Examining the Cayman Islands’ Prudential Solvency Regime

Episode Summary

In the fourth episode of Skadden’s yearlong podcast series on global prudential solvency requirements, host Robert Chaplin and associate James Pickstock explore the Cayman Islands’ insurance regulatory landscape. As the second-largest jurisdiction for captives and a significant player in reinsurance markets, the Cayman Islands provides insurers with the ability to design a bespoke capital, investment and resourcing model that is right for individual companies’ needs, making it an attractive market for insurers. Rob and James discuss the Cayman Islands’ insurance history, regulatory classifications, solvency capital requirements and investment rules. They also examine how the jurisdiction aligns closer to the U.S. solvency regime as opposed to Solvency II standards.

• Cayman Islands’ Insurance Market Position: The Cayman Islands has evolved into a significant global center for international insurance business over the past 50 years, becoming the second-largest jurisdiction for captives and maintaining approximately 10% of the offshore life reinsurance market emanating from the United States.
• Regulatory Framework: The Cayman Islands Monetary Authority (CIMA) supervises insurers according to core principles of the International Association of Insurance Supervisors (IAIS) (of which it is a founding member), while maintaining a flexible, tailored approach to regulation.
• Insurer Classification System: Insurers are categorized by both type (general, long-term or composite) and class (A through D), with each classification subject to specific regulatory requirements designed to accommodate traditional insurance companies and innovative risk management solutions.
• Capital Requirements: Requirements vary significantly by class, from as low as $100,000 for some Class B insurers to $50 million for Class D insurers, with additional Prescribed Capital Requirements (PCR) that ensure adequate financial resources based on the insurer’s risk profile.
• Regulatory Positioning: Unlike its perceived competitor Bermuda, the Cayman Islands has not sought Solvency II equivalence, instead focusing on achieving equivalence with the U.S. National Association of Insurance Commissioners (NAIC) standards, making it potentially more attractive for U.S.-based reinsurance activities.

Key Points

• Japan's Insurance Market: Japan holds 5% of the global insurance market, with premiums of $363 billion in 2024, making it the fourth-largest insurance market in the world after the U.S., China and the U.K. The country has seen increasing competition with the rise of foreign insurers and new entrants in the reinsurance market.
• Regulatory Framework: Japan's regulator, the Financial Services Agency (FSA), has more closely aligned the country’s standards with global frameworks such as Solvency II and the IAIS ICS. Foreign insurers must establish a local subsidiary or branch and obtain an FSA license to operate in Japan, with reinsurance being a notable exception.
• Reinsurance Boom: The past 18 months have featured a high volume of reinsurance transactions, particularly between Japanese life insurers and offshore reinsurers (often Bermuda-based). These transactions are driven by an aging population, as well as the capital- and asset-intensive nature of savings-oriented products.
• Economic Value-Based Solvency: Japan is implementing new economic value-based solvency regulations from the fiscal year ending March 2026 that are generally aligned with the ICS but with adjustments tailored to Japanese insurers, which could further transform the regulatory landscape.

Voiceover (00:01):
From Skadden, the Standard Formula is a Solvency II podcast for UK and European insurance professionals. Join us as Skadden partner Robert Chaplin leads conversations with industry practitioners and explores Solvency II developments that matter to you.

Rob Chaplin (00:20):
Welcome back to the Standard Formula Podcast. Today we’re diving into the prudential solvency regime of the Cayman Islands, a prominent hub for insurance and reinsurance. This episode is part of our year-long series on global prudential solvency requirements, which will form the basis of our forthcoming publication, the Encyclopedia of Prudential Solvency. A special thanks must also go out to our friends in the Cayman Islands at Appleby and Conyers for their review and input into the content for this episode of the podcast. Thank you. Joining me today is my colleague, James Pickstock. James, it’s great to have you here.

James Pickstock (01:01):
Thanks, Rob. It’s a pleasure to be back on the podcast today to discuss the Cayman Islands prudential solvency regime. The Cayman Islands has become a significant player in the global insurance markets over the course of the last 50 years. Shall I get us started with a brief introduction to the history of the Cayman Islands regime?

