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  • Kevin Poole
  • Role
    Client Services Director of Kane in the Cayman Islands
    Location
  • “In recent years, we have seen a marked increase in the number of US domiciles offering captive legislation which adds to the level of competition in the sector.”

Kevin has been based in the Cayman Islands for over 10 year, four of which were spent working in insurance regulation at the Cayman Islands Monetary Authority. Prior to this he worked in captive management in Guernsey for six years and Bermuda for eight years.

1) What is your current role in the captive industry?

2) What is a captive?

3)  Who have you seen innovating in the industry – has your company?

4)  Cost v return is an ongoing challenge for captives, what actions do you see being taken to manage against this? What effect is this changing challenge having on new entrants?

5)  So you’ve witnessed some change in the size of firms involved in captive insurance? 

6)  Are you doing business with brokers?

7)  Are you noticing any changes in fund management?

8)  Have you seen any innovation from the banks adapting their services for the captive industry?

9)  What will market developments in SPI / ILS mean for captive insurers?

10)  How else is the captive industry expanding and developing?

11)  What is the market like for Medical malpractice in the US?

12)  What impact are regulations having on captives?

13)  How does Regulation 114 Trust differ to a Letter of Credit and are there other methods?

14)  How and why would you choose to run-off your portfolio?

15)  Solvency II has been a moot point for some time, what steps do you believe captives should be taking in readiness for SII’s eventual implementation? What are the key facets of the regulation as far as captives are concerned?

16)  How else is the captive industry changing?

1) What is your current role in the captive industry?

After working as an insurance regulator here in the Cayman Islands I moved to HSBC Insurance Management in 2007, which was bought by the Kane Group in 2011. Kane is one of the largest global independent insurance managers. We offer a comprehensive range of management and administration services for a variety of risk transfer and financing structures. These include: captive insurance companies; cell companies; and Insurance Linked Securities (ILS) structures such as catastrophe bonds and sidecars. In addition, we provide administration services for life, pension and investment-related products.

My title is Client Services Director here in Cayman and I look after a team of seven account managers. I am also responsible for new business development for the Cayman office.

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2) What is a captive?

I would say we probably have a wider definition of a captive these days, as a risk-taking entity can take many forms. In Cayman, the Insurance Law was updated in 2010 in order to recognise this and take into account the different risk profile of the types of entity. For example, Special Purchase Vehicles have been given a separate license class and the traditional captives have been split into four classes depending on the amount of non-related business written and premium volume.

When you go back to what the original ownership structure of a captive was – being owned and controlled by a single-parent organisation – then it is fair to say that things have changed somewhat over the years. We still see single parent captives being formed, but we are also now seeing more group-type arrangements and programme-type deals, as well as cell companies.

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3) Who have you seen innovating in the industry – has your company?

We try to diversify in terms of the services that we are able to provide. As I mentioned, we look after the regular single-parent captives which span a wide variety of industries. In Cayman, we manage a number of medical malpractice-related captives, and we also look after a number of group captives involved in trucking, construction and various other industries.

Recently, we’ve seen increased interest from other industries in setting up a captive, such as organisations from the travel and sports sectors, as well as other coverages such as marine cargo, trade credit and surety type programmes. So I’d say that the net is being spread somewhat wider.

At Kane, we’re also involved quite heavily in the ILS sector. We look after a large number of SPVs and transformer vehicles which has helped us to diversify our client base. We also manage a growing number of segregated portfolio companies, and Kane has established its own cell companies in several domiciles. Most recently, we established a segregated portfolio company in Tennessee, the first cell of which will be used to write medical benefits coverage for a wide variety of clients.

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4) Cost v return is an ongoing challenge for captives, what actions do you see being taken to manage against this? What effect is this changing challenge having on new entrants?

I would not say that cost has been a significant barrier to captive formations. Certainly from Cayman’s perspective, and what I’ve seen from other domiciles, captive formations continue to grow. For example, in Cayman in 2013 we saw 39 new licences issued, while in 2012 there were 53 new licences. In 2010, Cayman updated the Insurance Law – a move that helped clarify the capital requirements. Now, for example, for a single parent captive the minimum capital requirement is $100,000, and the prescribed capital is $100,000. From talking to a number of prospects, they view the changes to the legislation as a positive development. Prior to this, there was an unwritten solvency rule based on a  5:1 premium to capital ratio or 3:1 premium to capital ratio, depending on how much non-related business was being written.

For those organisations that had considered a captive but may not have been large enough to set up their own captive, we have seen an increasing number going into group captives or cell captives. Also some of the US domiciles are seeing growth in what are termed the 831b captives, which are taxed on investment income only as long as premium written is less than $1.2 million.

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5) So you’ve witnessed some change in the size of firms involved in captive insurance?

