The New Contender For Reinsurance

InsurTech, Non-life And Crypto

Predominantly US firms but also Hong Kong, Singapore and European InsurTech companies, and indeed smaller/regional traditional US insurance carriers are forming reinsurance infrastructure in Cayman.

InsurTech is a term, similar to FinTech, for a company using technology to disrupt the insurance industry (Investopedia). The belief driving InsurTech companies and investments by venture capitalists in the space is that the insurance industry is ripe for innovation and disruption. InsurTech is exploring avenues that large insurance firms have less incentive to exploit, such as offering ultra-customised policies, social insurance, and using new streams of data from Internet-enabled devices to dynamically price premiums according to observed behavior.

General Property and Casualty (P&C) carriers and managing general agents/underwriters (MGA/MGUs), primarily US based, are exploring and in turn finding a lot of value having affiliated Cayman reinsurance infrastructure.

The crypto space is another animal entirely, that evolves and innovates at break-neck speeds. As these entities become more mainstream and institutional, the need for insurance products to support them becomes increasingly more popular and/or necessary.

The Drivers 

The material increase in reinsurance entity formations (Cayman class B(iii)) over the last five years can be linked (but exclusively limited) to the following:

1. Bermuda, the previous dominant market for US reinsurance business, elected the EU Solvency II (SII) equivalency route creating material additional costs for US focused reinsurance programmes who do not require SII equivalency in the US.
2. An ever-hardening global reinsurance market where insurers and reinsurers have materially increased pricing and retention requirements while at the same time limiting capacity and scope of coverage, forcing insurers to consider alternative placement and retention structures.
3. The consolidated capital benefits that US carriers (InsurTech and otherwise) can avail of via a Cayman reinsurance company owing to the Cayman Islands Monetary Authority’s (CIMA’s) more proportionate capital requirements.
4. Recommendations/referrals from existing clients – the new-gen InsurTech entities talk, collaborate and share stories and solutions. CIMA and the supporting Cayman industry have gained experience and a following and are becoming the go-to domicile for this business.
5. Cayman Government’s ability to innovate and respond appropriately to evolving market conditions.

Solvency And Capital Frameworks

To achieve appropriate capital levels and yet sustain credibility, it is critical to the reinsurer to reside in a jurisdiction where there is a high quality but sensible regulatory regime. For example, the SII framework requires higher risk weights for longer duration assets and therefore can be punitive, even if the reinsurance company has well-matched liability to asset durations.  The Cayman model in contrast is more flexible. 

With Bermuda having elected the SII route, US carriers and other non-European and/or Global reinsurance focused entities forming reinsurance structures in Bermuda will incur higher regulatory capital ratios, investment restrictions and higher operating costs relative to Cayman as a result of the SII Regime.

Further, the Cayman prescribed capital requirement for a non-life class B(iii) is staggered, starting at 15 per cent for first US$5 million in net earned premium subject to a minimum of US$200,000; 7.5 per cent for the next US$15 million in net earned premium; and 5 per cent for net earned premium in excess of US$20 million. While the capital requirements may appear low relative to typical US National Association Of Insurance Commissioners (NAIC) requirements, the fact is that the outstanding reinsurance liabilities under these programmes are collateralised in full to enable onshore insurers to claim full admissibility for reinsurance with the non-rated Cayman reinsurer. Frequently, Cayman reinsurers simplify the matter by setting a fixed capital ratio of net earned premium to surplus which would then contemplate their prescribed capital requirements as well as sufficient surplus for collateral requirements. Of course, this varies from reinsurer to reinsurer as needs require. Every programme is different in that earned premium, commission structures, loss ratios, claim pay-out patterns, length of tail in the programme (time it takes for claims to be reported and ultimately reserved for) etc. all determine what collateral requirements are needed. From CIMA’s perspective, they draw comfort that based off these metrics the outstanding liabilities are fully backed by credible assets.

