In this publication, Appleby Insurance experts provide a breakdown on the benefits of captive insurance companies and discuss why the Cayman Islands is a popular jurisdiction for such entities.
1. What is a captive insurance company?
A captive insurance company (Captive) is typically a wholly owned subsidiary insurer, which is established to insure the risks of its parent company or related entities. It is a form of self-insurance.
Captives are used by corporate groups in many different industries, including manufacturing, healthcare, energy, technology, food and beverage, aviation, financial services, fintech and retail. Captives are also used by non-profit organisations.
2. What are the advantages of a Captive?
There are a number of reasons why a corporate group may choose to set up its own Captive, including to:
- secure insurance coverage for difficult to insure risks
- reduce its insurance costs
- ensure more efficient claims handling
- increase its control over the underwriting process
- determine the investment strategy of the Captive
3. Why do Captives choose the Cayman Islands?
The Cayman Islands benefits from a respected and well-established regulator in the Cayman Islands Monetary Authority (CIMA), who are responsive, approachable and pragmatic.
The Cayman Islands also has an abundance of top tier service providers for Captives (insurance managers, legal advisors, accountants etc.) who are well positioned to service the captive insurance market.
The Cayman Islands is the second largest Captive domicile globally and the most popular domicile in the world for healthcare Captives.
4. What is the tax position for Captives in the Cayman Islands?
The Cayman Islands is tax neutral, with no direct taxation applicable to Captives incorporated in the Cayman Islands (other than stamp duty on documents executed in or brought into the Cayman Islands).
A Cayman Islands Captive can apply for a tax exemption certificate, which is an undertaking from the Financial Secretary of the Cayman Islands, that the Captive will be exempted for a period of up to 30 years from any legislation imposing taxes on profit, capital gains or inheritance if such legislation be introduced in the Cayman Islands.
It is also possible for a Cayman Islands Captive to make a Section 953(d) election for US tax purposes, subject to complying with the applicable US tax provisions.
5. How many Captives are there in the Cayman Islands?
As of 30 June 2024, there were approximately 673 Captives in the Cayman Islands regulated by CIMA, comprising:
(A) 154 segregated portfolio companies (SPC), which is a type of exempted company that may create segregated portfolios (SP), with the assets and liabilities of each SP being legally separate from the assets and liabilities of other SPs and from the general assets and liabilities of the SPC; and
(B) 519 non-SPCs.
6. What is the Insurance Managers Association of Cayman (IMAC)?
IMAC is the insurance industry association in the Cayman Islands which was established in 1994. IMAC represents insurance managers, Captives and service providers in the Captive insurance industry in the Cayman Islands.
IMAC acts as the liaison between CIMA, the Cayman Islands government and the Cayman insurance industry and has been instrumental in promoting the development of the captive insurance industry in the Cayman Islands.
IMAC organises and hosts the annual Cayman Captive Forum, which is the largest captive insurance conference in the world. The next Cayman Captive Forum is, as at the date of writing, scheduled to be held on 3 December 2024 to 5 December 2024 in the Cayman Islands.
7. How is a Captive established in the Cayman Islands?
The process is straightforward and involves:
(A) the formation of a corporate vehicle; and
(B) the licensing of that corporate vehicle with CIMA,
a brief summary of each is set out below.
(A) Formation of a Corporate Vehicle for a Captive
Exempted companies are the most common corporate vehicles used for Captives in the Cayman Islands. SPCs are often used by Captives given that multiple SPs may be formed under a single SPC. It is also possible for an SPC, for and on behalf of a particular SP to form a portfolio insurance company (PIC), which is a subsidiary exempted company that has separate legal personality and its own separate board of directors from the SPC. PICs do not require their own separate insurance license and instead “piggyback” off the SPC insurance license.
Companies in the Cayman Islands can be incorporated within 24 hours when the incorporation filing is made on a business day on an express basis with the Cayman Islands Registrar of Companies (Registrar of Companies).
Any Cayman Islands company which wishes to use in its name the term “insurance” or another term that suggests insurance business is being conducted by such company, is required to obtain a letter of non-objection from CIMA before the company can be incorporated with the Registrar of Companies.
(B) CIMA Licensing Process for a Captive
Under the Cayman Islands Insurance Act 2010 (as revised) (Insurance Act), the Class B insurance license framework applies to Captives. There are three sub-categories of Class B insurance license (Class B(i), Class B(ii) and Class B(iii)).
Below is a table summary for each sub-category of Class B insurance license of the CIMA:
(i) minimum capital requirements (MCR), which are the minimum capital that a Class B licensed Captive is required to maintain in order to operate; and
(ii) prescribed capital requirements (PCR), which are the total risk-based capital that a Class B licensed Captive is required to maintain in order to operate.
| Class B License Category | MCR | PCR |
| Class B(i) | General: US$100,000Long-term: US$200,000Composite: US$300,000 | General: PCR = MCRLong-term: PCR = MCRComposite: PCR = MCR |
| Class B(ii) | General: US$150,000Long-term: US$300,000Composite: US$450,000 | General:10% of Net Earned Premium (“NEP”) to first US$5,000,000 5% of additional NEP up to US$20,000,000 2.5% of additional NEP in excess of US$20,000,000Long term: PCR = MCRComposite: amount required to support the general business plus MCR |
| Class B(iii) | General: US$200,000Long-term: US$400,000Composite: US$600,000 | General:15% of NEP to first US$5,000,000 7.5% of additional NEP up to US$20,000,000 5% of additional NEP in excess of US$20,000,000Long-term: PCR = MCRComposite: amount required to support the general business plus MCR |
CIMA has a discretion to mandate regulatory capital requirements in addition to those set out in the table above, depending on the business plan submitted for the relevant Captive
The standard requirements for a Class B insurance license application are prescribed by the Insurance Act and include the following information:
a) Name of applicant
b) A detailed business plan
c) Three years’ financial projections
d) Personal details and references for proposed directors and shareholders
i. A completed personal questionnaire should be provided in respect of all proposed Directors, Officers and Managers.
ii. A “police clearance certificate” is also required, but CIMA will accept a sworn Affidavit an acceptable “other certificate.”
e) Last two years’ audited statements and/or notarised net worth statement of ultimate beneficial owners
f) Confirmation of appointment from a licensed insurance manager and approved auditor
8. How long does the CIMA licensing process take?
Typically around 8 weeks from the date of receipt of CIMA of a fully completed application form.
9. How can Appleby help?
Our insurance team in the Cayman Islands is comprised of market leading experts in the insurance sector. We have substantial experience in advising Captives on structuring, initial formation, the CIMA licensing process, ongoing regulatory requirements and commercial transactions. Please get in touch if you would like to discuss further.
For further information, please contact:
Jacob MacAdam, Partner, Appleby
jmacadam@applebyglobal.com
