(Re)insurance – The ABCs of SPCs

What is an SPC?

An SPC is a single legal entity, with one board of directors, that can establish internal segregated portfolios.  Each segregated portfolio’s assets and liabilities are legally separated from the assets and liabilities of the company’s ordinary account (called its “general assets”) and are also separate from any assets and liabilities attributed to the SPCs other segregated portfolios (if any).

A creditor entering into contractual dealings with a particular segregated portfolio will have restricted recourse; meaning it will only be entitled to make its recovery against assets attributed and credited to the specific segregated portfolio to which the contract is also attributed. That creditor will not be legally entitled to make recovery against assets attributed and credited to other segregated portfolios of the SPC, or (save to the extent otherwise provided in any relevant contract or the memorandum of association and articles of association of the SPC) against the general assets of the SPC.

Entry into contracts and PICs

Cayman Islands law provides that any act, matter, deed, agreement, contract, instrument under seal or other instrument or arrangement which is to be binding on an SPC must be executed by the SPC for and on behalf of the relevant segregated portfolio.

Given an SPC is a single legal entity, irrespective of the number of portfolios that it establishes, segregated portfolios are unable to contract with each other. In light of this, Cayman Islands law provides that a licensed (re)insurance company established as an SPC can establish, for the account of a particular segregated portfolio, a “portfolio insurance company” being a subsidiary in the form of an exempted company limited by shares (PIC).  That PIC is then permitted to undertake (re)insurance business without its own insurance licence, effectively piggy backing off the insurance licence of the SPC.  Furthermore, a PIC, which has its own board of directors and its own legal personality, can enter into contracts with any person including (a) the SPC acting on its own account, (b) the SPC acting on behalf of any of its segregated portfolios or (c) another PIC.

SPCs in the (re)insurance space

SPCs can be used for a variety of purposes including reinsurance vehicles, life and annuity companies, transformer vehicles, securitisation and derivatives structures, as well as special purpose vehicles.

SPCs are also frequently used to set up rent-a-captive structures. Rent-a-captives that take the form of SPCs allow a company that does not wish to establish its own captive to “rent” a portfolio from an established captive. The benefits of this approach (in comparison to a company establishing its own captive) include that (a) the operator of the existing captive is likely to have greater experience in managing the captive and (b) the costs of administering the existing captive are likely to be significantly less than those of a new captive due to economies of scale.

Conclusion

SPCs represent a major opportunity for international businesses, particularly in (re)insurance industry, to avail themselves of a structure that allows for cost effective and efficient segregation of assets and liabilities within a single legal entity. In the third quarter of 2022 the Cayman Islands Monetary Authority reported a total of 149 licensed international insurance companies that were registered as SPCs. These SPCs had total premiums of circa US$2.7bn with total assets valued at just under circa US$ 11bn. The success of the Cayman Islands in the (re)insurance space can be attributed to a number of factors, not least a flexible, modern and sensible regulatory regime for (re)insurance companies generally and captives in particular.

For more specific advice on establishing a (re)insurance structure in the Cayman Islands, we invite you to contact one of the members of our market leading (re)insurance team.