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CAPTIVEINSIGHT
INCORPORATED
CELL LEGISLATION
NEW OPPORTUNITIES FOR SEGREGATED PORTFOLIO COMPANY INSURERS
by Paul Scrivener
Partner
Solomon Harris
S
ince their introduction in 1998, segregated portfolio
companies (SPCs) have proved to be extremely popular
vehicles in Cayman’s captive insurance industry. SPCs
were originally developed to provide an improved model of the
traditional contractual rent-a-captive.
However, in the fifteen years that
they have been on the statute book,
they have been used in many different
circumstances. Indeed, they have
been used wherever there was a
need to create legally “ring-fenced”
accounts or portfolios within a single
licensed insurer thereby ensuring that
policyholders or other creditors only
had recourse to the assets of a specific
account or portfolio and not the entire
balance sheet of the SPC. Statistics
of the Cayman Islands Monetary
Authority (CIMA) bear witness to their
popularity with captive owners and
their consultants. As at 30 June 2013
there were 134 SPC insurers, out of a
total of 750 Cayman captives, writing
almost US$500 million in premiums.
Fine Tuning the SPC
Although not relevant to all SPC
insurers, for some a drawback of the
SPC was that none of the segregated
portfolios, or cells for short, of an SPC
was a separate legal entity. Only the
SPC itself was a legal entity and the
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cells were simply ring-fenced divisions
of that legal entity. Why was this a
drawback? There are two principal
reasons. First, any contract between one
cell and another cell of the same SPC
can never be legally binding because
of the absence of two legal parties. This
therefore prevents reinsurance and risk
pooling arrangements between cells of
the same SPC which for some SPCs is
commercially undesirable. Second, there
is considerable uncertainty over the U.S.
federal tax status of an unincorporated
cell of an offshore insurer casting doubt
over whether a cell can be treated as a
separate taxpayer and make its own
tax elections such as a 953(d) election
and an 831(b) election. These issues
were capable of being addressed if it
were possible for an SPC insurer to
incorporate one or more of its cells and
thereby create the separate legal identity
that was needed.
On 25 March 2013, the Insurance
(Amendment) Law (the Amendment
Law) was enacted in the Cayman
Islands to allow SPC insurers to
incorporate their cells for the first time.
It is, arguably, the most significant
legal development for Cayman’s
insurance sector since the introduction
of SPCs in 1998. The Amendment Law,
whilst now on the statute book, is not
yet in force at the time of writing this
article but will be brought into force
once necessary amendments have
been made to the underlying Insurance
Regulations. These amendments will
deal with administrative matters, such
as additional forms and returns that
are required and also more substantive
issues such as the capital and solvency
requirements for incorporated cells.
This legislation was widely anticipated
and was the product of a tremendous
collaborative effort over a two
year period between the Cayman
Islands Government, the Insurance
Managers Association of Cayman
(IMAC) and the Financial Services
Legislative Committee, a private
sector/public sector committee tasked
with maintaining Cayman’s financial
services legislation at the cutting edge.
A Different Approach to Cell
Incorporation
Incorporated cell legislation is not
new and was first developed in Jersey
several years ago. However, the
Amendment Law provides a model for
incorporated cells which differs from
that in Jersey and other domiciles.
It is specific to the insurance sector,
where there was a pressing need for
incorporated cells, and, at this stage,
does not extend to other sectors of
Cayman’s financial services industry.
The legislation amends the Insurance
Law rather than the Companies Law
and was deliberately crafted as a
modification to the existing regulatory
regime for SPC insurers rather than a
image © David Alary - Fotolia.com
change to substantive law which would
have taken much longer to implement.
Whilst PICs were developed to address
the intra-cell contracting problem and
provide greater certainty as to the U.S.
tax status of an offshore insurance
company cell, PICs have a number
of other benefits over a traditional
cell. Although they would have to
be approved by CIMA, the members
of the board of directors of the PIC
need not be the same people as the
members of the board of directors of
the SPC insurer itself. This provides
governance flexibility and gives a
voice at the board table for cell owners
which they typically do not have with
a regular SPC because of the fact that
there is a single board at the core level
responsible for the affairs of all cells
of the SPC. For third parties unfamiliar
with SPCs and the cell concept, a PIC is
probably easier to understand than a cell
simply because it is a separate company.
