Introduction

The Cayman Islands legislature recently enacted The Insurance (Portfolio Insurance Companies) Regulations, 2015 and related sections of The Insurance (Amendment) Law, 2013.

Rationale

To address market demand to broaden the statutory framework and confer upon an insurer incorporated as a Cayman Islands Segregated Portfolio Company (SPC) more flexibility with respect to quota sharing, risk pooling and reinsurance. The new law is also expected to improve the tax position of segregated portfolios under US federal law and enhance the market recognition of Cayman Islands SPCs within the insurance and reinsurance sectors.

Structure

New or existing insurers (other than Class A Insurers) operating as SPCs are now able to incorporate one or more of their segregated portfolios by establishing one or more “portfolio insurance companies” (PICs) underneath the SPC. In essence, a PIC is a Cayman Islands exempted company that is a subsidiary of the  SPC under which it is established but is related to a particular cell of such controlling SPC.

Regulation

A PIC will be regulated by the Cayman Islands Monetary Authority (CIMA) and will be subject to initial filing and registration fees. It will not, however, require a CIMA license separate to that of the SPC under which it is established. Existing SPCs wishing to establish a PIC and transfer the business of an existing cell to such PIC may take advantage of a statutory novation process as part of a fast-track registration process with CIMA. If CIMA approves the application, a Certificate of Registration will be issued to the PIC.

Ongoing obligations include the requirement to continue to operate under the conditions submitted to CIMA upon registration, maintaining the prescribed minimum solvency and capital levels and complying with annual filing requirements.

Key Features

A PIC will operate as a separate legal entity under established principles of corporate law.

Advantages include:

  1. the ability to contract with other cells of the SPC;
  2. substantially reduced risk of comingling of the SPC’s assets;
  3. reduction in apparent or real conflicts of interest by enabling a separate board of directors to operate each PIC, distinct from the board of the controlling SPC;
  4. potentially enabling each PIC to be recognised as a separate legal entity for purposes of US federal tax law, thereby allowing tax elections to be made under its own federal tax identification number;
  5. enabling a single PIC to be wound up without affecting other cells or PICs of the SPC or the SPC itself;
  6. improving market recognition of Cayman Islands insurers operating as SPCs by establishing the concept of incorporated cells;
  7. facilitating transition to a standalone insurance company;
  8. providing the ability to issue participating shares to investors with an economic interest in the PIC.