Obtain a Licence for Insurance-Linked Securities in the Cayman Islands

Obtaining a licence for insurance-linked securities in the Cayman Islands is required for launching a regulated ILS structure. It is needed for the issuance of catastrophe bonds, collateralised reinsurance and the transfer of insurance risk to investors. The supervisory functions are assigned to the Monetary Authority (CIMA).  This regime is used by international insurance groups, reinsurers, investment funds and sponsors of transactions for the transfer of catastrophe risks.

The Class C Insurer's Licence is applied for insurance-linked securities (ILS). Obtaining a licence for operations with insurance securities in the Cayman Islands is not intended for the mass insurance of natural persons or a standard business. The permit is used for a special structure where the obligations are limited to the collateral assets, are connected with a specific transaction and are financed at the expense of investors or another agreed source.

Obtaining a Licence for Insurance-Linked Securities in the Cayman Islands: Class C Insurance-Linked Securities 

Class C permits an exempted insurer to conduct activity through reinsurance arrangements where the obligations are limited to predetermined sources of financing or the proceeds from them. The financing may be ensured by the issuance of bonds, contracts for difference, letters of credit, swap agreements or other instruments accepted by the regulator. Such a structure is created for a specific transaction. Usually it does not conduct a broad insurance business and does not operate as a classic commercial insurer.

When It Is Necessary to Obtain a Class C Insurer's Licence in the Cayman Islands

Obtaining a licence for working with insurance investment instruments in the Cayman Islands is necessary for operations where the risk is transferred to investors or financing parties through a collateralised mechanism.

The Issuance of Cat Bonds — Catastrophe Bonds

A cat bond is used to transfer the risk of a natural catastrophe or another predetermined event to investors. The following usually participate in the transaction:

• the cedant;

• the Class C insurer;

• the investors;

• the trustee;

• the insurance manager;

• the calculation agent;

• the board of directors.

If the insurance event does not occur, the investors receive a return. Upon the occurrence of the trigger, part of the funds is directed to covering the cedant's losses.

Collateralised Reinsurance

Obtaining in the Cayman Islands a licence for working with insurance securities is necessary for operations where the obligations must be fully covered by collateral assets. For this, the following are used:

• funds;

• financial equivalents;

• money market funds;

• a letter of credit;

• a swap;

• other permissible mechanisms.

The Securitisation of Life Insurance Risks

Obtaining in the Cayman Islands a licence for an ILS structure is required for the securitisation of life insurance risks. This permit is also necessary for operations with longevity risk. Such transactions make it possible to transfer to investors part of the actuarial burden on long-term insurance obligations.

The Capital and Collateral Requirements for a Class C Insurer

The minimum requirement for the authorised capital for obtaining a licence for operations with insurance securities in the Cayman Islands constitutes 500 USD. The prescribed capital is equal to the minimum. At the same time, CIMA is entitled to establish an additional volume of financing taking into account the nature of the transaction and the level of risk. An ILS structure is obliged to constantly maintain assets in an amount no lower than the aggregate maximum risk exposure.

CIMA expects a predominance of conservative instruments with high liquidity. Usually the following are used:

• funds;

• government debt securities;

• money market funds;

• short-term investment-grade instruments.

The investment policy must correspond to the term of the transaction and the nature of the insurance risk.

Contingent assets — are permitted as part of the collateral if the issuer is regulated in an acceptable jurisdiction and has a rating no lower than A- by Standard & Poor's or an equivalent level in another recognised organisation.

It is possible to obtain a licence for transactions with insurance investment instruments in the Cayman Islands even without such a rating, if the applicant provides sufficient confirmations of the financial stability of the issuer.

The Requirements for the Applicant, the Directors and the Controlling Persons

When arranging a licence for operations with insurance securities in the Cayman Islands, CIMA assesses the business reputation of the participants in the project:

• honesty and good faith;

• competence and the ability to perform the functions;

• financial stability.

The check is passed by directors, managers, shareholders and other persons with controlling functions.

To obtain a Cayman permit for working with insurance investment instruments, a minimum of two directors is required. Any change of managers, managers or controlling persons requires prior agreement with CIMA. If the management is outsourced, the insurance manager must be licensed, possess sufficient experience and be in the proper regulatory status.

The Requirements for the Management of the Collateral Assets

Assets placed with the reinsurance trustee for the issuance of the bonds must be kept separately from other funds of such a person. 

CIMA assesses:

• the business reputation of the cedant;

• the experience of the manager;

• the regulation of the participants in the transaction;

• the financial stability of the parties.

If the cedant lacks a recognised rating, the regulator may request financial statements and additional confirmations of solvency.

AML/CFT, the Disclosure of Information and the Protection of Investors

When arranging a licence for transactions with insurance securities, CIMA checks the AML/CFT systems. Due diligence is conducted with regard to:

• directors;

• shareholders;

• managers;

• ultimate beneficial owners.

Potential investors must receive a sufficient volume of information about:

• the insurance risk;

• the procedure for payments;

• the investment strategy;

• the trigger event;

• conflicts of interest;

• the priority of claims.

The Step-by-Step Procedure for Obtaining a Licence for Working with Insurance Securities in the Cayman Islands

Obtaining a Cayman permit for transactions with insurance investment instruments takes place through the insurance department of CIMA and includes the following stages

When an Application Is Considered Uncomplicated

The speed of reviewing a request for obtaining a Cayman permit for working with insurance securities directly depends on the structure of the transaction and the composition of the participants. CIMA classifies an application as belonging to the uncomplicated category  upon the simultaneous observance of four conditions:

• all the investors are qualified;

• the reinsurance agreement is concluded with one cedant or its group;

• the covered event is connected with a natural catastrophe;

• the coverage concerns only property losses.

Conclusion

Obtaining Class C Insurance-Linked Securities in the Cayman Islands requires a deep elaboration of the entire structure of the transaction. Our team organises the registration of the company, the interaction with CIMA, the preparation of the investment memorandum, the reinsurance documentation, the collateral schemes and the materials for investors. Additionally, the questions of the approval of a director, AML/CFT checks, interaction with the trustee, the opening of accounts and the coordination of service providers are supported up to the moment of the issuance of the licence and the launch of the ILS project.