of risk retained. Confirmation from the company's Approved Auditors and from its local Licensed Insurance Manager that they are willing to accept the appointment. Appropriate fees. For a Class “B” licence, for example, the Government fee payable on application is the equivalent of US$8,536.59. This fee is also payable in January of each year after the year of incorporation. Ongoing Requirements The company must submit annual audited financial statements and must adhere to the parameters established in its business plan or receive prior permission from the Head of Insurance Supervision for any changes. On review of the financial statements the Head of Insurance Supervision has the discretion and authority to require the company to moderate its activities or to require the introduction of further capital. No changes in ownership, management or control may take place without prior approval. In addition an annual statement of operations must be filed with the Head of Insurance Supervision. In the case of an SPC separate statements of operation must be filed for each portfolio. Surrender of Licence A licensee may apply to the Governor in writing to surrender its licence if it has ceased to carry on the business in respect of which the licence was granted, or, if it is being wound up voluntarily and produces evidence that it is solvent and able to repay all its creditors. Our Services and Fees International Management Services Ltd can advise upon and arrange the formation and licensing of all types of insurance companies. The Company is licensed under the Insurance Law to provide full captive insurance company management services. Fees charged will depend upon the amount of work involved and complexity. However the following minimum fee levels are given as a guide: Insurance Licence Application - US$2,500 as long as a comprehensive Business Plan is prepared by the client and the application is fairly straightforward. Cost will include an initial meeting with the clients at the Cayman Islands Monetary Authority offices. Insurance Management Services - US$10,000 minimum per annum. Annual insurance management fees are normally negotiated on the basis of a fixed minimum fee plus a time spent fee at an average IMS staff rate of US$200 per hour. Cost of Formation of Insurance Company - US$2,190 including Government fees, tax exemption certificate and disbursements using standard insurance Memorandum and Articles of Association (there is an additional legal fee disbursement if local attorneys are required to prepare a special set of Memorandum and Articles to meet the needs of the particular type of insurance business). Annual Corporate fees - (US$800 - US$3000) Level depends on whether IMS is providing local Directors and Secretary or combination thereof. It should be noted the Cayman Islands Monetary Authority require some representation on the Board by the clients or overseas insurance professionals involved with the new company. Licensing Questionnaire ________________________________________________________________________ International Management Services Ltd P.O. Box 61, Harbour Centre George Town, Grand Cayman, Cayman Islands Phone: 345 949 4244 Fax: 345 949 8635 Email: ims@candw.ky ________________________________________________________________________