Regulation and Industry
Developments
James Trundle – CIMA
Ron Sulisz - SRS
Linda Haddleton – Kane
Agenda
James Trundle - CIMA
• Goals of Insurance Regulation
• Risk-Based Regulation
• Corporate Governance & the Rule on Risk
Management
2
The Goals of Insurance Regulation
• Insurance Core Principles (ICP) issued by IAIS
– ICP 1 section 1.3 states:
“the principal objectives of supervision promote
the maintenance of a fair, safe, and stable
insurance sector for the benefit and protection of
policyholders.”
3
The Goals of Insurance Regulation
• Insurance Core Principles (ICP) issued by IAIS
– ICP 1 section 1.3.1 states:
“all insurance supervisors are charged with the
objective of protecting the interests of
policyholders.”
How?
4
The Goals of Insurance Regulation
•
•
•
•
•
•
Laws and Regulations
Ongoing monitoring and supervision
Solvency standards
Corporate governance
Risk management
Intervention
5
Approaches to Insurance Regulation
Compliance Based Regulation
• Application of the Law regardless of the material risk of the
licensee
• Focus on insurance, market and credit risk
• Resource Intensive
• Does not easily incorporate non-prudential risk e.g.
operational
• Easy to administer
6
Approaches to Insurance Regulation
Risk Based Regulation
• Adoption of “proportionality” i.e. size, nature and complexity.
• Resource Efficient
• Requires constant reassessment of risk
• Encompasses all risk including operational risk
Solvency II ???
7
Corporate Governance
• Revised ICPs now available:
http://www.iaisweb.org/ICP-material-adopted-in-2011-795
• Corporate Governance is now ICP 7 rather than ICP 9
“The supervisor requires insurers to establish and implement
a corporate governance framework which provides for sound
and prudent management and oversight of the insurer’s
business and adequately recognises and protects the interests
of policyholders.”
8
The Rule on Risk Management
• Companies already consider their risk environments but CIMA
want licensees to document their processes to evidence:
– Board Strategy
– Risk Appetite
– Appropriate Controls
• Not interested in necessarily reducing risk. Taking risk is
acceptable as long as it’s monitored and controlled.
9
The Rule on Risk Management
• Rule and risk management framework should be a useful tool
for captive boards and management to assess and
management captive’s risk
• Focus of Rule and risk management framework follows range
of risk management issues identified in ICP 16 - Enterprise
Risk Management for Solvency Purposes
“The supervisor establishes enterprise risk management
requirements for solvency purposes that require insurers to
address all relevant and material risks.”
10
The Rule on Risk Management
• All insurance companies have adopted a RMF appropriate to
their size and complexity that will be made available to CIMA
at their request.
• Key words:
– Size
– Complexity
11
The Rule on Risk Management
• For Class B insurers writing the risks of their parent or
parents:
1. The Board to discuss and minute their tolerance for risk.
2. The Board to make a statement…… to be minuted……. that “given the
size and complexity of their Company, the Board do not feel that any
further formal documented process is required”.
For Class B insurers writing unrelated party risks:
1. CIMA will be expecting the Board of Directors to ensure that protocols
on key risks are implemented effectively and can be periodically
reviewed by CIMA. This includes the process of discussing the Boards
tolerance for risk, quantification of risk and processes to identify,
assess, mitigate and monitor risk.
12
The Rule on Risk Management
• Key risks to be considered:
–
–
–
–
–
–
–
–
Credit risk
Insurance underwriting and reinsurance risk
Investment risk (including use of derivatives)
Market risk (including liquidity risk)
Strategic and tactical risks from the business plan
Concentration risk
Compliance risk
Operational risk
13
The Rule on Risk Management
• RMF must be appropriate having regard to the size and
complexity of the insured, and the nature of its risk exposure
(section 5.1.2)
• RMF must include identification and adherence to
appropriate tolerance level or risk limit for material sources
of risk (section 5.1.5)
• Depending upon size and complexity of insurer and nature of
exposures, RMF should include periodic qualitative and
quantitative analyses (e.g., stress tests) (section 5.1.7)
14
The Rule on Risk Management
• RMF must include regular surveillance of market
environment to identify and respond to changes in operating
environment that may adversely impact insurer’s business
(section 5.1.6)
• RMF must include effective and comprehensive review by
independent functions, e.g., auditors, actuaries, risk and
compliance services and insurance managers (section 5.2)
15
Agenda
Ron Sulisz - SRS
• Captive Investment Policy
– An Overview
• The Competition
– Global Captive Market Statistics, Comparative
Differences and Niche Markets
• Developments in the Cayman Captive Industry
16
Captive Investment Policy
• CIMA Statement of Guidance (SOG)
“Asset Management & Investment Strategy
For Insurance Companies”
• General Guidance
• Accounting Issues – Unrealized Losses
17
Statement of Guidance
• www.cimoney.com.ky
– Regulatory Framework
• Index of Regulatory Measures
– Insurance – Index of Measures
• Rules, Statements of Guidance (SOG),
Regulatory
Policy
(RPY),
Regulatory
Procedures (PRP) and Forms (F).
