By John Dykstra From Maples and Calder

John Dykstra of Maples and Calder talks about the market-leading variety available in the Cayman Islands

The history of ILS in the Cayman Islands goes all the way back to the 1990s, when the very fi rst catastrophe bond transactions were set up in the jurisdiction. The ILS market has grown and developed considerably since that time, and a number of jurisdictions are now very actively jostling for position in this market. Although the Cayman Islands has a long history with this product, it is not resting on its laurels and welcomes the challenge of competition, confi dent that the advantages of a Cayman Islands structure place it in a very strong position. A willingness to innovate is in part what has made the Cayman Islands so appealing and successful for many years as the clear domicile of choice for a wide variety of investment and finance products. This openness to innovation makes the Cayman Islands the ideal place to set up new ILS structures that are novel in terms of their structure or the covered risks. As the market develops and pushes into new areas, the flexibility offered by a Cayman Islands structure can respond quickly to the demand.

None of the serious competitors for this work can lay claim to one of the unique advantages offered by the Cayman Islands: it is not limited to being a leader in just one product area. The Cayman Islands is a leading offshore insurance centre, with an unrivalled depth of experience with respect to products such as catastrophe bonds and healthcare captive insurers. The Cayman Islands is also the leading offshore centre for structured fi nance products, which include structures such as CLOs and ABS securitisations, and a leading centre for investment funds. Cayman Islands lawyers, managers and other service providers were seasoned by the global fi nancial crisis, and have unrivalled experience as a result of being at the coalface when transactions went into distress. The service providers in the Cayman Islands are uniquely placed in that they have considerable experience with both insurance products and securitisation structures. This is particularly helpful in the context of catastrophe bond transactions, which of course are a hybrid product, structured as a securitisation but with an overlay of insurance licensing and regulation.

Innovation

A few years ago, in recognition of the fact that catastrophe bond transactions are unlike traditional insurance structures, the Cayman Islands government created a special category of insurance licence. ILS issuers that are structured as limited recourse and fully collateralised transactions – which makes them more akin to a traditional securitisation than a traditional insurance product from the perspective of regulatory concerns – can avail themselves of this category of insurance licence that has been created specifically for them. Nominal capitalisation, a quick licensing process and comparatively light regulatory oversight provide clear benefits and facilitate these transactions. Other recent innovations may also be of benefit to ILS transactions; two innovations that are worth a particular mention are the Cayman Islands LLC structure and the Cayman Islands PIC structure.

Limited liability companies

In July 2016, the Cayman Islands Limited Liability Companies Law, 2016 came into force. The limited liability company (LLC) is essentially a hybrid structure that combines certain characteristics of a Cayman Islands exempted company with those of a Cayman Islands exempted limited partnership. When this new structure was created, certain Delaware concepts were taken into consideration and adapted, where appropriate, to mesh with Cayman Islands legal requirements.

The LLC is a body corporate with separate legal personality, but without share capital. Members can have capital accounts and the LLC agreement can set out how the profits and losses are to be allocated and how and when distributions are to be made. The parties have flexibility to decide if the LLC is to be managed by members or by appointed parties.

This structure has already proven to be popular with the funds industry, which is already accustomed to this structure as it is commonly used for domestic US funds. LLCs have also proven to be popular for other types of transactions, and the use of the LLC structure may help to open up certain ILS transactions to a wider group of potential investors.

Portfolio insurance companies

The Cayman Islands Insurance Law has been amended to allow a segregated portfolio company (SPC) to register subsidiary companies as portfolio insurance companies (PICs) with the insurance regulator, the Cayman Islands Monetary Authority (CIMA). PICs enable SPCs to transact insurance business between segregated portfolios (or ‘cells’). PICs also facilitate the incubation of smaller insurers that may wish at a later stage to spin-off on a standalone basis.

Any exempted company whose voting shares are held by a Cayman Islands SPC on behalf of a cell can register with CIMA as a PIC, so long as the SPC is licensed by CIMA (other than as a Class A insurer). A PIC is not required to hold its own independent insurance licence and can undertake insurance business that is within the scope of the insurance licence held by the SPC.

This structure will be appealing where a transaction is run through an SPC platform to reduce set-up costs and time delays, but the parties want the ability to freely contract with transactions housed within other cells of the same SPC.

Innovation continues

As this industry continues to evolve and develop, the Cayman Islands will continue to be responsive to the needs of new transaction structures by developing innovative solutions. CIMA’s insurance division has set up specialist teams to deal with the increasingly varied and complex insurance transactions that are being brought to market. The Cayman Islands government has publicly committed to pushing forward legislative changes that will enhance the insurance regulatory regime. Industry groups are actively participating in initiatives to address and respond effectively to new market requirements. Most recently, CIMA has announced further streamlining of the licensing process for catastrophe bond transactions, enabling applications to be approved in as little as five business days.

The spirit of innovation that initially drew catastrophe bonds and similar ILS products to the Cayman Islands continues to transform the jurisdiction’s service offering and will ensure that it remains a leading ILS domicile for years to come. The recently created LLCs and PICs provide new options to the market, and further changes in the years ahead are certain to bring developments that will continue to open up new opportunities.