September 25, 2020

Cayman SPCs can now form Portfolio Insurance Companies


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On 16 January 2015 the Cayman Islands Government brought into force certain sections of Part 4A of the Insurance Law, 2010 and passed the Insurance (Portfolio Insurance Companies) Regulations, 2015, thereby allowing insurers formed as segregated portfolio companies (“SPCs”) to enjoy the same benefits as incorporated cell companies in other jurisdictions. Cayman’s form of incorporated cell company (“ICC”) legislation is thought to be more robust than other jurisdictions offering ICCs because the model operates squarely within fundamental and well-understood principles of corporate law.
How does it work?
A new or existing SPC insurance company will effectively be able to incorporate one or more of its segregated portfolios (i.e. cells) by establishing a “Portfolio Insurance Company” (a “PIC”) under the relevant cell. The newly formed PIC will then undertake a straightforward registration process with the Cayman Islands Monetary Authority (“CIMA”) and once registered will be able to conduct insurance business in its own name. Although regulated by CIMA, the PIC will not need to be separately licensed as an insurance company. Its registration as a PIC will be sufficient to enable it to write insurance business. Unlike a cell of an SPC, a PIC will be a separate legal entity, i.e. an exempted company limited by shares.
What are the features of a PIC?
• A PIC must at all times be controlled (by voting shares) by its SPC, with the SPC acting on behalf of the relevant cell.
• Even though the voting shares in the PIC must be held by its SPC, participating shares can be issued to those with an economic interest in the PIC.
• A PIC must have “Portfolio Insurance Company”, “PIC” or “P.I.C.” in its name.
• A PIC must operate within the parameters of its business plan filed with CIMA at the time of its registration, as it may be amended from time to time.
• The minimum capital (“MCR”) and risk based capital (“PCR”) for a PIC will be the same as for a stand-alone captive writing the same level of related party business. For example, for a PIC which would fall within class B(i) if it were a stand-alone captive, the total minimum capital requirement will be US$100,000. It is anticipated that many PICs will fall within this categorisation. To provide a level of flexibility in circumstances where it would be inappropriate for a PIC to be capitalised as outlined above, CIMA has the discretion to modify both MCR and PCR.
• The minimum margin of solvency for a PIC will be the same as its PCR.
• A PIC is required to file an annual declaration and audited financial statements with CIMA.
• No more than one PIC can be established under any given cell of an SPC.
• Because the PIC is a company, it will have its own board of directors comprising a minimum of two directors but the composition of the board need not be the same as the composition of the board of the SPC itself.
• A PIC must have the same registered office and captive manager as its SPC.
• A PIC is expressly empowered to contract with the core of its SPC and with any other PIC or cell of its SPC.
• Broadly, a PIC will be subject to the same regulatory and enforcement powers as CIMA has in relation to a stand-alone captive.
• A PIC can be established either under a brand new cell or an existing cell of an SPC. In the case of the latter, it will be possible to utilise a statutory automatic novation procedure to facilitate a straightforward transfer of the existing program from the cell to a PIC.
What are the advantages of a PIC?
• A PIC has the ability to contract with other cells and other PICs within its SPC to facilitate reinsurance, quota sharing and risk pooling. This is not possible between cells of the same SPC.
• The PIC’s separate board of directors permits governance flexibility.
• For counterparties unfamiliar with cells, a PIC may be more readily understood than a cell.
• A PIC can easily transition to a stand-alone captive.
• A PIC can merge with another captive.
• A foreign captive can redomesticate in the Cayman Islands as a PIC where it is not of a sufficient size to operate as a stand-alone captive in the Cayman Islands.
• Because a PIC will be indistinguishable from any other company limited by shares, it is likely to be recognised as a separate legal entity for US tax purposes, allowing it to make its own tax elections under its own federal tax identification number.
What are the main costs associated with a PIC?
A PIC pays the following fees to CIMA:-
– US$1,220 on first registration
– US$305
The other costs involved will be the usual set up and ongoing costs for a Cayman exempted company together with legal fees.
Solomon Harris’ head of insurance. Paul Scrivener, comments, “I am very excited about portfolio insurance companies now being available in the Cayman Islands and delighted to have been closely involved in their development. This is the natural next step in the evolution of the SPC in the insurance sector and is an important additional tool in the tool box for Cayman. It provides a number of new opportunities for the use of SPCs 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. 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.”

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