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GRAND CAYMAN, B.W.I.-With no more uncertainty over who will oversee insurance regulation in the Cayman Islands, captive managers and regulators are optimistic about continued growth in the world's second-largest captive domicile.
While Cayman continues to be known as a mecca for medical malpractice captives, leading captive managers are successfully recruiting captives writing other lines of business.
Regulators and managers say new captives being licensed in Cayman are a mix of workers compensation, general liability, accident and health, product liability, and medical malpractice companies.
In addition, captive managers are finding opportunities in revived rent-a-captive and life and annuity markets. They also are helping reinsurers and insurers tap the capital markets and are looking to expand Cayman's reach to other parts of the world.
Overall, Cayman licensed 41 new companies in 1996, bringing the island total to 418 at year end. Another 10 captives have been licensed so far in 1997.
Most of the companies are single-parent and group or association captives that primarily insure members' risks. Less than 50 of the 418 companies are open-market companies that primarily write third-party business and are more strictly regulated, said William N. McCullough, the new head of insurance supervision (see related story).
Cayman lost 13 captives in 1996, mainly as a result of consolidation, with a few voluntary liquidations resulting from inactivity, Mr. McCullough said.
Premium volume for Cayman captives increased about 10% in 1996 to roughly $1.9 billion, he estimated. Exact figures have yet to be determined.
"The captive movement is as strong as ever," noted Wayne A.M. Cowan, senior vp for Johnson & Higgins (Cayman Islands) Ltd., Cayman's largest captive manager. "That's the fascinating thing: In a soft market, captives are forming at quite a considerable rate."
J&H added 19 new captives in 1996, bringing its total of true captives under management to 98.
With Marsh & McLennan Cos. Inc.'s recent acquisition of J&H, the combined captive management company will be an even bigger powerhouse in Cayman, with more than 130 captives under management and nearly $600 million in premium volume based on year end 1996 figures.
"Even with the soft market, there are still opportunities out there; it's a matter of finding them," agreed Tim Byrne, vp of Willis Corroon Management (Cayman) Ltd. Since its formation 31/2 years ago, Willis has added 23 captives: three new ones in 1996 and four new ones so far in 1997. Two captives moved to other managers in 1996.
Ian Kilpatrick, president of Crusader International Management (Cayman) Ltd., said, however, that while Cayman had an active year overall, most of the new business is "going to big-named brokers who have the task force over in the U.S."to help bring in business.
Crusader added three new captive companies in 1996 that are funding workers comp, general liability and automobile liability risks. Crusader manages 13 captives and saw a 3% rise in premium volume in 1996 to $64 million.
While medical malpractice captives continue to be Cayman's stronghold, captive managers are also attracting other lines of business.
According to the Monetary Authority, Cayman's new regulatory body, medical malpractice captives represented 34% of the island's captives at the end of 1996. While the total number of medical malpractice captives is up by four to 144, its proportion of the market is down from 36% in 1995.
Workers comp, general liability, and accident and health companies all increased Cayman presences in 1996.
"Although Cayman is the top domicile for health care-related captives, we don't see ourselves catering exclusively to that group," said John M. Pitcairn, vp of Mutual Risk Management (Cayman) Ltd. "It makes up 35% to 40% of the business (at MRM), but new business tends to be across the board."
MRM added three new captives in 1996, and premium volume increased 36% to $87 million.
After years of promoting medical malpractice business, J&H is "trying to promote" the setup of association or group captives among small and midsize companies-those with less than $1 million in premium and typically without the necessary capital to form their own captives, Mr. Cowan said.
"Workers comp, property, and automobile liability are the major risks we look at with smaller companies," he said.
"Medical malpractice is our bread and butter, and we're keen to continue that, but we have to look outside.*.*.to a whole myriad of different business," he said.
In addition to attracting new lines of business, many captive managers are looking to rent-a-captive facilities for growth opportunities.
"The market is changing," noted Anthony B. Stelling, director of Midland Bank Trust Corp. (Cayman) Ltd. More U.S. companies "are aware of captives even if they are not big enough to have their own captive." These companies understand entering into group or rent-a-captive arrangements is a way to obtain more financial benefits from their insurance programs.
"There is tremendous interest in the rent-a-captive field," Mr. Stelling said. "This is probably going to be a new growth area for the island."
While Midland does not own a rent-a-captive facility, "We have two companies that are in the rent-a-captive field that are just about ready to take on business," he said.
Midland added six new captives in 1996, predominantly medical malpractice companies, bringing its total under management to 75. Premium volume remained basically flat at $230 million.
International Risk Management (Cayman) Ltd. is managing two new rent-a-captive facilities licensed at the beginning of 1997, said its president, John R. Lower.
Safety National Re insures workers compensation, general liability, product liability and automobile liability risks for 10 clients.
The rent-a-captive will write an estimated $10 million in gross premiums in 1997, Mr. Lower said.
Safety National Re's fronting insurer is Safety National Casualty Corp.
Gulf Re also was formed at the beginning of 1997. It insures, among other risks, workers comp, dental and group life and disability, for 10 clients. Clients include third-party administrators, health care providers and managed care organizations.