Yes, there are certainly smaller companies coming into the captive market. But there are still some larger firms out there who, for whatever reason, haven’t yet formed captives. For example, we have a new Business Development Director based in Canada where there are a number of privately held companies that haven’t formed their own captive insurance company yet. We see this as an area of significant growth potential.

Generally speaking, those that we see now are generally smaller companies, start-up operations or a number of smaller organisations that are grouping together in some way. For example, a firm involved in investing in new start-ups may look to set up their own captive to help provide the coverage for all of these individual clients.

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6) Are you doing business with brokers?

We work with many different brokers, the fact that we are an independent manager doesn’t preclude us from working with the so called alphabet houses, in fact we have a number of clients who feel it’s important to separate their insurance manager from any insurance buying decisions. In addition Kane is the only captive manager that’s a member of the Worldwide Broker Network (WBN), which is an organisation made up of independent brokers. As Kane is an independent manager, we value our relationships with independent brokers and referrals from existing clients. We’ve worked with various WBN members in helping to promote captives to their organisations, so they can in turn promote them to their clients. We’ve also conducted some roadshows in the US and we will be involved in roadshows later this year in South America. We believe that this is a region that offers significant opportunities for captive growth, primarily because regulations are gradually easing which makes it easier for the reinsurance market to operate there, and we have so far seen some interest from Chile and Columbia.

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7) Are you noticing any changes in fund management?

First and foremost, our clients do understand that they are responsible for an insurance company. They have some fiduciary responsibility to make sure that funds remain in place to meet the captive’s obligations and pay claims. So while many captive owners might like to increase the investment returns of the captive, they acknowledge their fiduciary duties and therefore seek to avoid introducing unnecessary risk or volatility into their investment portfolio.

What we have seen is that, for those which have been around for a number of years and built up some surplus – depending on where the captive is domiciled and the regulatory environment – the regulators themselves are willing to give a bit more latitude in terms of the captive’s investment policy. So if a captive did want to increase their exposure to equities, as long as they’ve got their reserves covered, they are able to use some of their surplus to diversify the investment portfolio.

We have seen some companies move away from traditional US Fixed Income securities such as US treasuries in an effort to generate yield and have therefore looked more closely at high yield and corporate bonds.

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8) Have you seen any innovation from the banks adapting their services for the captive industry?

I wouldn’t say we’ve seen too much in the way of innovation. I think many of the banks have their standard services and specific captive-related products. They do from time-to-time come out with some new funds. More recently, we’ve seen more innovation at the shorter end of the duration as given low returns the banks have tried to offer an alternative to cash to provide a captive the ability to earn a small return. Other than that, I think particularly in the area of Letters of Credit, what we’re seeing is pressure being put on the banks themselves, as  it’s becoming more difficult for them to issue Letters of Credit if they’re not holding the underlying assets themselves. So that’s causing a bit of pressure on pricing.

The majority of our captives that require Letters of Credit are group captives. They require what we call a back-to-back Letter of Credit. So the parent organisation gets a Letter of Credit from their bank, which they pass on to the bank that issues the Letter of Credit on behalf of the captive to the fronting carrier. The alternative to Letters of Credit is the trust arrangement and we do have a few clients with a trust arrangement as well.

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9) What will market developments in SPI / ILS mean for captive insurers?

Firstly, I’d like to comment on the developments we’ve seen in the ILS market. 2013 was a banner year as the total value of new issuances totalled approximately $7.5bn and was second only to the record year of 2007. This was partly driven by the low interest rate environment which led investors to seek out other available investment opportunities producing attractive returns. As a result, there has been an increased demand amongst investors which has enabled a number of new sponsors to enter the market. A higher demand has led to a reduction in risk spreads meaning the ILS cost for sponsors has come down, resulting in increased competition for the standard reinsurance market. Given the investor appetite, we have also seen an increase in higher risk transactions which has also led to some changes where sponsors are located. We are now seeing sponsors from countries such as Canada, Japan and Mexico.

The majority of transactions in 2013 have been indemnity-based, which is preferred by many sponsors. The underlying investments have continued the trend – began after the Lehman collapse a few years back, when questions were raised about the investment holdings and the need to be more transparent and less risky – as a result there are now greater reporting requirements for investments and most transactions stick to money market funds or US treasury investments.

In addition one of the main innovations we have seen in the last year is what we call ‘floating resets’. Each year, the cat bond goes through a reset where the attachment point is reset. The floating reset enables the sponsor to make sure that cat bonds remains fully aligned with the rest of their reinsurance programme.

In terms of what ILS developments mean for captives, I think the increased number of cat bond deals and investors in the market has reduced the return for cat bonds. As their pricing has dropped, so ILS transactions are providing more competition for the reinsurance market. This helps reduces reinsurance rates – a development which captives can in turn benefit from.

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10) How else is the captive industry expanding and developing?