• Subheadings for Licensing, Business Conduct,
Prudential Standards, Reporting and Anti
Money Laundering
18
Statement of Guidance
•
•
•
•
•
•
•
•
Statement of Objectives
Asset and Liability Management
Segregation of Assets
The Investment Process
The Investment Strategy
Operational Issues
Monitoring and Control
Audit
19
Statement of Guidance
• The Investment Strategy
– 5.1 – Asset mix
– 5.2 – Any limits on geographical area, markets, sectors,
counter-parties and currency.
– 5.3 – Overall approach to the selection of individual
securities; and consideration to risk profile of Company
and its liquidity needs.
– 5.4 – Any restrictions on assets.
– 5.5 – Details of any derivatives and/or structured products.
– 5.6 – If actively managed, the scope of investment
flexibility through quantitative asset exposure limits.
20
Statement of Guidance
• The Investment Strategy
– 5.1 – Asset mix
• In general, no more than 20% of the actuarially
determined reserves should be invested in equities
without prior approval.
• In addition, no P&C insurer should cover their technical
reserves with short-term liquid assets.
21
General Guidance
Balance Sheet
Investments
$10 million
Actuarial Reserves
$ 7 million
Net Worth
$ 3 million
20% of $7 million = $1.4 equities
100% of $3 million = $3.0 equities
TOTAL
$4.4 equities
22
General Guidance
• The Investment Strategy
– Asset mix
The Board of Directors has adopted a formal
investment policy which maintains a strategy which
utilizes short term, intermediate term and longer-term
investment components consistent with the liability
profile developed in the annual actuarial report. The
investment guidelines and asset allocation, which
allows for “30% equities with a range of + and – 5%”;
under the condition that no more that 20% of the
actuarial reserves will be invested in equities.
23
Accounting Issues – Unrealized Losses
• At times accounting net worth has been less
than the minimum net worth regulatory net
worth.
• CIMA takes into consideration more than just
balance sheet net worth into consideration for
regulatory net worth. Other considerations
include:
– Retrospective provisions in the
program; and
– Confidence level funding of reserves.
insurance
24
Accounting Issues – Unrealized Losses
Balance Sheet
Investments (at market)
$ 6 million
Total Reserves
$ 7 million
Net Worth
$ (1) million
*
Retrospective insurance program doesn’t include the unrealized gains or
losses on investments so a $4 million receivable can not be booked;
however CIMA knows that when investment gains or loss are realized the
premium will be collected from the Shareholder/Insured.
Also
Shareholder/Insured has ability to pay $4 million assessment.
25
Accounting Issues – Unrealized Losses
Balance Sheet
Investments (at market)
$ 6 million
Total Reserves (at 90% c.l.) $ 7 million
Net Worth
$ (1) million
Not a retrospective insurance program but:
Reserve @ 90% c.l. =
$7.0
Reserve @ expected c.l.= $5.0
Difference
$2.0
26
The Competition – the Global Captive
Market
• Estimated over 5,000 captive worldwide.
• Use the database of Business Insurance for 7
years for our analysis today which had 5,390
captives for the calendar year ending 2009.
27
Introduction
• Breakdown the global captive statistics by
geographical areas – Caribbean & Bermuda,
USA and Rest of World.
• Explain niche markets in certain domiciles.
• Illustrate recent trends.
28
Statistics - Overall
• What Country is the largest captive domicile?
29
Statistics - Overall
• What Country is the largest captive domicile?
• However, each state has its own captive
legislation, therefore each should be
evaluated independently as they are domicile
in their own right.
