CAPTIVEINSIGHT
INCORPORATED
CELL LEGISLATION
NEW OPPORTUNITIES FOR SEGREGATED PORTFOLIO COMPANY INSURERS
by Paul Scrivener
Partner
Solomon Harris
S
ince their introduction in 1998, segregated portfolio
companies (SPCs) have proved to be extremely popular
vehicles in Cayman’s captive insurance industry. SPCs
were originally developed to provide an improved model of the
traditional contractual rent-a-captive.
However, in the fifteen years that
they have been on the statute book,
they have been used in many different
circumstances. Indeed, they have
been used wherever there was a
need to create legally “ring-fenced”
accounts or portfolios within a single
licensed insurer thereby ensuring that
policyholders or other creditors only
had recourse to the assets of a specific
account or portfolio and not the entire
balance sheet of the SPC. Statistics
of the Cayman Islands Monetary
Authority (CIMA) bear witness to their
popularity with captive owners and
their consultants. As at 30 June 2013
there were 134 SPC insurers, out of a
total of 750 Cayman captives, writing
almost US$500 million in premiums.
Fine Tuning the SPC
Although not relevant to all SPC
insurers, for some a drawback of the
SPC was that none of the segregated
portfolios, or cells for short, of an SPC
was a separate legal entity. Only the
SPC itself was a legal entity and the
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cells were simply ring-fenced divisions
of that legal entity. Why was this a
drawback? There are two principal
reasons. First, any contract between one
cell and another cell of the same SPC
can never be legally binding because
of the absence of two legal parties. This
therefore prevents reinsurance and risk
pooling arrangements between cells of
the same SPC which for some SPCs is
commercially undesirable. Second, there
is considerable uncertainty over the U.S.
federal tax status of an unincorporated
cell of an offshore insurer casting doubt
over whether a cell can be treated as a
separate taxpayer and make its own
tax elections such as a 953(d) election
and an 831(b) election. These issues
were capable of being addressed if it
were possible for an SPC insurer to
incorporate one or more of its cells and
thereby create the separate legal identity
that was needed.
On 25 March 2013, the Insurance
(Amendment) Law (the Amendment
Law) was enacted in the Cayman
Islands to allow SPC insurers to
incorporate their cells for the first time.
It is, arguably, the most significant
legal development for Cayman’s
insurance sector since the introduction
of SPCs in 1998. The Amendment Law,
whilst now on the statute book, is not
yet in force at the time of writing this
article but will be brought into force
once necessary amendments have
been made to the underlying Insurance
Regulations. These amendments will
deal with administrative matters, such
as additional forms and returns that
are required and also more substantive
issues such as the capital and solvency
requirements for incorporated cells.
This legislation was widely anticipated
and was the product of a tremendous
collaborative effort over a two
year period between the Cayman
Islands Government, the Insurance
Managers Association of Cayman
(IMAC) and the Financial Services
Legislative Committee, a private
sector/public sector committee tasked
with maintaining Cayman’s financial
services legislation at the cutting edge.
A Different Approach to Cell
Incorporation
Incorporated cell legislation is not
new and was first developed in Jersey
several years ago. However, the
Amendment Law provides a model for
incorporated cells which differs from
that in Jersey and other domiciles.
It is specific to the insurance sector,
where there was a pressing need for
incorporated cells, and, at this stage,
does not extend to other sectors of
Cayman’s financial services industry.
The legislation amends the Insurance
Law rather than the Companies Law
and was deliberately crafted as a
modification to the existing regulatory
regime for SPC insurers rather than a