I think the captive industry is always looking for new ways of expanding the coverage remit of captives. For example, we manage a large number of healthcare captives writing medical malpractice cover. In addition to this, there is growing interest in coverage for cyber liability, billing errors, duplicate medical records and also medical equipment. Another risk that has become increasingly popular on this side of the world is medical stop loss coverage.

The Affordable Care Act (ACA) or "Obamacare" healthcare reform in the US should also ultimately provide some additional opportunities for captive insurers. We expect to see a number of new and different risks that will need to be covered as Accountable Care Organisations and other organisations are formed in response to the Act.

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11) What is the market like for Medical malpractice in the US?

There’s a strong domestic market which is still quite soft, so the environment remains competitive. There are still companies that are setting up their own captives to capitalise on the standard benefits associated with a captive programme, and Cayman, being recognised as the leading healthcare domicile, continues to attract healthcare clients.   Given the changes driven by healthcare reform in the US, we have been seeing an increase in M&A activity as healthcare providers acknowledge that small, regional or community-based hospitals will find it increasingly difficult to compete as Medicare reimbursements are reduced and the pressure for cost savings increases. 

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12) What impact are regulations having on captives?

From a general perspective, I would say that in most domiciles we are seeing an increasing move towards more risk-based captive regulation. This means that whereas single parent captive might receive somewhat lighter regulation, those captives that are writing unrelated business may be viewed a little bit differently which may  impact their solvency requirements. These regulations are driven by organisations like the International Association of Insurance Supervisors (IAIS) who oversee global insurance standards.  In addition, the potential impact of Solvency II needs to be considered, although this is being handled differently by each domicile. For example, Cayman has taken the stance that it will not become Solvency II compliant, at least for the time being; while Bermuda has sought Solvency II equivalence and is hoping that captives will be carved out of any Solvency II requirements.

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13) How does Regulation 114 Trust differ to a Letter of Credit and are there other methods?

They are both types of collateral that are readily accepted by fronting carriers. The main difference is the acceptable investments in a 114 Trust arrangement are somewhat more restrictive than those for a LOC, which therefore reduces the potential for earning investment income. The actual trust itself is relatively simple to set up and administer – so it tends to be less expensive than a Letter of Credit. Other than Trust and LOC arrangements, front companies are also often willing to work on a funds withheld basis. From our point of view, the most important aspect of any collateral arrangement is the working relationship with the front company, as it’s important to be able to negotiate collateral requirements and where appropriate reduce requirements without getting into a dispute.    

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14) How and why would you choose to run-off your portfolio?

Over the years we have managed a number of captives that have gone into run-off. Group captives tend to have a private placement memorandum that governs exit arrangements so members are aware of how the exit strategy works. In the case of single parent captives, some will choose when they use their captive and when they use the commercial market depending on market conditions. 

Should it be decided the captive is no longer needed then, depending on the nature of the business written, there are a number of exit strategies that can be considered. These include: commutation, novation, loss portfolio transfer perhaps to a cell company or a sale to a third party. However, many choose to run-off their captive until all insurance liabilities have been discharged, following which the captive can be liquidated and any remaining funds returned to the parent.

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15) Solvency II has been a moot point for some time, what steps do you believe captives should be taking in readiness for SII’s eventual implementation? What are the key facets of the regulation as far as captives are concerned?

There is a slight difference in stance from jurisdiction to jurisdiction. Given its large reinsurance market, Bermuda, for example, has chosen to go down the route of Solvency II equivalence, with the expectation that have captives carved out of the requirements. Cayman on the other hand has taken the decision not to go down the Solvency II route at this stage. Most captives on this side of the world aren’t overly concerned about Solvency II, but instead are more focused on US regulation, such as the Foreign Account Tax Compliance Act (FATCA) and the provisions of the Nonadmitted Reinsurance Reform Act (NRRA).

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16) How else is the captive industry changing?

We are experiencing increased competition between the onshore and the offshore domiciles. In recent years, we have seen a marked increase in the number of US domiciles offering captive legislation (35 and counting) which adds to the level of competition in the sector. There is of course a risk that with so many domiciles operating in the captive space that this could dilute the captive service offering.

Having said that, both Cayman and Bermuda have continued to maintain their strong captive positions and have seen significant numbers of new formations. So while there are a number of new US states with captive-enabling legislation, and there is some pressure for US-parented captives to consider re-domiciliation to their home state, we certainly haven’t seen any really knock-on effect on the captives that we manage.

Given the increase in competition, it is essential that each domicile try to stay ahead in terms of regulatory developments. In Cayman, for example, we are seeing more segregated portfolio companies than perhaps we have in the past. Of the 39 captives licensed last year, 12 of those were segregated portfolio companies. In response, Cayman, like some other domiciles, has taken steps to introduce regulations that are akin to incorporated cell regulations which in Cayman are termed Portfolio Insurance Companies (PICs). This is a new development that shows Cayman continues to be innovative and make available structures that clients may have an interest in.

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