State of the Cayman Islands Insurance Industry Remarks by Deputy Managing Director – Operations Patrick Bodden Cayman Islands Monetary Authority at the Cayman Captive Forum 2015 December 3, 2015 Salutations Mr. Chairman, Speakers, Distinguished delegates, Members of the Cayman Islands Government Members of the Cayman Islands Monetary Authority Ladies and gentlemen, Thank you and Good morning…

Introduction First and foremost, on behalf of the Cayman Islands Monetary Authority, I wish to extend special thanks to the Insurance Managers Association of Cayman (IMAC) for the opportunity to share some insights into the captive insurance market of the Cayman Islands, from our perspective. I also take this time to congratulate IMAC on staging the 23rd annual Cayman Captive Forum. As the largest captive conference in the world, it provides exceptional networking opportunities for over 1,400 participants within the sector. Its continued growth and success over the years have been invaluable in promoting our captive insurance sector.

History Just to give some brief history, I’d like begin by noting that the international insurance segment in the Cayman Islands began in the mid-1970s, and was formalised with the introduction of the Insurance Law in 1979. Since then the industry have thrived and plays a critical role in the overall success of our financial industry.

State of the Cayman Islands Insurance Industry In more recent years the Cayman Islands has become a major centre for international insurance business, making us the second largest domicile for international insurers, including captive insurance companies, and number one for healthcare captives worldwide.

Perhaps a most convenient starting point is a brief overview from our perspective of the current state of the insurance sector in the Cayman Islands, which consists of domestic and international markets.

Our jurisdiction also has one of the highest insurance densities and insurance penetration ratios in the world and this year’s trends shows continued growth for the Cayman Islands. As at November 30th, the domestic market was comprised of - 9 locally-incorporated companies and 21 branch/agency operations of foreign companies. Of the 30 domestic insurers regulated by the Authority 24 were engaged in active business.

Domestic market recorded a gross written premium (“GWP”) of US$604 million in 2013 compared to US$481 million in 2012; approx. 25% growth. Preliminary data indicates a growth of 6% in GWP from US$604 million in 2013, to US$642 million in 2014. Net income is expected to rise by approximately 8% from US$184 million in 2013 to US$199 million in 2014 when final stats are in.

Of the 712 international insurers regulated by CIMA as at November 2015, there were 680 Class Bs, 31 Class Cs (special purpose vehicles) and 1 Class D., the total premiums of international insurers amounted to US$12.5 billion, having increased 67% OVER the last 5 years, from US$7.48 billion in 2010. Total assets were US$58.5 billion, having increased 30.0% in the last 5 years, from US$44.7 billion. These increases are a direct result of new captive formations during the period of 2010 to 2015 in which we realized 189 new captives licensed, including 15 this year. 2

Currently, Cayman has 369 pure captives, 142 segregated portfolio companies and 123 group captives. Other categories include 31 special purpose vehicles (4%), 46 commercial insurers (6%) and 1 reinsurer.

The 142 segregated portfolio companies include over 600 active segregated portfolios.

Healthcare captives account for approximately 45% of the international insurers. The next largest industry segment is Financial Services at 25%.

By line of business, 34% of international insurers provide hospital and medical professional liability, followed by workers’ compensation (21%), property (11%), general liability (11%) and professional liability (9%). As of November this year, risk location of captives continued to be dominated by North America, which accounts for 90% of the Cayman market, followed by the Caribbean & Latin America at 3%, Europe at 2%, and the remaining global market at 5%.

Recent Developments Significant developments affecting the Insurance industry Speaking of recent developments, I think it is also worth mentioning at this stage that there have been a number of significant developments which in recent times have helped to further enhance the reputation and attractiveness of the Cayman Islands as a premier insurance domicile, in addition to our robust regulatory regime.

Despite less favourable external conditions, especially as a result of the emerging on-shore captive domiciles in the United States and healthcare reforms introduced by the Patient Protection and Affordable Care Act (commonly called the “Affordable Care Act”), 23 new entities were added to the Cayman Islands’ international insurance market in 2014. The year 2015 continued to show growth for the Cayman Islands with 62 licences granted in total so far, resulting in a 2.5% increase in the total number of licensees.

Another development in Cayman’s international insurance sector has been the increased interest by hedge funds seeking opportunities to participate in the insurance profitability, commonly referred to as Hedge Fund Re vehicles. With the Cayman Islands being a leading jurisdiction for hedge funds, it is well 3

positioned to build on its expertise to be the domicile of choice for the emerging hedge fund-backed reinsurers. This is an area which we are monitoring closely as an area of potential growth and opportunity.

