This blog is part two of a series by James Trundle, Vice President at Global Captive Management Ltd. (GCM), and Barbara Fawcitt, Assistant Vice President at USA Risk Group (Cayman) Limited. Read part one on the GCM website.
Prioritizing Due Diligence
Managers must conduct initial and ongoing due diligence to ascertain the fitness and probity of all clients. In all our years working in this industry, we have never come across any prospective Director or Shareholder who is delighted to receive a request for due diligence documents! However, most understand the reasoning behind the requirements and the need to understand with whom the insurance entity will be conducting business. There is a need to trace ultimate ownership in understanding the ultimate source of funds, which results in a review of companies and individuals all the way to the top of the ownership structure. In some cases, this can be a complex jigsaw puzzle, but there can be no missing pieces. There are laws and regulations that need to be considered such as Anti-Money Laundering Regulations and Beneficial Ownership Regulations, as well as adhering to the specifics of the Companies Act and the Insurance Act.
It should be a cause for concern when entering a business relationship where the party does not require this due diligence. If they do not need to know you, then they will not have a true understanding of their own clients. Ultimately, this could have a negative impact on the Captive and the Manager.
Data and Stewardship
Much attention has been given to data protection because of policies like the General Data Protection Regulation (GDPR) and, specifically to the Cayman Islands, the Data Protection Act. In today’s world with cyber security threats being a constant, a robust cyber security framework is a necessity. In most instances, the Manager is the record keeper for the Captive, and in cases where the Manager is not, they would still need access to all client information. These records must be readily accessible for the Cayman Islands Monetary Authority (CIMA) to review and be maintained for a minimum period of five years following the cessation of the business relationship.
The Manager has become a repository for data. Rather than just storing the data, it can be used in analytics and benchmarking in ways that are to remain compliant with the law and keep the data confidential. Data analytics and benchmarking reports are not only useful for clients to deepen their understanding of the industry, but also to assist the Manager in improving the service they offer. The Manager should always be reaching out to the client to receive feedback on the effectiveness of the relationship and how the relationship can be improved. This two-way feedback process will also aid in strategic planning for the Captive and understanding how the Captive might be utilized going forward.
Financial Soundness
The Cayman Islands Insurance Act requires the Manager to notify CIMA if the Manager has concerns about the fitness and probity or the financial soundness of a client. It goes on to say that the Manager is required to monitor the capital and solvency positions of the client to ensure that such positions meet the requirements of the Act and its regulations. This can significantly affect a client’s capital position in a time of poor investment performance, particularly if the client does not have a capital buffer or if the client has experienced particularly bad loss development. The Manager must not only work with the client to rectify the capital shortfall or work on a plan to address it but must also notify the Authority of the capital shortfall or solvency concern once it is aware of the issue.
Dual Obligations
Managers are expected to abide by two sets of obligations. One set is their obligations, as service providers, to the client insured to which they provide insurance management services. The second set is their obligations as licensees of CIMA. This dual obligation can place the Manager in a difficult position. An example of this can be the immediate need for the Manager to report a breach in the minimum capital requirement set by a regulator. A breach must be reported as soon as the Manager becomes aware of the situation. Whilst neither the Manager nor the client insured wants to find themselves in this position, the reality is that it has happened and will happen again. The Manager must look to the law in all cases, and this will always mean having to report any breaches or suspected breaches of any law or regulation, whilst working with the client to remediate any issues as soon as possible.
Future-Focused Industry
When Fred Reiss, the father of Captive Insurance, set up the first Bermuda Captive in 1962, could he have imagined that this was the first of thousands of these entities to be established? The growth in the industry in the last 30 years has seen numbers rise from around 1,000 Captives to over 7,000 globally. Moreover, as we have seen, the role of the principal service provider to these companies, the Insurance Manager, is ever-changing as the continuously developing legal and regulatory landscape and the constant innovation in the structures and programs continues to transform the Captive industry.
If you’re ready to own your outcomes and learn more about what Captive Insurance can do for you, reach out today and let’s start a conversation!