30
Statistics - Overall
Caribbean & Bermuda – 2,629 or 49%
USA – 1,666 or 31%
Rest of World 1,095 or 20%
31
Statistics – Largest Domiciles
Bermuda – 885
Cayman Islands – 780
Vermont - 560
(Top 3 Represent 41% of Global Market)
32
Bermuda – Brief History
• Largest International Domicile.
• Established in the 1950’s when US companies
needed to create more capacity than the commercial
marketplace had available.
• Reiss conceived wholly-owed insurance company.
• Companies also found they could:
– Reduce their net premium costs for property insurance and other tariff
rated coverages,
– Offer coverages that were not available in the commercial
marketplace and
– Enjoy the freedom of a regulatory environment that welcomed the
captive structure.
33
Cayman Islands - Brief History
• Second largest International Domicile
• In the 1970s, when litigation exploded and jury awards
became increasingly more onerous, coverage availability for
medical malpractice became more difficult to obtain. It was
during this time that the Cayman Islands established itself as a
captive domicile by accepting Harvard's medical-malpractice
captive.
• The Cayman Islands has since become the largest domicile in
the world for healthcare captives with 266 medical
malpractice captives as of June 30, 2010.
• 2nd niche is CAT Bonds and 3rd Group captives.
Statistics – Caribbean & Bermuda
(From Business Insurance Published March 2010)
Domiciles
2003
2004
2005
2006
2007
2008
2009
Bermuda
1,150
1,000
987
989
958
960
885
Cayman Islands
644
694
733
740
765
777
780
British Virgin
Islands
307
350
380
400
409
332
285
Barbados
248
290
242
235
219
230
225
Anguilla
N/A
N/A
N/A
N/A
N/A
200
209
Turks & Caicos
159
164
166
169
173
182
203
Bahamas
18
19
22
26
28
16
15
Netherlands
Antilles
18
18
16
17
15
15
14
Panama
8
3
4
4
4
5
5
Puerto Rico
0
0
1
0
0
0
5
U.S. Virgin
Islands
7
7
9
6
6
3
3
2,559
2,545
2,560
2,586
2,577
2,720
2,629
-0.55%
0.59%
1.02%
-0.35%
5.55%
-3.35%
Total
Year to Year
Growth
Excluded Nevis estimated 60+ and Tortula estimated 60+.
3% ↑
since
2003
Bermuda
was 25%
of world
market in
2003. In
2009 only
16%.
Statistics – Caribbean & Bermuda
(From Business Insurance Published March 2010)
Domiciles
2003
2004
2005
2006
2007
2008
2009
Bermuda
1,150
1,000
987
989
958
960
885
-13.04%
-1.30%
0.20%
-3.13%
0.21%
-7.81%
694
733
740
765
777
780
7.76%
5.62%
0.95%
3.38%
1.57%
0.39%
350
380
400
409
332
285
14.01%
8.57%
5.26%
2.25%
-18.83%
-14.16%
Year to Year
Mvmt
Cayman Islands
644
Year to Year
Mvmt
British Virgin
Islands
Year to Year
Mvmt
307
In the 6 years there was a decrease of 23% in Bermuda and a
decease of 7% in BVI; while the Cayman Islands saw an
increase of 21%.
Statistics – Caribbean & Bermuda
• Fourth largest – Barbados – 225
– Historical tax treaty with Canada however recent TIEA’s with other
domiciles in the region (i.e. Bermuda, Cayman Islands, others) with no
tax environments.
– Other domiciles in region will try to compete on service levels and
geographical advantages.
• Fifth largest – Anguilla – 209
– Grown at the expense of BVI.
– Mainly 832(b) captives.
• Sixth largest – Turks and Caicos – 203
– Known for niche hybrid reinsurance companies (PORC’s)
– Auto dealer warranty captive.
Vermont – Brief History
• The largest USA captive domicile and 3rd largest in the world
• In 1981, the Vermont Legislature passed the Special Insurer
Act which was designed to provide a unique and attractive
statutory framework for captive formation. These landmark
regulations had become the model of captive regulation in
USA .
• The captive insurance industry has received universal and
enthusiastic support from the governors and state legislators.
• Vermont's Infrastructure.
