In May 2023, the Cayman Islands Monetary Authority (CIMA) issued new legislation that will impact all captives, including Portfolio Insurance Companies or PICs, who use outward reinsurance. The legislation was published in May 2023 and will become effective on May 26, 2024, by which point all captives who purchase reinsurance will need to have reviewed their reinsurance strategy and updated their business plan to demonstrate they are in compliance with the new rule.
The Rule and Statement of Guidance on Reinsurance Arrangements notes that details of the reinsurance strategy can be documented in the business plan and does not require a standalone policy. However, it must be stressed that the revised captive business plan, including the Reinsurance Strategy, will require prior approval from CIMA.
Risk-Based Approach to Guidance
Reinsurance arrangements will vary significantly from one captive to another depending on how the captive is structured, organized, and managed. As with most legislation, CIMA emphasizes the need for a risk-based approach and captives should consider the size, nature, scale, and complexity of its operations when addressing its reinsurance needs.
Most captives who use outward reinsurance will already have some level of detail on their reinsurance arrangements in their business plan. This new Rule and Statement of Guidance gives further direction on what CIMA expects to see in the business plan including:
- Business objectives being pursued by using reinsurance.
- Documentation of how and when the reinsurance strategy will be reviewed.
- Minimum criteria to be used for the selection of reinsurers and brokers, if applicable.
- The structure of the reinsurance programme in terms of coverage, limits, retentions, layers etc.
- What collateral is required, if any.
- The net risk to be retained by the captive.
- Exposures to a single reinsurer or different reinsurers of the same group.
- Resilience of the reinsurance programme in stressed situations.
- How the reinsurance programme will be maintained including reporting, internal control systems, and oversight by the Board of Directors.
- Loans, guarantees, or other financial arrangements that are linked to or inure to the benefit of the reinsurance contracts of the insurer.
- How reinsurance contracts will operate in the event of an insolvency of itself or the reinsurer if an insolvency clause is not included within the reinsurance contract.
- Sufficient documentation around the insurer’s reinsurance contracts to demonstrate risk transfer.
The Importance of Internal Controls
One of the key aspects of the new legislation is internal control and the reliance on reinsurers and brokers to ensure the provisions of the reinsurance contracts are being upheld. It is here that we can see a clear link to other recent legislation including the Statement of Guidance on Outsourcing for Regulated Entities and the Rule and Statement of Guidance on Internal Controls for Regulated Entities.
Work with Our Experts
With the increasing amount of new legislation being implemented by CIMA, some captive owners may feel overwhelmed. This is when you should be placing reliance on your insurance manager.
At GCM, we make sure we are at the forefront of any new legislation and work internally to provide recommendations for all our captives to help them improve their captive process and procedures whilst ensuring they remain in compliance. If you’d like to talk with us about this or have questions about the Rule and Statement of Guidance, please don’t hesitate to reach out to us. We’d love to chat!