This past February, the Cayman Islands Monetary Authority (CIMA) issued new legislation, with a 1-year grace period, meaning it will be in effect February 2023. The Rule on Investment Activities (“the Rule”) is in effect for insurers to help set clearer regulatory investment requirements ensuring they fully consider solvency, liquidity, and all other relevant risks when investing.
The Rule applies to all insurers and registered Portfolio Insurance Companies (PICs) supervised by CIMA in accordance with the Insurance Act, but it does have additional requirements for B(iii) licensed companies that do not apply to those with a B(i) or B(ii) license.
Companies that will experience the most significant change as a result of the Rule are likely to be smaller captives who do not have a standalone Investment Policy, as well as those with a B(iii) license, which I’ll discuss more about in a bit.
Does Your Insurance Captive Need a Standalone Investment Policy?
A standalone Investment Policy will be required, subject to the nature, scale, and complexity of the business. What does this mean for your insurance captive?
In practical terms, this means any insurance captive with investments beyond cash will need to have a standalone Investment Policy that has been reviewed and approved by CIMA, and an insurer should only invest in assets with risks it can properly assess, monitor, and mitigate.
Per the Rule, the Investment Policy will need to:
- specify the nature, role, and extent of its investment activities
- identify how the company sets and evaluates its risk tolerance
- provide an allowable range for investment into each asset class (cash, fixed income, equities, and anything else approved by CIMA)
- list permitted and unpermitted asset classes
- where an external investment advisor or investment manager is used, provide profile of the manager criteria used for selection and engagement
- ensure investments should be sufficiently secure for the portfolio as a whole, which is essential in ensuring obligations to policyholders can be met
- ensure that its assets generate sufficient cash flows to pay policyholder claims when they become due
Additional Requirements for B(iii) Captives
In addition to all of the other requirements, the Rule lays out some additional requirements for B(iii) captives.
First, they must create an Investment Committee, which must include at least one director with some experience in investment/financial matters and anyone else deemed appropriate. This may include someone from the investment manager if desired.
The committee’s duties include, at a minimum, the implementation and oversight of adequate risk management systems and controls in respect of the investments of the insurer.
In addition to the Investment Committee requirement, B(iii) insurers shall conduct an internal audit of its investment activities, which ensures timely identification of internal control weaknesses and deficiencies in the management information systems. The internal audit will check for compliance with the insurer’s policies and procedures and statutory requirements.
Meet Regulations Sooner Rather than Later
While these changes may seem significant, it is important to note most captives have an Investment Policy that will already have most of the above items covered, requiring limited updates.
If your Investment Policy is very limited and included in your business plan, then we encourage you to work with your captive manager to create a detailed investment policy that will meet the requirements as stipulated in the Rule. We recommend this is passed by the Board and approved by CIMA prior to the February 2023 deadline.
Regulations and risk management can be a lot to cover for an insurance captive, but it’s one of the many things we do at GCM. Need a captive manager or looking to start an insurance captive? Reach out to us today!