Cayman has implemented new insurance regulations which allow insurers formed as segregated portfolio companies to enjoy the same benefits as incorporated cell companies in other jurisdictions.
According to the Insurance Managers Association of Cayman, the regulations enhance the insurance statutory framework by providing more risk management alternatives and flexibility to insurers incorporated as segregated portfolio companies.
The regulations covering portfolio insurance companies were passed by Cabinet on Jan. 16 and entered into force together with corresponding sections of the Insurance Law.
Under the regulations, a new or existing SPC insurance company is able to incorporate one or more of its segregated portfolios, or cells, by establishing a portfolio insurance company under the relevant cell.
Unlike the cell of a segregated portfolio company, a portfolio insurance company takes the form of an exempted company limited by shares.
The PIC has to register with the Cayman Islands Monetary Authority and it will be regulated by CIMA, but it does not need to be separately licensed as an insurance company.
Once the portfolio insurance company is registered, it is able to write insurance business in its own name, as a separate legal entity.
Paul Scrivener, head of insurance at Solomon Harris said, “This is the natural next step in the evolution of the segregated portfolio company in the insurance sector and is an important additional tool in the toolbox for Cayman.”
“It provides a number of new opportunities for the use of segregated portfolio companies, not least because it neatly overcomes the current inability of cells of the same SPC to be able to contract with each other. We have seen significant interest already from captive owners, prospective captive owners and consultants,” said Mr. Scrivener.
“It is not an understatement to say that this is one of the most significant legal developments for Cayman’s insurance industry since SPC legislation was first introduced in 1998,” he added.
Segregated portfolio companies are among others used for the formation of captive insurance companies as a variation of rent-a-captive arrangements. They offer a business that does not have enough capital to start its own captive insurer the ability to rent a cell where its assets and liabilities are segregated from other assets and liabilities of the insurance company.
Several perceived issues with the SPC structure concerning inter-cell transactions, taxation and the lack of control over the assets, which rests with the board of the sponsor SPC, can be overcome by the new regulations because each PIC is a separate legal entity with, potentially, its own board.
The advantages of the portfolio insurance company regime include that a PIC can contract with other cells and other PICs within the segregated portfolio company, which facilitates reinsurance, quota sharing and risk pooling.
Although the PIC is controlled by voting shares by its segregated portfolio company, participating shares can be issued to those with an economic interest in the PIC.
As a separate legal entity, a PIC can have a different board of directors from that of the controlling SPC, giving it greater governance flexibility.
The PIC will also be recognized as a separate legal entity for U.S. tax purposes, and it will have its own federal tax identification number.
Moreover, a PIC can be wound up without affecting its controlling segregated portfolio company or other PICs. It can also merge with another captive.
Kieran O’Mahony, chairman of IMAC welcomed the new regulations. The Cayman Islands has always positioned itself as being a center of innovation and created an environment that balances market needs and good governance, he said. “The PIC legislation and accompanying regulations both exemplify and reinforce Cayman’s leading position over other jurisdictions in terms of sensible and proportionate regulation, innovative legislation [based upon a trustworthy and reliable legal system] and the high level of governance and compliance afforded to it.”
Cayman’s version of incorporated cell company legislation operates within the principles of corporate law, based on English Common Law. As a result, this legislation is considered more robust than the incorporated cell company structures offered in other jurisdictions, IMAC said.