The National Risk Assessment initiative Since October 2014, in conjunction with the World Bank as well as the Cayman Islands Government, the Authority has been actively involved in the National Risk Assessment Initiative This is intended to ensure that the jurisdiction’s anti-money laundering laws, regulations, policies and procedures continue to adequately protect the interests of all stakeholders doing business here in the Cayman Islands. CIMA currently leads eight of the NRA working groups set up by the Cayman Islands Government. A final report is to be sent to the Anti-Money Laundering Steering Committee this month.

Looking at Domestic Legislation CIMA continues to advise the Government on updating and enhancing key regulatory laws and regulations, some of the recent developments include the enactment of the Portfolio Insurance Companies legislation earlier this year, which enhanced the risk management options available to insurance participants in the Cayman Islands.

In order to further respond with comprehensive regulatory provisions for existing, as well as potential, re-insurers within the Cayman Islands, the Authority is also in the final stages of developing a regulatory framework to review Internal Capital Models. ICMs allow reinsurers to better integrate the processes of risk and capital management within the company. Development of an ICM review framework is a testament to the commitment of CIMA to building a world-class reinsurance regulatory framework that allows licensees innovation and sophistication.

As a re-reflection of the ongoing work and commitment to regulate by utilising international standards, in particular the International Association of Insurance Supervisors (IAIS) core principles, there has also been the introduction in 2015 of the Rules and Statement of Guidance on Outsourcing arrangements, risk management, and market conduct. The introduction of these new Rules and Statement of Guidance not only ensure that the Authority continues to comply with the Insurance Core Principles (“ICPs”) of the IAIS, to which the Authority is a member, but it confirms the Cayman Islands as a jurisdiction that upholds robust and world-class regulatory standards. 4

In addition, since the revision of the 2010 Cayman Islands Insurance Law during the 2012-13 fiscal year, a number of reinsurance entities have now established a reinsurance presence in the Cayman Islands, and this trend is expected to develop with greater momentum.

Speaking to the Supervision of Licensees Cayman has been successful in striking a proper balance between regulation and operational freedom. This is mainly due to the built-in flexibility of its legislation and our practical application of business awareness by the regulatory staff in the Insurance Supervision Division. Over the years Cayman has built a world-class infrastructure of professionals who have facilitated, managed and supervised thousands of captive programmes.

Part of that infrastructure of professionals are the regulatory staff of the Insurance Supervision Division, who continually make every effort possible to respond to the needs of its licensees, responding with consistency of approach and efficiency.

At this point, I would like to acknowledge the staff of CIMA’s Insurance Supervision Division, by asking them to briefly stand and turn around to face you. These are the people who make insurance regulation work in the Cayman Islands and I wish to publicly thank them for their contribution. Thank you!

CIMA’s regulatory approach is not that of micro-managing its licensees’ day-to-day operations, but rather to create an appropriate regulatory framework that allows them operational freedom to reach their business objectives, while remaining in compliance with the applicable laws and regulations, and at the same time being open to new ideas and innovation.

Our Insurance Division is always available to meet with our licensees on a regular basis, and as the need arises. This remains our commitment. We see this as a very important part of our regulatory functions and we are, and remain, available to our licensees and potential licensees.

This is reflected in the 119 prudential meeting we have had this year with a total of 236 overall meeting with our licenses and potential licensees.

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I would like to take this opportunity to address a matter which appears to have been of some discussion in the industry which is the appointment of a permanent Head of Insurance Supervision at CIMA.

Let me assure you that the division is being competently administered by a management team which includes an acting Head and two Deputy Heads. I also want to assure you that the Authority’s management is continuing efforts to recruit a suitable candidate for the position. We have conducted a number of interviews, sought the assistance of external resources in the region, and also engaged recruitment agencies with international reach. Although our significant efforts have not resulted in a suitable candidate thus far, we will continue to pursue the recruitment process to ensure placement of the individual best suited to effectively carry forward our regulatory remit and contribute to the continued success of this important industry and domicile.

The now Acting Head Mrs. Morag Nicol is no stranger to the Insurance Industry and has vast experience in the field. She has been a part of the regulation of Insurance since she served in the capacity as Deputy Head from 2001 and ultimately Head until 2007. She will continue as Acting Head through February 2016 and as I have said we are continuing our search. The position has been placed on our website and can be responded to at any time; we are also aggressively pursuing international exposure to attract potential candidates while very much being aware that it has to be the right skill set to maintain the right balance between regulation and industry awareness. Regulators worldwide are always high in demand and few in supply however or efforts are continuing. We do believe in 2016 we will be in a stronger budgetary position to enhance the attractiveness of this post.

