US woes to affect Cayman

The fallout in the US financial markets as well as the recently approved bailout plan will not only impact US markets and other onshore economies, it has potential ramifications offshore as well, and certainly in the Cayman Islands.

First, the wider economic fallout within the US clearly poses a threat to the Cayman Islands economy generally due to the heavy reliance on North America in the areas of tourism and trade generally. As wealthy and ordinary American citizens experience serious erosion in their wealth, the Cayman Islands should expect to see a reduction in US-based travel to, and spending and investment in, the Cayman Islands.

As far the financial services sector is concerned, the major impact will therefore depend on a) whether the various entities are reduced significantly as a result of the crisis; or b) in the case of entities which generate fees on the basis of market values, such as in the case of fund or trust administration, whether there is serious erosion in value of assets under administration. This is particularly an issue as fund managers may start to switch to cash partially in preparation for a possible increase in redemptions in the fourth quarter. It is also partially due to their decision to hold cash as a safety net against negative market movements in their current investments, thereby creating a vicious downward cycle on the financial markets.

In the case of the funds sector, anecdotal evidence indicates that we are already losing some funds as a result of the crisis. But new funds will also be created as investment managers onshore pounce on opportunities in the current state of the financial markets, especially now that the US bailout plan will go ahead.

Most experts believe that the insurance markets in the US will see hardened market and pricing as a result of the crisis and following the US government takeover of its largest national insurer AIG.

As a leading jurisdiction for creation and management of captive insurance companies, on the one hand we might expect that the hard market conditions would be ideal for some new captive formations. But this also has to be offset by the general conditions in the US regarding access to capital as well as the potential difficulty gaining access to reinsurance.

The key thing to be prepared for is the wider short-to-medium-term economic impact which is expected to be negative, while monitoring developments in the US to ensure that the negative impact of the fallout, bailout and any additional regulation on the local industry is minimised.

Paul Byles