Captive insurance companies carry risk originating primarily from their owners or affiliates. Owners of captives are typically not in the insurance business; they set up a captive because they are either unable to obtain a certain type of coverage through conventional onshore insurance companies, or can self-insure at premiums significantly lower than those available in the open market. Consequently, the ebb and flow of captives depends on the state of the insurance market, which dictates the pricing of premiums.
The main advantages of a captive include lower costs of operations and greater capacity to absorb risk than the parent based in its home market. In 2005, the bulk of the 733 offshore insurance licences were for captives. According to the Cayman Islands Monetary Authority, 38% were in the healthcare industry, 21% in workers’ compensation and 10% in property insurance. The vast majority of Cayman Islands captive insurance business originates from the US, with Latin America, the Caribbean and Europe representing most of the rest.
Captives are managed by top-tier insurance companies and are also very active in the reinsurance market. In the case of a large deductible, the captive insurance covers the risk directly by managing its own reserves, and then purchases reinsurance from large global insurance underwriters.
Cayman demonstrated its innovation in 1998 when it introduced the segregated portfolio company (SPC) structure for the insurance sector. This cutting-edge legislation enabled various users to use the same captive insurance entity, and is gaining popularity among clients who do not want their own captive. The structure allows for a clear separation of assets and liabilities.
