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The tendency to think of all offshore jurisdictions as alike should be avoided. No two of the half-dozen leading jurisdictions appeal to the same investors, offer quite the same legislation, or have developed their markets in the same way. Where Bermuda, for instance, has attracted physical presence companies, the Cayman Islands has built a managed insurance sector run by managers and professionals, with more than 600 captive companies, an eighth of the global total.

Cayman Islands captives write, in the main, U.S. health care and workers' comp. As of June 30, 2003, Cayman's insurance sector had annual premiums of $4.4 billion and net income of $419 million. Assets employed in the sector totalled $18.5 billion. With 617 captives in existence at that date, Cayman is indisputably the world's second largest captive jurisdiction. All of those companies were in business as of June 30; other jurisdictions that claim similar numbers count total incorporations, dead or alive.

Captives Rule

The defining characteristic of the Cayman market has been its steady growth. Since 1993, the number of Cayman captives has increased at an average of 7 percent annually. The number of companies grew 10 percent in 2002, after the events of Sept. 11 persuaded risk managers that the time was right to fire up the captive project that had been sitting on the back burner for a while.

By primary class of business, half the Cayman book at the end of June was health care (200 companies) and workers' compensation (127 companies). The other half was a mix of property, professional and general liability and other lines.

Pure captives account for about 60 percent of the Cayman companies, association captives 12 percent and the new powerhouse, segregated portfolio cell companies, 11 percent. The balance is made up of group captives, rent-a-captives, alternative financing vehicles and a handful of open market insurers. Fully 87 percent of Cayman's risk on June 30 originated in the United States, with no other geographical region reaching 5 percent of the total coverage.

Cayman is probably best known to the world as a banking center. The number of Cayman banks fell from 571 to 388 between 1999 and 2002, as new regulations took effect. Privately owned banking institutions that are not subsidiaries or branches of other banks, and hence not included in the consolidated supervision of a banking group, are now required to have a physical presence in Cayman. Of the 12 Argentine banks in Cayman a year ago, at least four have gone into either compulsory or voluntary liquidation.

The value of assets held by Cayman banks, however, has marched in the other direction. In December 2002, assets passed the trillion-dollar mark for the first time, keeping the small group of islands (and specifically the largest island, Grand Cayman) among the five biggest money centers in the world.

Cayman's banking sector took a series of body blows in the 1990s, when it became associated in the public mind with tax dodging. The Tom Cruise movie The Firm did a lot of the damage. Cayman's omission from the OECD tax havens hit list changed the islands' fortunes when it was interpreted as a rubber-stamp to the effect that Cayman belonged in business with the family of nations. Subsequent alphabet soup initiatives have all approved Cayman's style and the attitude of the regulatory authorities.

As much as banking dominates the Cayman financial sector, it is being joined in the spotlight by a fast-growing fund industry. In 1997, Cayman had about 1,500 mutual funds; now it has more than 4,500. At last report, Cayman held 51 percent of the overall world market for offshore hedge funds. In business, 51 percent constitutes ownership.

A "Squeaky Clean" Image

Cayman's insurance sector has always been squeaky clean, presided over by a cadre of seasoned administrators who often knew the industry from the inside, having worked in various branches of insurance before coming to regulation. The position of Head of Insurance has been something of a revolving door in the past four years, but everyone who has held the position has cleaved to the same concepts and the same high degree of integrity.

Four years ago, veteran Bill McCullough, who had been pulled out of retirement to take the position, took me through his system in great detail, proudly pointing out where practices and procedures had been strengthened over the years. He believes that the best regulator is an informed regulator. Within 18 months, MeCullough had gone back into retirement, this time "permanently." (He has since come out of retirement in Australia, "one last time," to manage affairs down in the British Virgin Islands.)

McCullough was replaced by Clive Thursby, another industry man, and a manager by nature. He, in turn was replaced by Gordon Rowell, a smart administrator and a rock-solid regulator. Now the position is held by Mary Lou Gallegos, whom I have not met, but whose approach is little different from the standard Cayman insurance formula.

Having pioneered the securitisation market a few years ago, Cayman suffered when interest in the vehicles seemed to peak. One response was legislation permitting segregated cell companies, which have caught on in a big way. By June 2001, a quarter of Cayman captives were being set up as SPCs and Cayman had 33 such facilities, with a total of 144 portfolios or ceils. In some cases, existing captive insurers had been converted into SPCs tn respond to the new business opportunity.

Those who incorporate in Cayman do so for compelling business reasons. For North Americans, Bermuda is nearer and almost everywhere else is cheaper. A factor, clearly, is the A-list acceptance that comes from trading in an offshore community with approved status.

Cayman was not unduly troubled by the passage of the U.S. Patriot Act, given the steps taken in 2000 and 2001 to meet international anti-money-laundering standards. Internally, considerable concern was raised by a group that believed Cayman should rebuff the OECD and its nosy parker buddies, FATF, FSF, G-7 and all the others. Common sense prevailed.

Among recent changes, Cayman allowed the investigation of fiscal wrongdoing for the first time in 2001, at least where criminality is in evidence both internationally and in Cayman itself. The prevailing attitude in Cayman however is still to protect confidentiality in the absence of demonstrated criminality.

The Cayman Islands Monetary Authority, the regulator, was granted its independence earlier this year. Operational decision-making has been placed in the hands of CIMA's board of directors, who now have responsibility for such matters as licensing. The authority's independence means Finance Minister George McCarthy makes way as chairman tar Michael Austin, a member of the board since its inception six years ago.

The hallmark of a successful offshore economy is careful economic planning. Develop too slowly, and you lose the race. Too fast, and the internal stress can prove fatal. Right now, Cayman ,nay be the best example of getting it right in the entire offshore constellation.

"The progress we have made here is the result of deliberate policies and the result of putting those policies into effect," said Sir Vassel Johnson, one of the architects of the modern Cayman economy, writing in his autobiography, As I See It. "Some have regarded it as a Cayman that has transformed beyond its natives' wildest dreams, while other residents have not yet realized the full benefit of their enviable position of living in a leading international offshore financial center."

RELATED ARTICLE: Setting up shop: why a Texas company picked the Caymans.

For Francis J. Fey, president and CEO of the JI Companies in Austin, Texas, setting up a captive in the Cayman Islands was a no-brainer. Going offshore cost the company less than $500,000, compared with the $3 million it would have cost had the company created a captive stateside. Lower taxes and looser regulations also make it easier to set up a captive program offshore, he said

Speaking at a recent convention of the Self-Insurance Institute of America Inc. in Dallas, Fey said his company was driven to set up a captive unit because of the big increases in stop-loss insurance over the past three years. Despite a recent softening, prices are up 40 percent over what they were three years ago, he said. Hence the need to look at alternatives.

The JI Companies, which administers workers' compensation and group health benefits plans to self-insured Texas-based employers, is just one of thousands of companies using captive insurance programs.

In the employee benefits arena, captive companies are used to offer special purpose life insurance, group pension plan insurance, health and health stop-loss insurance.