New Cayman Islands insurance law to tighten regulation of cat bond SPV’s

The Cayman Islands government has been working on a new set of laws to govern it’s insurance industry and the licensing of insurers and captives on the islands. Cayman has become the main domicile for cat bonds in recent years and plays host to many captive insurers as well. The Caymans ‘Insurance Law 2010’ will put the domicile more in line with Bermuda’s recent regulatory environment changes.

Currently, under the 2008 version of their insurance laws, insurers are licensed as either Class A (domestic insurers who carry out business in the Cayman Islands) or Class B (restricted or unrestricted insurers carrying on captive insurance business). The new regulation will include four classes of insurer.

Catastrophe bond special purpose vehicles/insurers have always been incorporated and licensed as Class B insurers. Companies wanting to issue cat bonds would apply for a Class B license, which had no set capital requirements which allowed SPV’s to be set up with just nominal capital in place. Now a new Class C category has been created specifically for cat bonds and SPV’s.

The new class breakdown will be as follows:

• Class A – domestic insurers
• Class B – captives
• Class C – catastrophe bonds or special purpose insurers
• Class D – reinsurers

The new regime hopes to provide insurers and reinsurers with clarity, certainty and predictability within the market.

Samuel Rose, Deputy Chief Officer, ministry of finance said: ‘This law encompasses several recommendations by international standard setting bodies as well as from the Cayman Islands insurance industry representatives. It mandates an effective corporate governance system by strengthening existing legislation and opening up new frontiers of business development.’

‘This modernized legislation paves the way for our local financial services industry to build on the islands’ existing reputation as a dynamic place to do business,’ he said. ‘By bringing clarity to a number of key issues – particularly with reference to the regulatory requirements for international businesses – we are now well-placed to be able to meet market demand for an increasingly diverse suite of reinsurance products, such as Insurance Linked Securities.’

The Cayman Islands has become the domicile of choice for catastrophe bonds in recent years with close to $8b worth of cat bonds listed (see our list of which cat bonds domicile in Cayman vs Bermuda here). It’s possible that part of the reason for it’s dominance in this area has been the lighter regulatory environment and nominal capital requirements. This change in legislation should put it on a more level playing field with Bermuda.

The law comes into force later this year at a date to be set by the Governor in Cabinet. Additional subsidiary legislation and guidance notes are expected to be announced soon.