Guide to captive insurance
How to maximise profits, control costs and provide better employee coverage by establishing a captive insurance formation in the Cayman Islands
Captive insurance is an alternative way for companies to access insurance coverage. In this set up a parent group, or groups of companies, create a licensed insurance company to provide coverage for itself instead of going to a third-party insurance provider.
In other words, the company becomes the owner of their own insurance company rather than a buyer of an insurance policy. It originated as a company that insured only the risks of its parent company. Now the term refers to any insurance company set up in a captive jurisdiction that is not regulated as a regular insurance company.
Captive insurance clients domiciled in the Cayman Islands offer a variety of insurance products including the following:
- General Liability
- Professional Liability
- Workers Compensation
- Medical Malpractice
- Stop Loss
- Long-term annuities
The benefit of having a captive insurance company includes:
- Transparency on premiums, claims processes and costs
- Control of the company’s overall financial position and employee product offerings
- Protect against market costs and coverage fluctuations that happen within the volatile commercial insurance options on the market that hike up premium rates
- Potential for profits for group captives as they typically allow members to earn dividends on unused funds. Plus, underwriting profits can be optimized by adopting rigorous risk control practices and claims management
- Ability to structure plans with customizes offerings with unbundled services
- Flexibility to offer customised policies not otherwise available in the conventional market.
- Direct access to reinsurance at a lower cost than in the traditional market that take place in the traditional market
Establishing a captive insurance company in the Cayman jurisdiction adds even more benefits to this list in being that it is a tax-neutral country that chooses not to levy additional taxes on companies that operate from within the regime.
The benefit of having a captive insurance company in Cayman includes:
- Business focused regulation in Cayman allows captive insurance companies to take advantage of the flexible regulatory approach while still meeting internationally recognised standards
- Possible tax advantages are found in Cayman with the country having no income, corporation or premium taxes and provide a renewable twenty-year guarantee against the imposition of such taxes. (However, owners should always seek appropriate tax and legal advice.)
The main types of captives are:
- Single Parent Captive – an insurance or reinsurance company insuring only its parent or affiliated companies.
- Group Captive – an insurance company that insures or reinsures the risks of a group of potentially unrelated companies which have a common goal.
- Association Captive – a company formed and owned by a trade association or group of service providers to provide insurance for its members.
- Segregated Portfolio Company “SPC” – a company which is set up with various segregated cells taking the insurance risk. The assets and liabilities of each cell are segregated from each other. This is commonly utilized by those groups preferring not to set up their own captive.
How to set up a captive insurance company in the Cayman Islands
For both the service providers here in Cayman and our international client base it is comforting to know Cayman is at the forefront of international standards when it comes to due diligence and anti-money laundering practices. Yet, this brings a highly regulated international business environment that requires high levels of due diligence, expertise and active involvement from all involved.
That’s where industry-qualified and regulated insurance manager experts come in to simplify the process. At CSI we start with a client intake session to learn about your programme planning needs and assess your feasibility studies.
From there, we will work further with you and/or your chosen broker or programme manager/administrator to streamline the business plan and other essential documents to a point where all parties are satisfied with the quality final product before filing with Cayman’s regulator, CIMA.
Steps to set up a captive insurance company in the Cayman Islands
- Determine what type of insurance you want, and which broker or program manage to use. This would be a third-party outside of CSI, but we can recommend companies based on your needs. You may wish to consult us at this stage to so we can advise you from the beginning.
- Set up a consultation with a company management firm (we suggest going with us of course!) to create a feasibility analysis for the new captive programme. This includes looking at variables needed for the business plan such as risk retention levels, types of coverage and limits of coverage.
- Negotiate fronting and reinsurance arrangements (if necessary).
- CSI meets with the CIMA, if necessary, to discuss the proposed new captive programme.
- Licence application to be prepared with assistance from CSI. The licence application will include the following:
- The completed licence application form
- Business plan also including the risk management statement
- Financial projections for a three-to-five-year period
- Last two years of audited financial statements and/or notarised net worth statement of ultimate beneficial owners
- The acceptance letters from a licensed insurance manager (CSI) and approved auditor in the Cayman Islands
- The acceptance letters from other crucial services providers including but not limited to actuaries, thirdparty administrators, etc.
- A letter of undertaking as to the minimum capital (usually from shareholder) h. The personal questionnaire, references and due diligence documents as required for each manager, shareholder, director, and officer
- Meet formally with the Insurance Supervision Division of CIMA (client and insurance manager) to present and discuss the proposed captive/reinsurance programme.
- Submit the completed licence application to CIMA The Cayman Islands offering also includes the captive insurance company option of a segregated portfolio insurance company (more than one cell writing different types of insurance or for just separating the insureds in different cells).
Continued oversight of captive insurance company
A licensed insurance manager needs to be heavily involved in all aspects of any new insurance company from the very start of the process. The role of the insurance manager in Cayman can be summarised as being responsible for the financial and business affairs of the client company. It will typically involve working with other appointed service providers for the program being responsible for the administration from a Cayman point of view.
Duties will include:
- Incorporation of the proposed company
- Provision of registered office and corporate secretarial functions
- Preparation or assistance with the license application
- Preparation or assistance in the preparation of the business plan of the company
- Preparation and maintenance of accounting records
- Working with the captive’s auditor to produce audited financial statements
- Monitoring investments of corporate funds
- Liaison with the Cayman Islands Monetary Authority ensuring all regulatory filings are made
- Due diligence coordination and documentation management
- Ad hoc consultancy services
- Cash and banking services coordination, including letters of credit and timely payment of approved invoices
- Premium billing and tracking
- Meeting preparation and coordination
- Coordination with other service providers