Rob Chaplin (01:17):
Yes. James, please take it away.

James Pickstock (01:19):
The Cayman Islands initially rose to prominence in the insurance industry in the late 1970s with the creation of an internationally recognized legal framework. Since then, the territory has grown into a global center for international insurance business and is the second-largest jurisdiction for captives. The Cayman Islands have also gained a foothold in the reinsurance markets, capturing approximately 10% of the offshore life reinsurance market emanating out of the United States. Rob, can you tell us a bit more about the legal framework governing the insurance industry in the Cayman Islands?

Rob Chaplin (01:50):
Absolutely. The Cayman Islands Monetary Authority or CIMA is the regulatory body governing the insurance and reinsurance industry in the Cayman Islands. CIMA derives its regulatory powers from the Monetary Authority Act 2020 as revised and the Insurance Act 2010, also known as The Act. The Act grants CIMA the authority to license, supervise, and enforce regulations within the industry. There are several additional powers granted to CIMA. First, CIMA can issue supplementary rules, guidance, and policies that are binding on regulated entities in the jurisdiction. Second, CIMA may also issue procedures and policies for the regulation of their own internal frameworks and procedures.

James Pickstock (02:40):
Now, of course, Rob, it’s definitely worth noting at this stage that CIMA is a founding member of the International Association of Insurance Supervisors or IAIS and is party to the IAIS Multilateral Memorandum of Understanding, which establishes a formal basis for global cooperation and information exchange amongst insurance supervisors. CIMA has been parties to this memorandum since June 2011 and CIMA regulates the insurance and reinsurance sector in accordance with the core principles of insurance supervision issued by the IAIS. Listeners may remember that you recently hosted our colleague Caroline Jeffer, who recently joined us from the Bank of England for an episode covering all things IAIS, but back to Cayman. Rob, does the legal system in the UK have any influence in the Cayman Islands?

Rob Chaplin (03:26):
That’s an interesting question, James. It does. And this is to be expected given the history of the Cayman Islands. As a British Overseas Territory, The Cayman Islands has a political and legal system rooted in English common law enhanced by a modern statutory framework tailored to meet current commercial needs. The territory isn’t an independent country with ultimate power remaining with the British monarch in the UK and their appointed representative, the governor who is responsible for ensuring security and good governance within the Cayman Islands. With over 165 years of representative government, the Cayman Islands legal hierarchy begins with the local summary court and culminates with the highest appeals being heard by the Judicial Committee of the Privy Council in London. This structure helps to ensure a highly stable and robust legal environment conducive to establishing an insurance company. On that note, James, could you talk us briefly through the structural overview of insurers in the Cayman Islands?

James Pickstock (04:33):
Of course, Rob. In the Cayman Islands, insurers are categorized into different types and classes depending on the nature and scope of their insurance business. There are three designations assigned to each insurer. First, general insurers. This type of insurer provides non-life insurance products. These could include property, casualty, motor, liability, and other forms of insurance that do not involve life or health coverage. General insurers focus on covering risks associated with physical assets and liabilities. Second, long-term insurance. This category is dedicated to life insurance and other long-term insurance products. It includes life insurance, annuities, and health insurance. Long-term insurers focus on policies that provide benefits over an extended period relating to the life or health of the insured. Third, composite insurers. A composite insurer is authorized to conduct both general and long-term insurance business. This means they can offer a wide range of insurance products covering both life and non-life risks.

(05:34):
However, composite insurers must maintain separate accounts from their general and long-term business to ensure clear financial management and regulatory compliance. In addition to the types of insurer, there are also licensed classes of insurers. Class A, insurers licensed for the carrying on of domestic business by local or external insurer or limited reinsurance business as approved by CIMA. Such insurance primarily serve the domestic market offering a range of insurance products such as life, health, property, and casualty insurance to residents and businesses in the Cayman Islands. Class B, This is a very broad category facilitating the carrying on of insurance other than domestic business and includes captive insurers, which are companies established to ensure the risks of their parent company or related entities and also certain types of reinsurers. Class B licenses are further divided into three subcategories based on the percentage of net premiums written from related business.

