Cayman Regulatory Update December 2014

Ruwan Jayasekera Cayman Islands Monetary Authority Paul Scrivener Solomon HarrisPaul Scrivener Solomon Harris Damian Pentney PricewaterhouseCoopers, Cayman Islands James Trundle Kane (Cayman) LimitedJames Trundle Kane (Cayman) Limited

CAYMAN REGULATORY UPDATE 2014 TODAY’S TOPICS  Update from the Regulator  Portfolio Insurance Companies  An auditor’s perspective  “Hot Topics” – what keeps a captive manager awake at night?

UPDATE FROM THE REGULATOR New Insurance Law and the transition period Regulatory Procedure on Business Plans Increasing diversity of prospective licensees CIMA’s Domestic and International involvement

UPDATE FROM THE REGULATOR New Insurance Law and the transition period –Transition period is for all types of licensees –Fulfilment of their obligations under section 4(4) and 8(2) of the Law –Bring themselves into compliance with the appropriate licence categorization

UPDATE FROM THE REGULATOR Regulatory Procedure on Business Plans –Amendment to the previous regulatory procedure on business plan changes –Guidelines to provide clarity: prior approval vs. notification –In conformity with the principle of proportionality

UPDATE FROM THE REGULATOR Increasing diversity of prospective licensees –Captives are being put to more sophisticated use –Highly sophisticated and large dollar value (re)insurance transactions

UPDATE FROM THE REGULATOR CIMA’s Domestic and International involvement (Insurance Related) –IAIS committees –National Risk Assessment

PORTFOLIO INSURANCE COMPANIES Introduction and History Generic term = cell company Segregated portfolio companies (SPC) in Cayman (other jurisdictions: protected cell companies, segregated account companies) Developed from inherent weakness in accounting segregation in traditional rent-a-captive

PORTFOLIO INSURANCE COMPANIES Introduction and History cont’d Guernsey was the first in 1997; others quickly followed (Cayman 1998); upwards of 50 jurisdictions today including a number of US states Cayman – 30 September 2014: 138 SPCs out of 765 captives writing more than US$750m in premiums with total assets in excess of US$4.6bn Segregated portfolios (cells) are legally segregated pools of assets within a single company “firewalled” from each other

PORTFOLIO INSURANCE COMPANIES Key features: Core Participant Cell ACell BCell C Participants

PORTFOLIO INSURANCE COMPANIES  General assets or “core” is the SPC company excluding the cells  A cell creditor only has recourse to assets of that cell; a core creditor only has recourse to assets of the core  Cell is not a separate legal entity – cell company acts on its behalf through a single board of directors  Exposure of core to “overflow” cell liabilities

PORTFOLIO INSURANCE COMPANIES  Intra-cell contracting is not possible  Specific statutory duties on directors – o Physical segregation of assets o Transfers between cells at full value o Cell transactions to be clearly identified in documentation  Cell ownership – preferred shares, contractual participation or sometimes owned by sponsor

PORTFOLIO INSURANCE COMPANIES  Core ownership – common shares  Naming/numbering of cells – “Segregated Portfolio”, “SP” or “S.P.”

PORTFOLIO INSURANCE COMPANIES Typical and not-so-typical uses for an SPC  SPCs began life as an improved version of the contractual rent-a-captive  Well-suited for life and annuity products  Need to separate by business line or geographically  Single parent captives expanding into third party business to be run as separate program(s)

PORTFOLIO INSURANCE COMPANIES Typical and not-so-typical uses for an SPC cont’d  Agency group captives – larger accounts or unrelated business  Regular captives set up as SPCs to provide flexibility  Revenue generator through management fees paid by cells  Only limitation is the imagination of consultants!

PORTFOLIO INSURANCE COMPANIES Effectiveness  Do SPCs work?  Could a cell creditor pierce the firewall to attach assets of other cells and assets of core?

PORTFOLIO INSURANCE COMPANIES  Cell is not a separate legal entity  Drawback – intra-cell contracting not possible; uncertain tax status of unincorporated cells  Enter the “portfolio insurance company” or PIC!