CIMA’s Role in International Regulatory Bodies CIMA endeavours to ensure that Cayman’s insurance sector is regulated in accordance with international best practices, while having consideration for the competitiveness and innovation that are required for Cayman to remain among the leading jurisdictions.

As a regulator, we also recognise that the globalization of insurance markets evolves at a rapid pace, and that captive structures are being put to more sophisticated use by their owners. Therefore, CIMA continues its commitment to actively participate in international regulatory organizations.

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This is demonstrated by the Authority’s participation in proceedings of the International Association of Insurance Supervisors (IAIS) as a member of the Education, Market Conduct and Financial Stability Committees and a founding member. We also serve as Regional Training Coordinator for the IAIS.

CIMA is also represented on the Group of International Insurance Centre Supervisors (“GIICS”), formerly known as the Offshore Group of Insurance Supervisors, or OGIS. Our own Managing Director, Mrs. Cindy Scotland, currently serves as Vice-Chair, and Chair of the Education Committee.

She was also appointed as the first Deputy-Chair of the Group of International Finance Centre Supervisors (GIFCS) in 2011, and is a current member of both the International Organization of Securities Commissions (IOSCO), and of the Caribbean Association of Insurance Regulators (CAIR).

The Cayman Islands is also a member of the Financial Stability Board’s Regional Consultative Group for the Americas. CIMA is also currently a co-Chair of the group. As a means of facilitating ongoing cooperative interaction with other regulatory bodies, and ensuring that Cayman licensees can continue to participate in internationally-based insurance activities, CIMA continues to monitor the ongoing developments of Solvency II in the European Union.

Anticipating the future The captive insurance industry will continue to see new licensees enter the market as successful organisations recognise the benefits of arranging insurance through captives with key benefits as flexibility, tailored insurance provisions, and cost efficiency.

Although healthcare reforms in the US have posed some challenges to the healthcare captive industry, CIMA believes that the changing landscape could present opportunities for captive growth. As examples, it is possible that hospitals acquiring physician practices will expand existing captives. There is also a possibility for physicians and practices to team up to form large provider groups and establish captive insurance companies for professional liability and other risks.

Also in the pipeline is the introduction of a new licence subcategory, namely the class B(iv) insurer licence, to encourage small to medium open-market (re)insurance companies to form their companies in the Cayman Islands. 7

Changes made to the main insurance law in the Cayman Islands in 2010 and subsequent changes to the capital and solvency regulations in 2012 have facilitated the creation of new classes of licence for open market reinsurance companies. Since then, there has been a significant increase in interest in establishing open market reinsurance vehicles in the Cayman Islands. In recent years, several companies have obtained reinsurance licences in Cayman and a number of market participants have held initial discussions with CIMA to set up their reinsurance operations in the Cayman Islands.

CIMA will continue to monitor the progress of the European Solvency II directive and its potential impact on captives. Given that over 90% of the Cayman captives underwrite North American risks and the North American regulators are not expected to follow the Solvency II model for capital regulation, CIMA has not taken a decision to achieve equivalence under Solvency II. In fact, we have seen a few new captive re-domestications in the Cayman Islands as a result of some other jurisdictions deciding to pursue this method.

Conclusion Let me conclude by saying that with historically low interest rates, strong, consistent regulation, continued growth year after year, adherence to international standards and best practices, encouraging innovation and sophistication, there is very little doubt why the Cayman Islands is an excellent choice for insurance businesses.

The Authority will continue to actively strive to protect and enhance the reputation of the Cayman Islands while remaining a responsive, practical and an accessible regulator in support of the international insurance industry of the Cayman Islands as a leading global player. We will continue to evaluate our insurance regulatory framework to ensure compliance with insurance best practices, with the built-in flexibility of legislation to provide for proportionate application of international standards, based on the size and complexity of our licensees.

Although the numbers of healthcare captives have declined, we have seen an increase in the size, capitalization and usage of the other captives.

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Given our robust, yet flexible and competitive regulatory regime, infrastructure and high levels of expertise and experience in service areas such as insurance, legal and accounting, CIMA is confident that the Cayman Islands will continue its dominance as a leading financial centre and our insurance sector will continue to thrive. CIMA stands prepared to play its role in contributing to the continued success of this industry.

Thank you very much for your valuable time and I wish you a continued successful conference.

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