The Cayman Islands Monetary Authority (CIMA) issued a new piece of legislation in February last year that aimed to tighten up regulation around the investment activities of insurance companies on the island. The Rule was broadly designed to ensure assets are managed in a manner consistent with the risk profile of the insurer and its liquidity needs, with new principles that echo many of the developments we’ve seen in Europe.
Executive Director and the head of London & Capital’s Caribbean Office, Darren Treasure, has been working with the local insurance managers to ensure The Rule is incorporated by the February 2023 deadline. We sat down with him to ask some key questions about these important regulatory changes.
Q.1 WHY WAS THE NEW RULE INTRODUCED?
CIMA is requiring insurance companies to introduce enhanced governance procedures around their investments, with a particular eye on protecting policyholders’ interests. Insurers on the island are being asked to ensure they have a much greater understanding of the investments in their portfolios, from both a risk and solvency perspective. This means stronger accountability for investment decisions and how they impact the insurers’ ability to pay out claims when the time comes.
We’ll also see greater transparency around the investment activities of the insurers and achieve some degree of standardisation around reporting and monitoring, which should make it easier for the regulator to monitor the overall health of the sector’s balance sheets going forward.
Q.2 ARE COMPANIES READY FOR ITS INTRODUCTION?
From the discussions I have had with clients, yes they are. Most captives will already have incorporated many of the recommendations contained in The Rule. Some B(iii) licensees may have to do a little more work to satisfy some of the details but insurance managers have been aware this guidance was coming. I suspect there may be a handful of captives who have not fully considered the implications to their business which may cause a dash to the finish line once the imminence of the deadline is realised.
Q.3 WHAT BENEFITS WILL IT HAVE FOR INSURANCE COMPANIES?
The Rule brings more clarity for captives on their own responsibility for investments processes and decisions but should also put the Cayman Islands in a good light as a captive domicile. Having, and importantly
demonstrating, a solid understanding of the risk of the investments could provide captives with improved rates or terms with fronting insurers, particularly where there are collateral requirements. Stronger governance around the investments allows directors and investment committees to manage and identify mismatches with asset liability matching or identify potential solvency issues. It can also highlight the overconcentration
of a particular risk.
Of course, ultimately there are no guarantees in investment markets. Black Swan events can expose risks that were not previously apparent, but the adoption of The Rule should at least reduce the probability of an insurance company stumbling into issues as a result of inadequate risk oversight.
Q.4 HOW CAN LONDON & CAPITAL HELP INSURANCE COMPANIES TO COMPLY WITH THE RULE?
We’re working proactively with insurance managers to ensure any necessary changes to an investment policy statement (IPS) are incorporated. Our approach is to perform a gap analysis between The Rule and the IPS and make suggestions on the wording or procedures in order to remain compliant come February 2023. However, given our expertise in working with insurers and captives globally, most of our clients are already able to meet the requirements laid out in the CIMA rule as many of the rules around risk safeguards represent best practice that is already in place today.
Q.5 WHAT ARE THE MOST IMPORTANT PARTS OF THE RULE?
Any and all guidance coming from the Regulator needs to be treated as important and making sure you have a comprehensive understanding of what they require is always wise! That said the sections
on management of investment risks, investment policy and internal controls & audit should be of particular interest to captives. These sections may require extra documentation, new reporting, new
processes, assignment of new responsibilities and increased knowledge of investments and risk.
Q.6 WHICH SECTIONS OF THE RULE WILL BE MOST CHALLENGING FOR INSURANCE COMPANIES?
The section on management of investment risks could prove challenging as part of it requires understanding and responsibility for risk internally within the insurance company. Captives in particular may not have the investment expertise in-house to fully satisfy the requirements so they may need support and education for their board or investment committee.
The Rule also requires insurers to understand the risk around investments before a decision is made and I can see how this could be a challenge for captives investing outside of the major asset classes. If external investment managers are being used, it’s important to ensure the Board or Investment Committee are clearly briefed on investment risks before allocating to equities for example. Captive boards should also consider
carving out more time on investments to ensure they can demonstrate proper monitoring of their investment portfolio.
The section on internal controls and audit may also pose problems for B(iii) insurers who are now required to get an internal audit performed. CIMA has provided further guidance stating the internal audit has to be performed by an independent person, group, division or company. This could be someone internal to the insurer as long as independence can be demonstrated. The challenge faced here is around the procedures and scope of the internal audit and the time and resources required to satisfy CIMA.
Q.7 WHAT IS THE ONE CONCERN YOU ARE GETTING MOST QUESTIONS ABOUT?
Even though it only applies to B(iii) insurers, the requirement for an internal audit is the subject of concern for many. Concerns exist about the time, scope, frequency and cost. Also, what will be acceptable as independent by CIMA? Would the insurance manager qualify? How about someone within the parent company? Does a B(iii) insurer have the skills and expertise in-house to perform a meaningful internal audit? These are some of the questions we’re hearing.
Q.8 DO YOU THINK THERE WILL BE FURTHER REQUIREMENTS IN THE FUTURE?
Change is inevitable and regulation is always under the microscope so there is a strong possibility of further requirements in the future. In this particular instance, I would not be surprised to see some adjustments in future as a result of more specific industry feedback. The Regulator and IMAC have demonstrated a strong symbiotic relationship in the past which ultimately contributes to the success of the jurisdiction as a whole. As different external and internal forces have been applied the Cayman regulators have shown themselves to be nimble and adaptive to ensure the reputation of the jurisdiction does not fall into disrepute.