A warm welcome to our latest edition of Conyers Coverage. It’s been a dizzying year to date for the Cayman Islands (re)insurance industry, so it’s time for some updates and insights.
The momentum is real and the pipeline is strong, with a significant increase in interest following the Cayman Reinsurance Roundtable in New York in January and the Refocus conference in February. I believe we are at an inflection point in the jurisdiction and I’ve taken some time to reflect on the factors driving this “virtuous circle”. Philippa touches on more of the micro factors as to why reinsurers are ramping up in Cayman and the rest of the team have weighed in with a host of updates on new rules and regulations including important deadline reminders and other industry news and views. We also have some topical updates from our litigation and regulatory colleagues and you’ll find out more about some new team members and service offerings at Conyers.
Reflections on the Cayman Islands (Re)insurance Market – a “Virtuous Circle”
Derek Stenson, Partner
A virtuous circle describes a scenario whereby new and existing factors are included and discarded in a continuous system of improvement and self-reinforcement. Such a positive confluence of various factors continue to drive growth in the Cayman Islands insurance and reinsurance market. It’s an exciting time for the jurisdiction, so I’m taking a moment to reflect on the primary drivers of this “virtuous circle” we are experiencing.
What’s fuelling this “virtuous circle”, you ask? [Read on here]
A Trailblazing Surplus: Knighthead Leads the Way
Derek Stenson, Partner and Nicholas Ward, Associate
Conyers, working alongside Piper Sandler & Co. as placement agent and US counsel Sidley Austin, advised Knighthead Annuity & Life Assurance Company (“Knighthead”) in connection with Knighthead’s issuance of up to US$50,000,000 of Series A Fixed-Rate Prescribed Capital Notes due 15 December 2042 (the “Notes”), paving the way for other insurers licensed by the Cayman Islands Monetary Authority (“CIMA”) to raise capital by similar means and for similar purposes.
This was a landmark transaction, marking the first time such instruments have been issued by a Cayman Islands domiciled entity and the first time CIMA has been asked to consider and approve such a transaction involving one of its licensed insurers. Moreover, it builds on the introduction to the Cayman Islands licensed insurer’s toolkit last year of ‘capital redemption contracts’ - see our previous briefing paper here.
The Notes – rated by both A.M. Best and Kroll Bond Rating Agency, LLC – have a similar character and bear terms substantially similar to “surplus notes” popular for a long time in the US insurance market. Such instruments may, under statutory accounting principles, be classified as equity on the basis of their subordinate nature and are characterised in particular by a requirement to obtain approval from the relevant regulatory body to make each and any payment of principal or interest in the case of the Notes.
It is expected that the proceeds from this Notes issuance will be used for general corporate and working capital purposes, to support growth and the fulfilment of Knighthead’s strategic objectives – potentially including the assumption of additional reinsurance and merger & acquisition activity – without dilution of existing equity holders.
Five Reasons Reinsurance is Ramping Up in Cayman
Philippa Gilkes, Counsel
Whilst traditionally the Cayman Islands has deservedly been recognised as a leading captive jurisdiction, around 70% of all licences issued by the Cayman Islands Monetary Authority (“CIMA”) in recent years have been for commercial or affiliate reinsurers, with private equity groups, traditional reinsurance and insurtech increasingly selecting Cayman for the establishment of side cars and reinsurance platforms. The confidence in the jurisdiction has been evidenced by the entry of larger players in the life & annuity space, including RBC Re’s redomicile from Barbados to Cayman in 2021 and Talcott Re’s establishment of a reinsurer which effectively doubled the life business in Cayman in 2022. CIMA’s release of a regulatory policy on requirements for licensing a Class D reinsurer last month further cements the expectation that the growth of this licence class will continue on a strong trajectory in the coming years.
The ideal jurisdiction of domicile for a new reinsurer is driven by a multitude of factors and there is certainly no one size fits all. Relevant considerations in selecting the most beneficial jurisdiction include the goals of the client and the interests of their stakeholders such as investors and cedants, along with a wide variety of other variables, including size of the sponsor’s balance sheet, type of business proposed and jurisdiction from which cessions will be sourced including the requirements of the regulators of the targeted cedants and rating considerations (if any), among others.
We wanted to highlight some of the reasons we are seeing clients consider Cayman to be not only a viable option, but a premier jurisdiction for establishing a reinsurer platform. [Read more here]
Capital Contributions - Banana Peel, Beware!
