Insurance Services

The Development of Offshore Captive Insurance Companies

The concept of the captive insurance company is not new.  Many of the insurance companies formed in the United Kingdom in the 18^th and 19^th centuries, and later in the United States, would be regarded as captives if they were formed today. The growth in domestic captives was a feature of the insurance market in the early part of this century but it was not until the 1960s that the benefits to be gained by incorporating offshore captives (subsidiaries and affiliates formed outside the country of origin of their parents) were widely recognised. 

Most developed countries enacted legislation to regulate insurance business but successive amendments often resulted in simple laws becoming complex statutes which were difficult to understand.  With legislation being largely designed to protect the consumer, corporations sought alternative methods of securing insurance for their own risks.  It was soon recognised that by forming offshore subsidiaries, companies could arrange insurance cover appropriate to their needs and very often at a reduced cost. There was also the added benefit to the subsidiary of being able to maintain reserves and accumulate earnings in a low or no tax area which was also relatively free of over-restrictive regulation. The offshore captive was born.

The offshore insurance market developed in a number of small territories which were perceived to be politically stable and whose laws were conducive to the conduct of insurance business. These territories also boasted relatively good communications, financial and legal services, low taxation and were free of monetary controls. 

The Cayman Islands came to the forefront as an offshore insurance domicile in the middle to late 1970s at a time when purchasers of liability insurance in North America, particularly hospitals and physicians, found it difficult to obtain professional liability cover at reasonable rates, if indeed it could be found at all. The lack of insurance available in the conventional market, coupled with spiralling premiums, caused many of them to form captive insurance or re-insurance companies. Several of these ‘medical malpractice’ companies, as they are often referred to, were established in the Cayman Islands during the 1976-78 period and they were followed by groups and associations from other professions and industries which recognised the benefits to be gained through having greater control over the cover and cost of their insurance. The rapid growth of offshore insurance in conjunction with the expansion of financial services in general in the Cayman Islands led to the enactment of the Insurance Law 1979, and the Insurance (Forms) Regulations 1980. Arising out of the legislation, a Superintendent of Insurance was appointed within the Government’s Financial Services Supervision Department, to regulate the insurance market in the Cayman Islands, including the activities of insurance managers, and agents and brokers operating in the domestic market. In January 1997, the Cayman Islands Monetary Authority was formed to take over the supervisory roles, previously the responsibility of the Government's Financial Services Supervision Department. The Head of Insurance Supervision position was established to oversee all insurance related activities in the Cayman Islands.

The continuing increase in the number of captives being formed is a reflection of their general acceptance globally and an appreciation of their being a long term financial tool with significant advantages for many organisations.