Walkers Global
Established early last year, interest in PICs is growing. Derek Stenson and Ramesh Maharaj of Walkers Global take a look at the specifics
Since portfolio insurance companies were introduced in the Cayman Islands in January 2015, have you seen a lot of interest in them?
Derek Stenson: We have seen significant interest in the portfolio insurance company (PIC) product, which is not surprising given that the PIC initiative was insurance sector-led. The enabling legislation was specifically designed to allow Cayman Islands insurers established as segregated portfolio companies (SPC) to incorporate one or more of their segregated portfolios, also referred to as cells, as separate legal entities—PICs.
What is a PIC’s function? Do insurers need an SPC first?
Ramesh Maharaj: The ultimate function of a PIC is the same as a cell of an SPC in that it permits the segregation of assets and liabilities of the PIC from those of the SPC itself or another cell of the SPC. PICs have a number of benefits, which may be attractive to some insurers. They are only available to Cayman-licensed SPC insurers, so to utilise a PIC an insurer must be established as an SPC or convert to an SPC, which is a relatively straightforward process.
Under what circumstances should PICs be used and what are the benefits?
Stenson: It will be a subjective test as to whether a PIC should be utilised or not. It is simply another choice on the menu of risk management options made available by using a Cayman entity. When considering the establishment of a captive, or whether an existing insurer might potentially convert to an SPC, the pros and cons should be examined to determine if an SPC, which has the option of using PICs, is the most suitable structure for the captive.
The benefits of PICs are broad ranging:
Due to the fact that a PIC is a separate legal entity, PICs address a nagging concern with SPCs as to whether courts outside Cayman would recognise the
What is the process to establish a PIC?
Maharaj: Each PIC will be incorporated as a Cayman exempted company and will be a subsidiary of its controlling SPC but related to a particular cell of the SPC. A cell can have no more than one PIC.
The insurance programme of an existing cell, including assets and liabilities, will be the subject of a statutory novation from the relevant cell to the PIC as part of a fast track registration procedure with the Cayman Islands Monetary Authority (CIMA). Although a PIC will be regulated by CIMA, with initial and annual filings and registration fees payable, it will not be separately licenced and instead will fall under the licence of its controlling SPC.
The incorporation of the PIC is simple and can be achieved within 24 hours. All the voting shares of the PIC must be held by the SPC but non-voting participating shares may be issued as required. The name of the PIC must include the letters “PIC” or “P.I.C.” or the words “Portfolio Insurance Company”.
Registration of the PIC with CIMA will be largely the same as the current procedure for creating a new cell of an SPC and will involve, among other things, the submission of an application with prescribed particulars, including written consent from the SPC, due diligence materials on proposed directors and officers (if different to those of the SPC), a business plan and the required filing fee.
If satisfied with the application, CIMA will issue a Certificate of Registration (no licence required) and the assets and liabilities of the relevant cell will be the subject of a statutory novation to the PIC. The PIC will have ongoing obligations to, among other things, carry on its business only in accordance with the application submitted to CIMA, maintain a margin of solvency and capital in accordance with the requirements prescribed in the PIC legislation and make annual regulatory filings with CIMA.
The cell concept seems to be rising in popularity. Do you see it overtaking the pure captive at all, or is it an alternative?
Stenson: PICs are an alternative to the more conventional legal structure of a captive. The term captive covers a very broad range of insurers established for different reasons and to achieve different outcomes, which of course can change over time. PICs are simply a new option for these insurers to be utilised if they offer some benefit to the insurer or if they resolve a particular issue being experienced by the insurer. There is a place in the insurance sector for the various types of structures available, whether they’re single parent captives established as conventional limited liability companies or large SPC insurers utilising a significant number of PICs.
How do they offer more flexibility in terms of quota sharing, risk pooling and reinsurance?
Maharaj: For some SPCs, a drawback is that the cells do not have separate legal personality, which means that cells of an SPC, or the SPC and a cell, cannot enter legally binding arrangements, because of the absence of two legal parties. The result is that quota sharing, risk pooling, reinsurance or other arrangements between cells of an SPC is not possible. PICs have separate legal personality and so provide the captive the flexibility required to participate in these arrangements.
