Author: Andrew Edelsberg
The Cayman Islands (aka Cayman) is well-known as a major offshore financial center, but it is looking to expand into new sectors. It has been making a determined play for U.S. life reinsurance business in recent years, and it has met with some success.
Based on recent U.S. regulatory filings it is estimated that Cayman has captured around 10% of the offshore U.S. life reinsurance market. Assets associated with international insurance companies in Cayman have more than doubled from USD71.2B at the end of H1 2023, to USD154B as of the end of Q3 2024, according to the islands' regulator, the Cayman Islands Monetary Authority (CIMA).1 Life companies accounted for roughly half of this.
Bermuda remains the unquestioned leader, with about 81% of cross-border reinsurance transactions from the U.S., according to Moody's. However, Cayman's growing significance has attracted attention. Marc Rowan, the CEO of private-equity group Apollo, which owns the life insurance business Athene, said in November he wanted to add a "word of caution" on the islands.2
While the jurisdiction may not be as prescriptive as Bermuda, it does have its own risk-based solvency calculations which determine the level of capital. Some Cayman-based entities have a bespoke approach to risk-based capital (RBC), while others apply the standard model. When considering any counterparty, it is necessary to evaluate how that entity measures and maintains sufficient capital.
As advisers, at Gallagher Re we are agnostic on domiciles. We undertake robust due diligence wherever our clients' counterparties are based. But judging from our conversations with clients, reinsurers, regulators and others, this debate is far from settled. Cayman's supporters and detractors both have plenty of well-supported arguments, and it is worth considering them carefully.
The case for Cayman: not 'if' but 'when'
For some, Cayman's growing appeal is straightforward. Bermuda introduced stricter capital requirements on life and annuity (re)insurers, making the Caribbean locale comparatively more attractive.
Bermuda's new rules were outlined in a paper known as CP23, and came into force on 31 March 2024. The impacts upon life reinsurers have been described as "wide-ranging"4 and involve bringing some aspects of Bermuda's financial and solvency calculations more closely in line with the EU's Solvency II regime. This alignment with Solvency II is primarily driven by the substantial presence of European P&C reinsurers, while only 1% of Cayman's reinsurance industry is connected to Europe.
The territory's regulator, the Bermuda Monetary Authority (BMA), has also been clear that life (re)insurers backed by private-equity capital can expect particularly close scrutiny. In December 20235 the BMA concluded: "To put it simply, PE insurers require an intensified supervisory engagement." In December this year, it published details of further consultations designed to tighten its rules.6
By contrast, authorities in the Cayman Islands do not intend to align with Solvency II,7 and will not adopt a new global minimum corporation tax rate8 of 15% – again unlike Bermuda, which plans to do so in 2025.9 Bermuda's move may be largely motivated by a desire to keep tax income on the island, which is not echoed by Cayman. These variations – particularly the tax differential — could represent a material, sustained advantage for Cayman.
The case for Cayman, then, is that Bermuda is bound to European-style solvency rules that are not optimal for U.S. life business.
It is not hard to build a bullish case. If just a half dozen reinsurers set up in Cayman per year, with a 50% success rate, there will be 15-20 additional reinsurers on the island in five years' time. A critical mass will be achieved.
The case against Cayman: many obstacles remain
This view, still common across the industry, is that although there has been a lot of buzz around Cayman as a reinsurance destination, there are many barriers to it becoming a distinct reinsurance market.
To be regarded as a real center, Cayman requires more reinsurers with a physical presence and staff on the island to set up shop there. CIMA defines these as "Class D" firms, and said the numbers have increased from three in 2017 to nine as of the end of September 2024.10
Nevertheless, much of the islands' insurance business comes in the form of sidecars and similar vehicles. These boost the headline assets under management (AUM), but the true test is the establishment of actual underwriting and operations.
One reason this is important is that regulators themselves benefit from advice and support sourced from the industry. One only needs to look at the detailed process of consultation and industry response that the BMA went through on its recent changes.
In addition, CIMA itself will need to recruit more experienced staff, probably from off-island. This will take time. From where Cayman's (re)insurance industry is now, depending on how you measure, it took Bermuda 15-20 years to get to where it is; and it did not have an existing Bermuda to compete with.
Based on conversations with current and former CIMA employees, we note that Cayman's regulator has a formal, detailed and engaging consultation process on all legal and regulatory changes, and benchmarks itself against the International Association of Insurance Supervisors (IAIS)'s Global Regulatory Standards.
Our view: it depends how you look at it
Entities that require clear guardrails and governance arrangements, such as (re)insurance sidecar structures, can fit very well into the regulatory environment in the Cayman Islands. If AUM is the main metric, Cayman may indeed be the most efficient home for this kind of reinsurance capital, and we believe this could happen in two to four years.
On the other hand, if success is defined as companies with on-island staff, writing multiple non-affiliated transactions, we believe this could take 10 years or more. The territory is also hopeful for U.S. regulatory recognition. In April 2024, the Cayman International Reinsurance Companies Association (CIRCA) and Cayman Finance organized the islands' inaugural reinsurance conference. Additionally, the law firm Conyers recently reported progress in CIMA's ongoing efforts to secure 'Qualified Jurisdiction' status from the U.S. National Association of Insurance Commissioners (NAIC). Delegates were told that Cayman had "secured the support of a U.S. state" to assist with its application, "which is ongoing."11
Domicile is less important than vigilance
All cedants, no matter where they reinsure, need to be their own regulator, and be comfortable that their counterparty will have sufficient resources to meet reinsurance obligations. And this applies just as strongly to vehicles based in the U.S. as those based offshore.
There are different structural protections that can offer much-needed reassurance to carriers. Cedants should require clarity on collateral and capital arrangements and put minimum conditions in place for how vehicles will operate.
This is especially true in offshore jurisdictions where transparency requirements may be less stringent than carriers are used to. As Moody's analysts observed in their recent note: "While certain reinsurers in the Cayman Islands may be well-run and capitalized, this is challenging for outside parties to determine."
We do push back strongly against the notion that offshore vehicles are automatically less trustworthy; all the same, it does mean that cedants need to do their homework. In general, financial disclosure from offshore entities lacks the detail of U.S. statutory accounting (although all accounting systems can be distorted).
And of course, cedants need to verify that potential partners have the expertise required, and that there is alignment on business values. At Gallagher Re, we understand the type of protections that meet cedants' needs, as well as how to balance risk protection with optimal pricing and avoid unintended consequences.
When drafting the reinsurance treaty, there must be features that define capital robustly and provide protection against potential erosion. We help our clients to design structural protections, evaluate the various forms of counterparty risk, and provide ongoing oversight through the life of the transaction.
The support of a trusted adviser, able to pick up some of the due diligence burden, can offer valuable peace-of-mind to carriers considering such transactions.