A PIC can also transition more easily to
a stand-alone captive than a cell because
it is a separate legal entity with its own
constitutional documents and board of
directors. Therefore, the transition is
likely to be much less disruptive than
would be the case with the hiving-off
of a cell. There is very limited judicial
authority in any jurisdiction surrounding
the legal efficacy of the ring-fencing
concept in a traditional cell company
and whilst legal experts generally
agree that the concept will withstand
close judicial scrutiny in the case of a
“
“
However,
the
most
important
difference with the Cayman model is
that cell incorporation is achieved by
a separate company being established
by the SPC underlying the relevant
cell rather than the cell itself taking
on incorporated status. Cayman has
adopted a more conservative solution
than competitor jurisdictions, one that
is based on clear and well-established
principles of corporate law. An SPC
insurer that wishes to incorporate one
of its cells will set up a regular Cayman
exempted company – called a portfolio
insurance company or PIC for short
- which will be owned by the SPC
insurer on behalf of the cell in question.
Effectively, the cell will own the PIC
and the PIC, for all practical purposes,
will replace the cell. So if the cell has
an existing insurance program, going
forward, that program will be operated
by the cell’s PIC and no longer by the
cell. A PIC is simply a subsidiary of the
SPC but tied to a particular cell of that
SPC, a concept which can readily be
understood by parties dealing with an
SPC and its PICs. Only one PIC can be
established under each cell.
Cayman has adopted
a more conservative solution
than competitor jurisdictions,
one that is based on clear and
well-established principles of
corporate law.
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CAPTIVEINSIGHT
SPC with PICS
PARTICIPANTS
CORE
CELL A
CELL B
CELL C
PIC A
PIC B
PIC C
Hybrid SPC
PARTICIPANTS
CORE
properly established and operated cell
structure, there is no doubt that a PIC
will benefit from well-developed case
law supporting corporate limitation
of liability.
CELL A
CELL B
CELL C
PIC A
Regulation
A PIC will be regulated by CIMA but
as long as it remains a PIC it will not
need its own insurance licence. Instead
it will operate under the umbrella of the
licence held by the SPC insurer which
controls it. The legislation provides for
a straightforward registration process
with CIMA for each PIC.
The level of regulatory oversight that
CIMA will have over a PIC will be
largely the same as for a cell. So, for
example, audited financial statements
reflecting the financial condition
of each PIC will need to be filed
with CIMA.
However, the ability for a PIC to
simply be registered with CIMA only
applies as long as the PIC is whollyowned by the cell of a licensed SPC
insurer. So, for example, if a PIC
were to be transferred to a third party,
perhaps as part of becoming a standalone captive, the PIC would have to
obtain its own insurance licence and
could not continue writing insurance
business until it did so.
Only a cell – or strictly the SPC acting
on behalf of a cell – will be able to
hold the voting shares in the PIC.
In this way, the PIC will at all time
be controlled by the SPC through a
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cell and hence why it is appropriate
for the SPC insurer’s licence to
extend to each PIC established by
the SPC insurer.
filing with CIMA a straightforward
declaration sworn by two directors
of the SPC containing certain
prescribed particulars and obtaining
creditor consents.
Establishing the PIC and
Automatic Novation
New Business Opportunities
The incorporation of the PIC will be
the same as any incorporation in the
Cayman Islands – a 24 hour process
once the necessary due diligence/
know your customer information has
been provided on the directors and
principals. The registration of the PIC
with CIMA will be largely the same
as the current procedure for creating
a new cell for an SPC. Creating a cell
generally takes just a matter of a few
days, with the principal step being the
filing of a business plan for the new
cell with CIMA.
In developing the Amendment
Law one of the issues that had to
be considered was the need for a
streamlined process for novating the
assets and liabilities of an existing
cell program to the underlying PIC.
This is addressed in the Amendment
Law by providing for an automatic
novation by operation of law by simply
Discussions
with
clients
and
consultants in Cayman and the U.S.
point to the fact that the ability to set up
PICs will bring new insurance business
to Cayman which might otherwise have
been lost to other domiciles. Therefore,
PICs should provide an important new
revenue stream for CIMA and the
Cayman Islands government and help
in maintaining Cayman’s position at
the cutting edge of developments in
alternative risk management.
T: +1 345-949-0488
E: [email protected]
W: www.solomonharris.com