The Cayman Islands has experienced a great deal of growth in the financial reinsurance (FinRe) sector, with a number of carriers licensed and a significant number of start-ups in the pipeline. Having identified the opportunity in this sector some time ago, the jurisdiction is now embracing change on the ground.

FinRe transactions are underwritten with financial management rather than risk transfer as the primary driver. Traditionally, primary insurers have entered into such transactions to either improve solvency ratios, strengthen their rating or boost return on capital.

Recent global regulatory changes have caused a capital strain on many international pension, life and annuity insurance companies. FinRe is now a popular way to access capital relief for these strains and this has stimulated growth in the formation of FinRe companies both globally and locally in the Cayman Islands.

Solvency and capital frameworks

To achieve appropriate capital levels and sustain credibility it is critical that the reinsurer should reside in a jurisdiction where there is a quality, but sensible regulatory regime.

For example, the EU Solvency II framework requires higher risk weights for longer duration assets and therefore can be punitive, even if the reinsurance company has well-matched liability to asset durations. The National Association of Insurance Commissioners (NAIC) model is more favourable.

There is little appetite in Cayman to pursue Solvency II equivalency. The jurisdiction is predominantly US-facing in its financial services sector; indeed, 90 per cent of all risks covered by the Cayman international insurance industry are North America-based. Solvency II would simply not be a match. It is no surprise that the Cayman Islands Monetary Authority has shown a willingness to facilitate a more NAIC-focused model which, for potential start-ups with prospective US cedants, has been a significant factor in determining that Cayman is the most appropriate jurisdiction for their new platform.

This article was first published in The Lawyer.

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