(06:33):
The relevant subcategory will be important in so far as it relates to the underlying capital requirements. Third, class C. These licenses are often issued for the carrying on of an insurance business involving the provision of reinsurance arrangements in respect of which the insurance obligations of the class C insurer are limited and recourse to and collateralized by the insurer’s funding sources. Class C licenses are often used for special purpose vehicles in insurance link securities or ILS transactions such as catastrophe bonds. And finally, class D. This license category is usually reserved for the largest reinsurers that provide reinsurance coverage to other insurance companies. Class D insurers can operate on a global scale offering reinsurance solutions across various lines of business. They play a crucial role in risk management by helping primary insurers manage their risk exposure and capital requirements.

Rob Chaplin (07:25):
Thanks, James. You alluded to it in your description of the various classes of insurer that each class of insurer is subject to specific regulatory requirements. The classification system together with CIMA’s approach of considering each application on its merits allows for a tailored regulatory approach recognizing the diverse nature of insurance businesses operating in the Cayman Islands. It also facilitates the growth of the insurance sector by providing a flexible framework that accommodates both traditional insurance companies and innovative risk management solutions like captives and ILS vehicles. James, how are solvency capital requirements dealt with in the Cayman Islands?

James Pickstock (08:08):
The solvency capital requirements for insurers in the Cayman Islands vary depending on the class of insurer. By way of an example, local class A insurers must maintain available capital that exceeds the minimum capital requirement or MCR, which is the greater of 300,000 US dollars or a calculated amount based on various risk factors. The available capital is defined as the capital and surplus made up of issued share capital, additional paid-in capital, retained earnings, investment reserves, capital reserves, currency translation reserves, and other equity reserves, less any applicable liabilities or deductions. Additionally, there is a prescribed capital requirement or PCR, which is 125% of the MCR for local class A insurers. In contrast, external class A insurers have different requirements. Available capital for external class A insurers is limited to the total assets located in the Cayman Islands, less total liabilities and any other deductions applicable relating to the Cayman risks.

(09:08):
The MCR for external insurers is the greater of one million US dollars or its policy liabilities, and the PCR is 150% of the MCR. Additionally, external class A insurers must place and maintain assets in a segregated account with the Cayman Islands Bank in an amount at least equal to the PCR. The rules covering class B, C, and D insurers are complicated and each of the MCR and PCR are different with specific amounts and percentages based on the type of insurance activities they conduct. The exact requirements for each insurer are set out in detail in the chapter that will accompany this podcast, but to give our listeners an idea of the range of requirements, the MCRs for class B and D insurers vary greatly from $100,000 at the lower end for class B insurers to $50 million for Class D insurers at the upper end.

Rob Chaplin (10:01):
Well, James, that is a difference.

James Pickstock (10:03):
Indeed. We’ll touch on it in more detail shortly, but it’s good time to emphasize that whilst the MCR is prescriptive according to the class type, the overall regime is very flexible in respect of each individual insurer according to its own risk and business profile. For example, the PCR in the Caymans is set as the total risk-based capital that an insurer must maintain to operate in a safe and sound manner. There are some more prescriptive requirements in the legislation and also found in our chapter, but the overall calculations are often related intrinsically to the business conducted by any one insurer.

(10:36):
That isn’t to say that CIMA will defer to the business completely. CIMA has additional powers in respect of the PCR and the definition of available assets for certain classes of insurer. For example, CIMA can set an alternative PCR where it deems it appropriate and may exclude from the relevant calculations any assets it thinks are not suitable. Class B, C, and D insurers are also required to keep their solvency margin at least equal to the PCR, and if their capital falls below the PCR, but it’s still above the MCR, they must present a plan to CIMA for remedying the difference. If the capital falls below, the MCR, CIMA may consider a regulatory action. Can you tell us a bit about CIMA’s approach to group supervision? That will undoubtedly be relevant for insurer groups operating in multiple jurisdictions.