Frank Farrell, Associate
Insurers rarely consider that funds injected into them by a shareholder could potentially be clawed back in certain scenarios, but in circumstances where capital contributions are made to a company without receiving a formal allocation of shares in return or where the cash injection is not properly characterised in writing, that is exactly the risk taken!
Our practice regularly encounters scenarios where shareholders in Cayman Islands companies have made capital contributions in the absence of any formal issuance of shares or otherwise documenting the terms of the cash injection. In this note we highlight the steps that should be taken to avoid any potential pitfalls inherent in this approach. [Read more]
Debunking Common Cayman Clichés: Episode 1 – CIMA
Philippa Gilkes, Counsel
Part and parcel of practising law in the Cayman Islands regularly involves dispelling commonly held but mistaken myths around Cayman as an international jurisdiction. One such misconception which inexplicably persists in some quarters is that the Cayman Islands Monetary Authority (“CIMA”) as a regulator is a closed shop. Whether this view stems from publicity on Cayman’s grey-list status with the FATF (positive news on that in “Announcements” below), or old tropes in respect of the lack of transparency in the Cayman Islands, it couldn’t actually be further from the truth. [Read on to discover why here]
Top 3 Things to Know on Regulatory Updates for Insurers
Róisín Liddy-Murphy, Counsel, Head of Regulatory & Risk Advisory (Cayman)
1. Requirement in New Rule on Corporate Governance for audit committee and adoption of code of conduct, conflict of interests policies
In April 2023, CIMA issued/replaced a number of its Rules and Statements of Guidance. Notably, CIMA issued a Rule on Corporate Governance (the “Rule”) for all regulated entities, which replaces the Rule on Corporate Governance for Insurers (2016) along with the Statement of Guidance on Corporate Governance (2016). The changes proposed are largely not substantive for insurers where they will already have sophisticated governance programs in place in light of the existing Rules and Statements of Guidance which already applied to (re)insurers. Notable revisions to the application of the Rule to (re)insurers include the mandatory requirement for an audit committee to be appointed and policies to be adopted on conflict of interest and codes of conduct and procedures including resignation, termination and disqualification procedures for Directors and Senior Management. The Rule was gazetted in April but will not come into effect until 14 October 2023.
2. Documentation of reinsurance strategy to be revisited by licensed insurers
CIMA recently revised the Rule and Statement of Guidance on Reinsurance Arrangements (“Reinsurance Rule & SOG”) to bring such up to date with legislative changes, international standards and evolving industry trends and to mitigate risks to the insurance sector associated with money laundering, terrorist financing and/or proliferation financing. The Reinsurance Rule & SOG seek to ensure that insurers implement a reinsurance programme and strategy that is appropriate to the size, nature, scale and complexity of their business. The strategy may be detailed in the Business Plan of a licensee and must include the detailed implementation of the reinsurance strategy in terms of coverage, limits, retentions, layers, signed lines and markets used. It should reflect the (re)insurer’s risk appetite, comparative costs of capital and liquidity positions determined in the reinsurance strategy and be documented appropriately in accordance with the Reinsurance Rule & SOG requirements. Notably, the reinsurance strategy must require that reinsurance contracts with a duration greater than 12 months or with an automatic renewal term are reviewed both annually and when there are have been certain changes made to the contract. CIMA must also be notified of material changes to the reinsurance strategy. The Reinsurance Rule & SOG was gazetted in May 2023 and will come into effect on 27 May 2024.
3. New Beneficial Ownership Requirements to be introduced
The Beneficial Ownership Transparency Bill 2023 (the “Bill) was released in April 2023 for industry consultation and consolidates the beneficial ownership register provisions of the Companies Act, the Limited Liability Companies Act and the Limited Liability Partnership Act. It brings limited partnerships and exempted limited partnerships into scope of the reporting requirements. The Bill removes most of the exemptions from compliance under the current beneficial ownership legislation by replacing them with “alternative routes to compliance”. Entities “licensed under a regulatory law”, such as (re)insurers licensed with the Cayman Islands Monetary Authority will continue to be exempt as an alternative route to compliance under the proposed changes. (Re)insurers will no longer be required to file a written confirmation of exemption and must instead submit the contact name of a person in the Cayman Islands who will be responsible for providing a competent authority with the requisite beneficial ownership information upon request. The Bill is expected to be introduced next month.