38
Statistics – USA
Domiciles
Vermont
Hawaii
South Carolina
Utah
Nevada
District of
Columbia
Kentucky
Arizona
Delaware
Montana
New York
Georgia
Colorado
Missouri
Alabama
Tennessee
Michigan
Arkansas
Illinois
Kansas
Oklahoma
South Dakota
Rhode Island
Connecticut
Louisiana
Maine
Virginia
West Virginia
Total USA
Year to Year
Growth
(From Business Insurance Published March 2010)
2003
507
122
67
2
19
2004
524
147
106
2
39
2005
542
158
122
15
58
2006
563
160
146
30
95
2007
567
163
158
92
108
2008
557
165
156
122
123
2009
560
162
161
148
126
20
0
18
4
9
18
16
11
N/A
0
4
N/A
1
3
0
0
1
1
N/A
N/A
N/A
N/A
N/A
823
40
5
39
5
10
28
14
10
N/A
0
4
N/A
1
3
1
0
1
0
N/A
N/A
N/A
N/A
N/A
979
59
6
53
5
13
33
15
9
N/A
0
3
N/A
1
3
1
1
1
0
N/A
N/A
N/A
N/A
N/A
1,098
70
10
83
6
21
39
17
8
N/A
1
3
N/A
1
3
1
1
1
0
N/A
N/A
N/A
N/A
N/A
1,259
77
31
94
18
30
44
14
6
N/A
2
3
N/A
1
2
1
1
1
0
N/A
N/A
N/A
N/A
N/A
1,413
90
67
106
41
35
50
14
6
3
3
3
1
1
1
1
1
1
N/A
N/A
N/A
N/A
N/A
N/A
1,547
116
105
99
49
47
47
18
6
6
5
4
2
1
1
1
1
1
N/A
N/A
N/A
N/A
N/A
N/A
1,666
18.96%
12.16%
14.66%
12.23%
9.48%
7.69%
102%
↑
since
2003
Statistics USA
Vermont - 560
Hawaii - 162
South
Carolina – 161
Utah – 148
Nevada – 126
DC – 116
Kentucky - 105
Arizona - 99
40
Statistics USA
West
East
Vermont - 560
Hawaii - 162
South
Carolina – 161
Utah – 148
Nevada – 126
DC – 116
Kentucky - 105
Arizona - 99
41
Statistics – USA
(From US Captive magazine 2010 Edition)
Domiciles
Niche
Details by
Sector
2009
Legislation
Group captives
Vermont
560
1981
42 of Fortune 100 /
RRG's
Manufacturing 107 /
Healthcare 89
21%
Hawaii
162
1986
Japanese/West Coast
USA
Construction 47 /
Healthcare 28
10%
South Carolina
161
2000
RRG's
Utah
148
2003
831b's
Real Estate / Property
Mgmt / Const
0%
Nevada
126
1999
Group Captives
Healthcare /
Construction
56%
District of Columbia
116
2000
n/a
Healthcare
31%
Kentucky
105
2000
n/a
Diverse
11%
Arizona
99
2001
n/a
Health 31 /
Construction 22
22%
25%
Statistics – Rest of World
(From Business Insurance Published March 2010)
Domiciles
Guernsey
Luxembourg
Isle of Man
Dublin
Singapore
2003
383
216
173
205
49
2004
379
219
175
214
57
2005
382
208
165
154
60
2006
381
208
161
154
60
2007
368
210
155
131
62
2008
370
262
156
131
63
2009
355
251
145
114
63
Switzerland
Labuan
New Zealand
British Columbia
Gibraltar
Mauritius
Vanuatu
Malta
Jersey
Hong Kong
Guam
34
21
N/A
12
12
13
N/A
1
15
2
1
1,137
50
21
N/A
13
12
13
N/A
0
13
2
1
1,169
48
29
N/A
15
14
13
N/A
8
15
2
1
1,114
48
26
N/A
18
14
13
N/A
5
15
2
1
1,106
48
31
N/A
20
19
13
N/A
5
5
2
1
1,070
42
30
20
17
19
13
16
7
5
2
N/A
1,153
42
32
22
18
17
12
10
9
3
2
N/A
1,095
2.81%
-4.70%
-0.72%
-3.25%
7.76%
-5.03%
Year to Year
Growth
Of the largest 4 European domiciles, Luxembourg is the only
one that has grown since 2003, and the major reason was
the good year in 2008 (42 new captives).