Gulf Re is expected to write an estimated $3 million in gross premiums in 1997, Mr. Lower said.
Due to the increased interest in rent-a-captives, MRM's Mr. Pitcairn, who is chairman of the Cayman Insurance Managers Assn., said his goal this year is "to develop legislation to specifically attract rent-a-captives to the Cayman Islands."
Mr. McCullough said he also wants to strengthen the island's policy on rent-a-captives-specifically policies concerning segmenting accounts.
Regulators are concerned that if a rent-a-captive does not segment its accounts, one troubled company can adversely affect the entire captive, Mr. McCullough explained.
Many captive managers also are pursuing new interest in life and annuity business.
"In the last 12 months, I've seen a lot of inquiries for life and long-term business, and I'm not just seeing it from North America, but from Europe and Central America," said Seamus Tivnan, general manager of Marsh & McLennan Management Services (Cayman) Ltd. M&M added one new medical malpractice captive in 1996, bringing its total number under management to 34. Premium volume increased 30% to $83 million.
Other captive managers are taking advantage of increased interest in tapping capital markets to fund risk.
Major worldwide insurers and reinsurers are looking to capital markets to help extend their capital bases and hedge their catastrophe risks, Mr. McCullough said.
As many as five new companies have applied to form captives using capital markets. Some have been approved; some are under review, Mr. McCullough said.
"We see this as a tremendous potential for the reinsurance market, and it's great potential for Cayman to develop this type of business as it did with medical malpractice a couple of decades ago," Mr. Stelling said.
Midland Bank, for instance, is working with two catastrophe bond programs, he said. The companies, which were incorporated in 1996 but have yet to start business, are set up on behalf of one insurer and one reinsurer and are funding catastrophe risks.
Similarly, a "single purpose vehicle" was formed late last year to provide increased capacity for The St. Paul Cos. Inc.'s short-term property risks, said Mr. Cowan of J&H, which is managing the new company, called Georgetown Re.
St. Paul, with the assistance of Goldman Sachs, issued bonds to private investors to raise the capital.
In addition to attracting new lines of business to the island, regulators and captive managers are setting their sites on attracting new business from other parts of the world.
Cayman, 500 miles south of Miami, always has attracted primarily U.S. captive owners. While this will most likely continue, regulators and several managers are trying hard to attract business from other countries.
Recently, some companies have been formed in Cayman that have Far East owners, Mr. McCullough said. "I'd like to see the rest of the countries opening up."
To help in this quest, the government last year went on "a road show to spread the word a little bit" about Cayman to Hong Kong and Asia, Mr. McCullough said.
Part of this involves explaining the advantages of Cayman.
"Our flexibility and interpretation of regulation makes Cayman attractive," he said. However, "I think one of the big factors is that you can speak here to the decision-makers" quite easily. "We do all of our applications and licensing based on a business plan, which makes it so much easier" for individual captives, he said. "We look at the company's net worth, but we want the business plan to understand the whole basis of submission and how the company will work."
This year, Mr. McCullough plans to attend the Risk & Insurance Management Society Inc. annual conference and exhibition in Atlanta and its equivalent meetings in Europe, Australia and South America "to explain our position."
Captive managers have their sights set on Latin America for future growth.
"We've concentrated really on Mexico and Latin America," said J&H's Mr. Cowan. "Our feeling is European business will migrate to Dublin, Isle of Man or Guernsey. We've seen a bit of progress out of Mexico, but in Latin America, it's going to be a longer time," he said.
Latin America will be an opportunity for Cayman in the future, agreed MRM's Mr. Pitcairn. However, "The market there is getting used to regular insurance. It will take further time before it gets used to self-insurance and captives."
For instance, when talking to Latin American businesses, "We don't discuss why Cayman is better than Bermuda; it's more, 'This is what a captive is,'*" Mr. Pitcairn said.
Incidentally, "Cayman does have a couple of advantages for Latin American business," he noted. "With 580 banks, we already have the infrastructure that deals with Latin America, so those businesses can use the same bank." The proximity of Cayman also is an advantage, he said.
Indeed, according to several of the 24 licensed managers in Cayman, the domicile's stable, flexible approach toward regulation within a tax-free environment attracts many companies to the island.
Not only will Cayman license companies quickly if they have solid business plans, it also has one of the world's largest and most developed financial infrastructures. Nearly 600 banks, several major law firms with captive expertise and all the Big Six accounting firms have offices on Grand Cayman.
"You can get everything done you have to in a couple of days," Mr. McCullough said.
Indeed, the short turnaround time was attractive to Peter Trapp, director of insurance and dealer support services for Ford Motor Credit Co. in Detroit, which formed Vista General Reinsurance Ltd. in late 1995 to write credit life and disability coverage.
Mr.*Trapp said he was impressed by the "extremely friendly environment" in Cayman. "They are very interested in business and have a very favorable business environment."
Clearly, its proximity to the United States also is attractive, he said.
Willis Corroon Management manages Vista Re, and as a result, Willis' premium volume jumped more than 400% to $283 million in 1996