Cayman Regulatory & Risk Advisory Review [Jan-April 2023]
The past few months have been a particularly active time in Conyers’ regulatory team, most notably relating to sanctions advice, duties of confidentiality, breach notices and investigations concerning data protection, queries regarding beneficial ownership register requirements and upcoming changes to same and economic substance reporting and compliance notice requirements. As discussed further in the Cayman Regulatory & Risk Advisory Review, there has been a wave of new rules and statements of guidance from CIMA now in effect (and coming into effect) covering areas such as outsourcing, record retention, cybersecurity, internal controls and corporate governance.
Assisting our clients to ensure ongoing compliance and safeguarding against enforcement actions (to include potential administrative fines) has never been more of a priority. Download the full review here.
Segregated Portfolio Companies’ Silver Anniversary
Erik Bodden, Partner, Co-Head of Cayman Islands Litigation & Restructuring,
Jonathon Milne, Partner, Co-Head of Cayman Islands Litigation & Restructuring,
Spencer Vickers, Partner
In a series of recent judgements, the Cayman Islands Grand Court has celebrated the 25th anniversary of the introduction of the segregated portfolio company (“SPC”) regime in the Companies Act by confirming the strict separation of assets and liabilities between segregated portfolio (“SP”) as the defining feature of SPCs in the circumstances where an SP and/or the SPC itself were in distress. [Read more]
Q&A with Conyers Financial Institutions Group
Jarladth Travers, Head of Conyers FIG (Cayman) Limited,
Mark Mugglestone, Vice President at Conyers FIG (Cayman) Limited,
Maddison Billinghurst, Compliance Officer
Can you provide some background on Conyers Financial Institutions Group (“Conyers FIG”)?
Conyers FIG is an affiliate of Conyers law firm through which we provide a range of fiduciary services that are complementary to the Conyers legal offering. These services include the provision of independent directors, anti-money laundering (“AML”) services, FATCA & CRS services and board support services to entities operating within the insurance, investment funds and structured finance industries. Our team is made up of highly qualified individuals with many years of practical experience working in the Cayman Islands financial services and regulatory sectors.
What are the benefits of appointing an independent director to the board of a client entity?
Appointing an independent director is a natural response to the expanding Cayman regulatory environment and the increased importance placed on corporate governance by regulators and stakeholders. The regulatory regime faced by Cayman entities has expanded significantly over recent years and CIMA is under increased pressure to pursue enforcement action for non-compliance. Appointing a director with relevant experience in these areas will demonstrate a commitment to regulatory adherence and provide practical assistance with navigation of any complexities that arise.
Could you expand on the increased importance that regulators are placing on corporate governance practices?
CIMA recently released a series of new and updated regulatory rules and guidance on corporate governance for regulated entities. The requirements and guidance are wide ranging and aim to ensure that boards of directors of regulated Cayman entities are comprised of individuals with a diversity of skills and experience who are able to exercise independent judgement with respect to the operations of the entity. Conflicts of interest at the board level, board meetings and appropriate minute keeping are also focus points.
In addition to providing independent directors, are there any other focus areas of the corporate governance rules and guidance where Conyers FIG can assist?
Board meetings and appropriate minute-taking is a major focus point of CIMA. We have a team of board support specialists who can assist clients in arranging, holding and appropriately recording the minutes of board meetings to the level and standard expected by CIMA.
Are there any other topical areas of note that Conyers FIG have recently been assisting clients with?
AML has become a hot topic for any entities in the Cayman Islands that are conducting relevant financial business. The AML regulations are complex in nature and any incorrect application carries risks for the client entities and designated AML officers. Out of an abundance of caution, many clients have taken the prudent view to outsource the AML officer function to Conyers FIG where we have qualified specialists who have the capacity, knowledge and training to fulfil the requirements of the role to the required standard. In addition, we have also experienced recent demand for ancillary AML services such as policy holder and investor screening as well as independent AML audits.
Announcements
FATF Delisting
Exciting news for the jurisdiction following the recent confirmation that the Cayman Islands has now satisfied its FATF action plan and is anticipated to be delisted from the FATF’s “grey list” imminently. More information on the anticipated de-listing is available here: Cayman Satisfies FATF Action Plan; Onsite Visit Authorised
CIMA Appointment
The Cayman Islands Monetary Authority has appointed Kara Ebanks as Head of its Insurance Supervision Division. Kara has served as Deputy Head since April 2021 and is well-known by the industry.
[View source.]