Rob Chaplin (11:22):
Yes, James. Of course, CIMA’s approach to group supervision involves assessing and evaluating an entire group. It’s outlined in its November 2023 regulatory policy update. This defines consolidated supervision as a group-wide comprehensive approach that includes the assessment and evaluation of an entire group considering the group’s reputation, financial soundness, and overall risks. CIMA identifies risks such as reputational risk, contagion risk, intergroup risk, conflicts of interest, supervisory arbitrage, and gearing. There are two possible approaches to group supervision, which is dependent on whether CIMA acts as the home supervisor or the host supervisor. Home supervision occurs when the group is based in the Cayman Islands and is not subject to group supervision by a regulator in another jurisdiction. CIMA will act as the home supervisor if it considers itself the most appropriate regulatory body based on several factors including the group’s head office location, main business activities, main business decisions, main risks, and largest balance sheet.

(12:40):
Host supervision involves oversight of a regulated entity that is a branch, subsidiary, or affiliate of an entity in a different regulated jurisdiction. CIMA ensures effective group supervision by considering various factors including the home supervisor’s regulatory standards, information sharing capabilities, and any objections or regulatory concerns from the home supervisor. If CIMA decides host supervision is appropriate, it may request the regulated entity to submit financial statements of the parent undertaking and seek additional information from the parent undertaking’s home supervisor. Crucially, CIMA will not issue a license under The Act if the potential applicant’s group structure hinders effective group supervision. Next up, James, why don’t you talk us through the investment rules governing insurers based in the Cayman Islands?

James Pickstock (13:34):
Absolutely, Rob. CIMA has published rules and guidance in respect of the governance of an insurer’s investment activities. The difference, as the name suggests, is that the rules are requirements issued to licensees on matters that CIMA considers essential for the prudential supervision of an insurer. In contrast, the statement of guidance is intended to assist insurers in complying with the relevant rules and other legislation, including guidance on how insurers should operate. In summary, the principles in relation to investments include security, investments should be secure, available for policyholder payments, and comply with sanctions orders. Liquidity assets should generate sufficient cash flows such that they can meet policyholder claims as and when they fall due. Diversification, assets must be diversified unless deemed low risk by CIMA, considering the nature, scale, and complexity of the business. And finally, risk management. Insurers must invest their assets in a manner that allows them to properly identify, measure, monitor, manage, control, and report risks, including market credit, liquidity, concentration, strategic, and operational risks. Rob, tell us about best practice in the Cayman Islands for monitoring and deciding investment strategy.

Rob Chaplin (14:43):
Well, insurers must have an investment policy that aligns with the nature, scale, and complexity of their business. The investment policy should specify the nature and extent of investment activities, compliance with rules, evaluation standards, risk appetite, investment selection criteria, asset allocation limits, monitoring and control processes and details of investment managers. Insurers should also have appropriate systems in place to monitor and take steps to mitigate any key identified risks.

(15:15):
The investment policy should provide for due diligence processes for each investment, and an investment committee or IC should oversee the policy and investment activities. The IC should include at least one board member with expertise in financial and investment matters, although this requirement does not apply to certain class B insurers. The IC’s duties include implementing and overseeing adequate risk management systems and controls for the insurer’s investments, ensuring proper segregation of execution, monitoring, and performance measurement functions, and maintaining continuous risk monitoring procedures. Insurers should also have adequate internal control systems to ensure that assets are managed in accordance with the investment policy. CIMA suggests certain internal controls on investment activities could include concentration limits, valuation and recording of investments in accordance with generally accepted accounting principles and general reporting on investments. James, with all that we have covered today, how would you say the Cayman Islands is viewed as a destination for insurance activity?

James Pickstock (16:24):
Well, as we mentioned at the top of the podcast, the majority of business for both the captive industry and the reinsurance industry in the Cayman Islands has its origins in North America. Insurers in the Cayman Islands primarily reinsure risks sourced from the United States with more than 90% of the risks covered by the jurisdiction emanating from the North American continent. However, unlike its perceived rival, Bermuda, the Cayman Islands have not sought solvency to equivalence.

