Portfolio Insurance Company Legislation
In an effort to increase transparency of tax information for its citizens with overseas accounts, the US government introduced the Foreign Account Tax Compliance Act (FATCA) in 2010. This legislation required foreign financial institutions, from 2014, to report information on the accounts of US persons and other individuals holding some US investments to the IRS.
Cayman’s Response to FATCA
In order to comply with the requirements of FATCA, the Cayman Islands government said in 2013 it would adopt a Model 1 Intergovernmental Agreement, which would facilitate the reporting of information to the IRS.
Trust and Transparency
The Model 1 IGA where Cayman officials would pass the relevant information directly to the US, was seen as the most appropriate mechanism. The agreement highlighted Cayman’s strong reputation in co-operation with international tax authorities and was broadly welcomed by the industry.
The implementation of Portfolio Insurance Company (PIC) legislation was a landmark for the Cayman Islands insurance sector, creating new opportunities for the use of Segregated Portfolio Companies (SPCs).
It followed the recognition that clients wanted the ability to contract between segregated portfolios within the same SPC, to allow reinsurance and quota sharing which was otherwise not possible. Additionally, it would remove the uncertainty over how the IRS would treat unincorporated cells, providing the ability for tax elections to be made with a federal tax ID number.
Advantages of the PIC
In addition to being able to contract with other segregated portfolios or PICs within the same SPC, the PIC has flexible governance with a separate board of directors. Where counterparties are unfamiliar with segregated portfolios, a PIC may be more readily accepted and it can easily transition to a stand-alone captive.
Registration and Regulation
Any SPC insurance company can incorporate a segregated portfolio by establishing a Portfolio Insurance Company (PIC), which will conduct the relevant insurance business instead of the segregated portfolio.
Unlike a traditional segregated portfolio the PIC is a separate legal entity. It is regulated by CIMA, with a straightforward registration process, but will not need to be separately licensed as an insurance company. Annual audited statements are required to be filed with the regulator.
Although the existing segregated portfolio structure will continue to suit some companies well, it is expected that a significant number of SPCs will wish to set up PICs to address their limiting factors. For third parties unfamiliar with protected cells, a PIC is probably easier to understand than an unincorporated cell and it can more easily transition to a stand-alone captive if required.
With the aims of strengthening the powers of the regulator and creating new opportunities for reinsurers and issuers of Insurance Linked Securities in the Cayman Islands, in 2010 the Cayman Islands government revamped the jurisdictions Insurance Law.
Innovative Insurance Legislation
The changes aligned Cayman with international standards and made little real difference to captives from an operational standpoint, because much of the changes had already been standard practice in Cayman for some time, including certain regulatory and filing obligations for captives. The legislation also introduced the ability for a segregated portfolio company to incorporate one or more of its segregated portfolios, creating the flexibility for international insurance businesses to thrive in the Cayman Islands.
In this article by Paul Scrivener, the changes introduced in the Insurance Law (2010) Revision are explained comprehensively in terms of the implications for captives and he reflects on the benefits for the Cayman Islands from the enhanced legislation.
One of the hallmarks of the Cayman Islands’ success in international financial services is the strength and depth of its service providers. Cayman’s insurance managers have been operating in the insurance field for many years and have built up a wealth of experience, which can be used to the advantage of clients, both in terms of seeking new efficiencies in structures and creating innovative solutions.
Deep Pool of Industry Talent
All of the major accounting and audit firms have a presence in the Cayman Islands and the legal expertise is equivalent to that you would find in any major financial capital. Many of the international law firms have dedicated insurance practices, staffed by partners with experience from major insurance centres worldwide. Additionally, a large group of highly respected corporate services providers are in place to provide registered office facilities and all related corporate services and filing requirements.
See the list of Associate Member service providers here.
The cornerstone of Cayman’s successful international insurance industry is based on the robust regulatory system which has developed over decades through strong collaboration between professionals operating in the sector and government and regulatory officials.
This dynamic has created a responsive regulatory framework, which encourages innovation, with appropriate and cost effective supervision.
Cayman’s Insurance Regulator
Regulation of the international insurance industry falls under the remit of the Cayman Islands Monetary Authority’s Insurance Supervision Division. The regulatory framework is established on The Core Principles of Insurance Supervision issued by the International Association of Insurance Supervisors (IAIS).
The objective is to provide safety and stability to the financial sector and to hold licensees to the highest regulatory standards, while providing an environment that enables growth, innovation and competition.
Under the Insurance Law (2010 Revision), insurance licences are available under the following categories:
Domestic/retail business, permitting a local or an external insurer to carry on insurance business in or from the Islands.
Captive insurance entitles, permitting an exempted insurer to carry on insurance business other than domestic business.
For insurance-linked securities – providing for reinsurance arrangements limited to and collateralised by the holder.
For reinsurance companies, permitting an exempted insurer to carry on insurance business.
For the arrangement or procurement of insurance or reinsurance contracts on behalf of policy holders.
Permits a company to provide insurance expertise to or for Class B or Class C insurers.
Permits a person (who is not an insurer) to solicit domestic business on behalf of not more than one general insurer and one long term insurer.
For complete information on the licenses and requirements, visit the Cayman Islands Monetary Authority.