There is little appetite in the Cayman Islands to pursue SII equivalency.  Across all areas of the Cayman Islands financial services sector the jurisdiction is predominantly US facing, indeed 90 per cent of all risks insured by the Cayman Islands international insurance industry are North America based.  Accordingly, SII would simply not be a match for the jurisdiction.  It is no surprise therefore that CIMA’s support has shown a willingness to facilitate a more practical model which, for potential US start-ups, has been a significant factor in determining that the Cayman Islands is the most appropriate jurisdiction for their new reinsurance platform.    

Skin In The Game

Across the non-life sector, again primarily in the US but Europe and Asia as well, there has been a plethora of innovation within the InsurTech sector to develop the next generation of insurance company. Whether it be the use of telematics in the underwriting of auto-policies, or niche destination/activity specific travel policies, more and more entities are forming with a specific solution or innovation and disruption to certain insurance lines or other supporting functions like claims or policy administration. Many of them are looking for ways to participate in the risk programmes they are producing and underwriting. As a lot of these disruptors and startups begin as MGAs, a Cayman reinsurance vehicle provides them with the ability to participate in their own underwriting programme. This participation by the MGA is viewed favourably by their commercial reinsurance support and assists them in preferred terms, which in a hardening rate environment can have a material impact on programme economics. 

The Evolving Cayman Business Environment

The Cayman Islands is one of the world’s most efficient and well-recognised international financial centres.  Given the breadth of its financial services sector and expansive net of stakeholders it is a familiar, trusted and respected domicile.  Its infrastructure supports high-calibre international finance transactions, a commitment to stability, integrity and professionalism, and highly talented industry professionals.

Recently Cayman has rolled out many new legislations in response to EU mandates on transparency, AML/CFT, economic substance and others to align its regulatory framework to meet and in some cases even exceed global minimum standards. However, Cayman has also rolled out new innovations in response to market movements to ensure the frameworks and policies in place remain thoughtful and globally competitive.

For example, new Virtual Asset Service Provider (VASP) laws and other amendments to existing banking, fund and insurance laws have scoped in virtual assets (digital assets) as eligible mediums of transacting currency. In effect it is now conceivable to denominate insurance policies in crypto, remit in crypto and invest surplus assets in crypto. This of course comes with being able to provide a good measure of controls around remittance, custody and of course AML/CFT origins of these assets. While numerous entities are holding crypto investments on balance sheet, even remitting premiums in stablecoin, CIMA has been diligently and methodically reviewing and issuing licences under the VASP regulatory framework, and this author firmly believes 2022 will be the year to combine all the above, along with possibly the issuance of policies through smart contracts, for a full crypto licence application.

The Island Life

For executives of reinsurance entities who wish to build a presence in Cayman, softer benefits in the Cayman Islands have also been broadly welcomed.  These include the ability to secure a 25-year Substantial Business Presence certificate which means immediate security of tenure in the Cayman Islands; the ability to acquire or build a home without restriction; lower on-going operating costs when compared to competitor jurisdictions; quality schools for children, excellent healthcare and finally no income or payroll taxes.   

Regulation

The Cayman Islands operates a business-friendly and well-regulated financial system reinforced by the philosophy of integrity and transparency, and a belief that appropriate regulation and international cooperation drive commercial success. The Cayman Islands is a strong proponent of proportionate, risk-based-regulation.

Legal Framework

The Cayman Islands has a sophisticated legal regime that is based on English Common Law, with the final court of appeal being the Privy Council in London. In addition, a highly efficient and respected court system upholds the jurisdiction’s framework of legislation. Cayman Islands law maintains a legitimate right to privacy, but its confidentiality statute provides a clear gateway for tax transparency and there are no inhibitors for the effective operation of its many international cooperation agreements.

Service Providers

The Cayman Islands also has a global client base of major international companies, financial institutions and governments. This success is due to the insurance managers, lawyers, auditors, actuaries and investment service providers who choose to work in the Cayman Islands because of the high-quality business and lifestyle.

Continued Growth

The aforementioned reasons, coupled with the Government's firm commitment and support to grow the reinsurance sector, have firmly established the Cayman Islands as the go-to domicile for US and non-EU based InsurTech, Crypto and non-life reinsurance entities.  Given the global drivers and historic activity to date we anticipate this growth to continue its upward trajectory and that the Cayman Islands will remain at the forefront of the Reinsurance frontier.