(16:50):
Likewise, the Cayman Islands government has confirmed that it does not intend to implement the OECD Global Minimum Corporation tax rate, unlike its competitor Bermuda, which has done so during January 2025. By way of reminder for listeners, Solvency II ordinarily imposes strict standard capital requirements on insurers with the aim of preserving capital to meet potential liabilities. The Cayman Islands regulatory system allows a bespoke structuring providing the ability to design a bespoke capital investment and resourcing model for the individual insurer in the context of the risks being assumed coupled with appropriate reporting and transparent frameworks. This allows for the optimization of capital and asset deployment. However, there are concerns that the perceived lack of strict capital requirements for insurers in comparison to Solvency II style jurisdictions could lead to troubles in the future. Frequently, the Cayman Islands is pitted against Bermuda as a destination for insurers. In reality, the two are vastly different, and while they share similarities as offshore island venues, their prudential regulatory regimes are very different from each other.

Rob Chaplin (17:57):
I agree, James. Whilst not aligning with the Solvency II standard, the Cayman Islands is committed to achieving equivalence with the US’s National Association of Insurance Commissioners or NAIC, which would allow Cayman insurers and reinsurers to be structured in a manner that is closer in alignment to the US’s solvency regimes, which differ significantly from the EU’s Solvency II framework. As Cayman’s regulatory approach can be tailored to be more aligned with US expectations and practices, there can be lower regulatory friction and a greater ease of doing business for US sponsors and reinsurers in the Cayman Islands.

(18:35):
Achieving such a regulatory standard would enhance the reputation of the Cayman Islands as an international reinsurance hub. The flexibility of the Cayman Islands regime is seen as a positive factor by many, allowing insurers to tailor their capital and investment strategies to their specific needs. That said, there are barriers precluding it from being a distinct reinsurance market in its own right. One such barrier is the limited physical presence of insurers with staff in the Cayman Islands. As of the end of 2024, there were just nine class D insurers licensed in the Cayman Islands, although there is an increasing number of self-managed or partially self-managed class B reinsurers with premises and personnel in the Cayman Islands. In short, it’s essential for each insurer to assess the suitability of the jurisdiction within the context of their own business and the risks they underwrite.

James Pickstock (19:30):
Absolutely, Rob. In summary, the Cayman Islands is recognized as a significant global center for international insurance business, particularly known for captive insurance and healthcare captives. The regulatory framework overseen by CIMA provides a flexible and dynamic environment that supports both domestic and international insurance markets. While the Cayman Islands regime offers flexibility, it also faces scrutiny regarding its capital requirements compared to jurisdictions with stricter standards like Solvency II. Nonetheless, the Cayman Islands government and CIMA remain committed to achieving equivalence with the NAIC’s regulatory frameworks enhancing its reputation as an international insurance hub, the Cayman Islands Prudential Solvency Regime allows for the optimization of capital and asset deployment providing insurers with the ability to design a bespoke capital investment and resourcing model that is right for their individual needs. This flexibility coupled with appropriate reporting and transparent frameworks makes the Cayman Islands an attractive jurisdiction for insurers in defined circumstances. However, a key takeaway for listeners from today’s podcast is that it is essential for each insurer to assess the suitability of the jurisdiction within the context of their own business and the risks they underwrite.

Rob Chaplin (20:40):
Thank you, James. That seems like an excellent note on which to end today’s podcast. We hope you found this episode informative. Please stay tuned for more episodes in our series on global prudential solvency requirements, and also look out for our upcoming book chapter on the Cayman Islands, covering the issues discussed today in more detail. If you have any questions, comments, or suggestions, we’d love to hear from you. Until next time, thank you.

Voiceover (21:07):
Thank you for joining us on the Standard Formula. If you enjoyed this conversation, be sure to subscribe in your favorite podcast app so you don’t miss any future episodes. Additional information about Skadden can be found at Skadden.com. The Standard Formula is a podcast by Skadden, Arps, Slate, Meagher & Flom, LLP and affiliates. Skadden is recognized for its deep experience in representing insurance and reinsurance companies and their advisors on a wide variety of transactional and regulatory matters. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.