FAQ

Got a question? Try here for those most frequently asked. Feel free to reach out to us or to any Cayman insurance manager for more detail.

 

Q: What is a captive?
In its simplest terms a captive is a wholly owned insurance subsidiary of an organisation not in the insurance business whose primary function is to insure some or all of the risks of its parent.
It is generally owned through a common interest which is not engaged primarily in the business of insurance. This interest may be a single-parent shareholder or a group of shareholders.
A significant portion of the risks written are "captive", related in some way to the risks of shareholders, or third-party risks which the shareholders control. In this respect a captive is an insurer that writes risks whose origins are restricted, or those risks to which it has unique access.
Typical coverage includes:
  • Primary policy - usually assumed by the captive.
  • Excess coverage - purchased in traditional market.
  • An umbrella or stop-loss policy - traditional market
Q: How do I form a captive?
  • Determine the insurance program to be placed with the proposed captive
  • Contract with an insurance manager in the Cayman Islands
  • Negotiate fronting and reinsurance arrangements (as necessary)
  • Prepare the licence application with assistance from the insurance manager
  • Meet with the Insurance Division of the Cayman Islands Monetary Authority
  • Submit the completed application to the Insurance Division
  • The captive can be licenced in 4 – 6 weeks
  • The application should include:
    • completed licence application form
    • business plan which should include: rationale for formation; ownership and management structure; details of fronting and reinsurance arrangements and claims administration; description of loss reserving methodology; description of investment and dividend policy, due diligence procedures
    • financial projections for a three-year period
    • acceptance letters from an insurance manager and auditor in the Cayman Islands
    • letter of undertaking as to minimum capital (usually from shareholder)
    • personal questionnaire, references, and police clearance certificates or equivalent for managers, shareholders, directors and officers

For more information visit the Cayman Islands Monetary Authority



Q: How are captives regulated?
A: The financial industry in the Cayman Islands is regulated by the Cayman Islands Monetary Authority (CIMA).
The Insurance Division is granted powers to regulate the insurance industry under the Insurance Law (2010 Revision) and is responsible for the supervision of all insurance companies in the Islands, whether they operate domestically as Class "A" companies or are Class "B" insurance companies accepting overseas risks.
The Insurance Division CIMA has four regulatory objectives:
  • Understand the insurer and its business environment
  • Detect solvency problems
  • Detect non-compliance with legislation
  • Resolve detected problems early
Q: Why choose Cayman?
  • Highly developed professional services capability in insurance managers, lawyers, bankers and accountants
  • Robust, commercially-minded regulation
  • Freedom of investment management
  • Reasonable capital requirements
  • Freedom from various state regulations
  • Political and economic stability
  • An established, familiar legal system, based on English Common Law
  • Effective crime legislation
  • Possible tax benefits
  • The absence of exchange controls, and the opportunity to transact business in any major currency
  • Absence of income capital gains or other taxes
  • Access to the reinsurance markets either locally or in major insurance centers
  • Strong infrastructure and easy access to the jurisdiction
Q: What are the benefits of forming a captive?
  • Insuring the uninsurable - provision of coverage not readily available in commercial market or for which market rates or conditions are prohibitive
  • Cost reductions - the offshore captive can reduce expenses such as administration and settlement of claims, loss control expenses, various state and federal taxes, brokerage commissions, and other acquisition costs and consulting fees.
  • Risk retention, risk management and loss control - when a company has a better loss history than its industry average, the retention of its own risk can result in a lower premium.
  • Cash flow benefits - through investment income and flexible premium payment plans.
  • Tax minimisation or deferral - premiums payments by insureds to properly structured, adequately capitalised captive insurance arrangements are deductible for U.S. Federal income tax purposes
  • Access to the reinsurance market - direct access can result in reinsurance that is less expensive than conventional direct excess and umbrella coverage. There is also the opportunity to reduce costs by combining two or more lines of risk
  • Diversification into a profit centre - a captive is able to diversify into open market insurance operations and operate as a separate commercial profit centre. The captive can also generate profits from third party unrelated business
  • "Unbundling" of services - when a company is not satisfied with the technical services provided by its conventional insurer and wishes to "unbundle" risk control and claim handling services from the actual purchase of insurance cover
  • Reduction of government regulations and restrictions - includes a professional, yet flexible regulatory environment, widening investment opportunities and the facilitation of legitimate international movement of funds
Q: Are there different types of captives?
There are a number of different types of captives:
  • Single parent (parent-only or pure captive)
  • Association or industry captive
  • Agency captive
  • Group captive (stock or mutual)
  • Quasi profit center or open market captive
  • Rent-a-captive
  • Rent-a-captive segregated portfolio companies

For more detailed information, see What Is A Captive?

Q: What is the history of the captive concept?
A: In the mid 1970’s, the professional liability markets were in a major crisis. The evolution of a sophisticated legal structure in the United States, and in particular developments in tort law, led to an unexpected increase in liability claims. The hospital systems were particularly affected, and the health administrators were becoming increasingly disillusioned with the spiraling number of malpractice suits.

Out of this crisis, a prominent U.S. medical college developed the first Cayman Islands captive insurance company to provide coverage for their medical malpractice risks for their physicians. Given the success of this captive, other hospital systems soon followed, making Cayman a leading domicile for healthcare captives.

Given the sudden development of this new area of business, a new regulatory framework was required to monitor this business and in 1980, the Insurance Law was introduced.

Business is now spread amongst a diversity of companies ranging from small private shareholders to large public corporations. Types of coverage vary from worker's compensation and product liability to life and annuity business.

The newest industry trend is the segregated portfolio company, (SPC), known elsewhere as the protected cell company. This concept has developed from the rent-a-captive legislation wherein there is no legal distinction between each member. The SPC provides a facility for the legal segregation of funds.
Q: How do I donate to the IMAC Scholarship Fund?
A: If you are interested in making a donation (and receiving a little publicity too), please contact william.forsythe@caymancaptive.ky or any committee member. Cheques may be made payable to "IMAC Educational Scholarship Fund" and sent Attn John Pitcairn at P.O. Box 32345, KY1-1209, Grand Cayman, Cayman Islands. Thank you for your support!

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