Statistics Rest of World
Guernsey – 355
Luxembourg – 251
Isle of Man – 145
Dublin - 114
44
Statistics – Overall
(From Business Insurance Published March 2010)
Domiciles
2004
2005
2006
2007
2008
2009
World
Carribbean &
Bda
Carribbean
w/o Bda
3.85%
1.68%
3.75%
2.20%
7.11%
-0.55%
-0.55%
0.59%
1.02%
-0.35%
5.55%
-3.35%
9.65%
1.81%
1.53%
1.38%
8.71%
-0.91%
USA
18.96%
12.16%
14.66%
12.23%
9.48%
7.69%
Rest of World
2.81%
-4.70%
-0.72%
-3.25%
7.76%
-5.03%
USA (102% 6 year growth) is growing at a faster pace
than Caribbean & Bermuda (3% 6 year growth) as
well as the Rest of World (-4% 6 year growth).
Statistics – Overall – Insurance Managers
Manager
Captives Under Mgmt
%
Cum %
Aon
1,222
23%
23%
Marsh *
1,120
21%
43%
Willis
298
6%
49%
USA Risk Group
234
4%
53%
International Advisory Services *
200
4%
57%
HSBC Insurance Management
194
4%
61%
Atlas Insurance Management
170
3%
64%
Alta
130
2%
66%
Beecher Carlson
104
2%
68%
AMS
100
2%
70%
Tribeca Strategic Advisors
97
2%
72%
Strategic Risk Solutions
95
2%
74%
Chartis Insurance Management
87
2%
75%
R&Q Quest Management
83
2%
77%
Global Captive Management
79
1%
78%
JLT Insurance Management
78
1%
80%
Wealth Management Solutions
75
1%
81%
Artex Risk Solutions
60
1%
82%
Utah Captive Insurance
58
1%
83%
Alternative Risk Management
52
1%
84%
Risk Services
50
1%
85%
Statistics – Overall – Insurance Managers
• In 7 of the top 10 domiciles, all but BVI Marsh and Aon are of
a significant presence.
• The broker affiliated managers tend to be in multiple
jurisdictions.
• Of the independent managers only USA Risk Group, HSBC,
and Strategic Risk Solutions are in more than one jurisdiction
with a significant percentage of their presence in the top 3
jurisdictions.
Overall Positive Observations
• International
innovation.
Domiciles
provide
value
by
supporting
– Segregated Cell Companies started in Guernsey
– Catastrophe Bonds started in Cayman Islands
– Sidecars started in Bermuda
• Captive Consultants favour International Domiciles when
recommending third-party risk coverages due to their
flexibility.
• International Domiciles provide an opportunity to operate in a
more cost-effective environment (i.e. no premium taxes).
Overall Positive Observations
• International Domiciles have strong infrastructures for captive
insurance with immense intellectual talent, that will continue
to be as innovative in the future as they were in the past.
Overall Negative Observations
• International Domiciles are receiving negative press.
• Political pressure from state authorities to domicile a captive
in the US.
Cayman Developments
• Insurance Law 2010
• Regulation on Capital and Solvency
• Insurance Business Symposium 2010
– Ten Recommendations
51
Insurance Law 2010
• www.cimoney.com.ky
– Regulatory Framework
• Laws and Regulations
– Insurance Law (2008 Revision)
– Insurance Law, 2010
– Insurance (Forms) Regulations (2003 Revision)
– Insurance (Variations of Fees) Regulations, 2009
• Published with Gazette No. 21 on 11 October 2010 but is not
“in force”.
• Transitional provisions in the Schedule for Section 42(1).
52
Regulation on Capital and Solvency
• “Soon Come”.
• Split between Class A, B, C and D.
– A – Domestic Insurance Company
– B – Captive Insurance Company
– C – Special Purpose Insurer
– D – Open Market Reinsurance Company
53
IBS 2010 – Top Recommendations
 Consider Incorporated Cell Legislation.
 Industry “Fact Sheet”.
 www.imac.ky – Members – Cayman Islands
Captive Industry
 Development of a
Comparison Model.
Statistical
Domicile
 www.imac.ky – Members – Domicile Comparison
 Expand Captive Owners to new geographical
and industry segments.
 Attendance at CRIMS in September 2011
54