PORTFOLIO INSURANCE COMPANIES  Insurance (Amendment) Law passed on 25 March 2013 but not yet in force pending necessary Regulations being passed  Insurance specific – part of the Insurance Law  An SPC can incorporate one or more of its cells by establishing a Portfolio Insurance Company (PIC)  PIC is an exempted company beneath a cell and, generally, “replaces” the cell

PORTFOLIO INSURANCE COMPANIES PIC APIC BPIC C Core Participant Cell ACell BCell C Participants

PORTFOLIO INSURANCE COMPANIES Core t Cell ACell BCell C PIC A Participants

PORTFOLIO INSURANCE COMPANIES  PIC does not require insurance licence but registers with CIMA and is regulated  Straightforward registration process  Continuing obligations are similar to a licensee and include - o Must always be controlled by the SPC on behalf of cell i.e. voting shares o “Portfolio Insurance Company”, “PIC” or “P.I.C.” in its name

PORTFOLIO INSURANCE COMPANIES o Must operate within parameters of business plan o Margin of solvency/capital o Risk management rule o Annual declaration and audited financial statements  No more than one PIC per cell  Separate PIC board with minimum of two directors – need not be the same people as SPC board

PORTFOLIO INSURANCE COMPANIES  Non-voting shares permissible  Captive manager and registered office must be the same as for the SPC  Express power for PIC to contract with core, any cell and any other PIC  Broadly, CIMA has same regulatory and enforcement powers as for a licensee

PORTFOLIO INSURANCE COMPANIES  PIC can be established by a brand new cell or an existing cell  For an existing cell, unless opting out, there is a process for automatic novation of existing program to PIC

PORTFOLIO INSURANCE COMPANIES Advantages  Unlike a cell, a PIC is a separate legal entity  Contracting and risk pooling between cells and core  Greater certainty of IRS treatment  Easier for counterparties to understand  Board representation at PIC level (c.f. for a cell)  Easier transition to stand-alone captive

AN AUDITOR’S PERSPECTIVE Portfolio Insurance Company’s (PICS) -Specific accounting considerations: consolidation? -What a PIC looks like in ‘owner’ financial statement -Scope of audits Auditor whistle blowing obligations -the requirements -the implications for auditors -issues most commonly reported

AN AUDITOR’S PERSPECTIVE Beyond the audit opinion……auditor dialogue with the Board -The “Management letter” and other required communications -Focus from the board room “Everybody wants to rule the world auditors”…….current areas of focus on auditors from overseas regulatory bodies

HOT TOPICS Annual Returns – CIMA recently introduced the new reporting requirements for the annual returns. Could CIMA comment on how the captive industry has performed thus far? Changes in license class – With this re-classification exercise now largely complete for the Captive market, what are CIMA's observations? – Is the expectation that companies will move fluidly between license classes? – If so, who is responsible for monitoring this? Have any of the above, and also the MCR and PCR requirements, led to additional audit procedures?

HOT TOPICS The Risk Management Framework – This is obviously something that was talked about for many months before the rule was finalized. It definitely would have been a "hot topic" back in – Now, it seems firmly entrenched in each Captive's annual procedure, in that the Directors' review it a minimum of once a year and pass a resolution approving the framework. – Is this something that CIMA may ask to review more regularly? – Do the auditors view it as an important document?

HOT TOPICS Current Trends for New Captive Licenses – It is now very rare that the standard single parent healthcare captive is being formed. Is it a saturated market? Mergers / consolidations of healthcare captives seem to be more common? – Re- domiciling from other jurisdictions - any activity? – Growth in new and existing Group Captives. – Healthy interest in SPCs. What about PICs? – Captives from Canada and Latin America? – With regards to the last point, how is the industry working together to encourage new business from geographical areas other than the US? – What other growth areas have the panel noted?

CAYMAN REGULATORY UPDATE 2014 Questions?