Amid enormous political and economic uncertainties Cayman’s captive industry has been extremely successful in attracting new captives, a record number of delegates heard at the 2011 Cayman Captive Forum.
“2011 has generated what is almost a perfect storm of political uncertainties,” summarised Jay Waters of University Hospitals Health System.
"The unique number of catastrophe events, socioeconomic upheaval, historic drops in interest rates, sovereign credit problems in Europe, the unresolved budget impasse in the US, US healthcare reform, looming US presidential elections, the Arab spring and regulations such as Dodd Frank and Solvency II".
Despite this political and economic uncertainty, 2011 has been a “fantastic year” for new captive formations in Cayman, said Gordon Rowell, head of insurance supervision at the Cayman Islands Monetary Authority. An anticipated total of 41 new captives would constitute a new high for number of new captive licenses and a significant step up from 25 formations in Cayman in 2010.
The captive formations are also a good indicator of the health of the captive industry, he said. In total 731 captive insurance companies are located in the Cayman Islands and the industry sees record levels for both gross premiums at $9.6 billion and gross assets at $58.3 billion.
“In the midst of a soft market this shows the resilience of the Cayman financial model,” said Rowell.
He noted that while captive owners are hoping not to get caught up in more financial oversight and regulation and continue to wrestle with the competitive insurance market and weak fixed investments, these challenges may change how captives are overseen and even put in question the need for captives in a soft market. Some experts expect that we will see more corporate governance regulation for captives in 2012, said Rowell.
“However, all of this is window-dressing for the ultimate captive purpose. Captives are a risk management solution. As long as you keep the fundamentals of the insurance at the forefront, captives are an incredible long term solution to your risk management needs,” he said
The new Insurance Law, for which the regulations are currently being finalised in a private sector consultation and expected to be released at the end of the first quarter, is a good law for captive owners and captive managers alike, he noted.
Rowell reassured captive owners and managers that the concept of proportionality is key to the formulation of regulations, taking into account the size, the nature and the complexity of each licensee.
2011 also brought a new tax information exchange agreement with Canada which puts Cayman on an equal footing with jurisdictions such as Barbados that in the past benefitted from its tax treaties with Canada.
“This when added to our existing strong business ties with Canada and the competitive strength of our jurisdiction should increase Cayman’s attractiveness for new captive formations from Canada going forward,” Rowell said.
This was echoed by IMAC Chairman Clayton Price who said the agreement with Canada brings tremendous benefit to Cayman.
“Barbados was really the domicile of choice. We see that as a great opportunity for new interests to come to Cayman.”
The success of Cayman’s captive industry was also reflected by the Cayman Captive Forum.
“We must be doing something right,” said Price, referring to the attendance of the event which has improved from 1,040 delegates last year to over 1,200 this year. Nearly one third of the delegates were current or prospective captive owners and 27 per cent were first time visitors to the event. IMAC estimates that inn total more than 800 overseas guests attended the Cayman Captive Forum.
Difficult year for reinsurance
2011 meanwhile turned out to be a very difficult for reinsurers, said Bart Hedges, CEO of Greenlight Re, in a panel discussing how last year’s events would affect the market in 2012.
Hedges and other panellists expect a hardening insurance market for the year not only because of an extraordinarily high number of natural catastrophes that affected the industry’s underwriting return but also because of a sharp drop in the investment return, which typically makes up the majority of a reinsurers return on equity.
With limited options to increase return on equity in 2012 without increasing the capital costs, reinsurers will have to turn to higher rates, Hedges said.
In the face of growing uncertainty, it is important to focus on hard trends, argued technology forecasters and business strategist Daniel Burrus, the key note speaker at the Cayman Captive Forum.
Burrus encouraged the audience to be anticipatory. Economists for example use cyclical change as their main tool for predicting the future, he explained. Lately economists have been fundamentally wrong, because another kind of non-cyclical change has slowly emerged. But this linear change represents profound predictable one-way courses.
“Once you had a smart phone you are not going to get a dumb phone,” Burrus said, and once Chinese consumers start buying fridges they are not going back to a time without refrigerators anymore.
Aspects of technological change are largely predictable, he said, reminding delegates that they already know the iPhone 6, which does not even exist yet, will have a faster processor and more functionality. At the same time the “cloud is not going to be full” and 4G is not the end. Technological change will accelerate.
Basing decisions on hard trends, which definitely will happen, rather than soft trends which may happen, can yield powerful results, not only in the field of technology.
Demographic change for instance is such a hard trend that is tangible, fully measurable and predictable. In the US the trend is that between 2010 and 2020 the share of 25-44 year olds will decrease by 10 per cent. The share of 55-64 will increase by 75 per cent and the share of over 65 year olds will increase by 55 per cent.
“You could create a thousand companies right now based on the certainty of demographics,” said Burrus.
The fact that 10 years from now baby boomers, having partially depleted their investments, are going to be more conservative will have a profound effect on the stock market. This however will only be a negative issue if it is not planned for, he said.
New challenges will emerge. For the first time four generations will work in the same workplace due to increasing longevity. It can constitute a problem, but if properly planned for it can be the opportunity to create the perfect mix between the wisdom of long-time experience and the openness to applying new technologies, Burrus argued.
In another piece of advice, Burrus told delegates to take their biggest problem and skip it, because it is in fact not the issue.
“Hey you’re smart, you would have solved it by now,” he said. By skipping the “biggest problem” the true issue will emerge, for which most commonly a solution can be found.