Regulatory Policy – Approval of Trusts pursuant to section 7(1) of the Insurance Law (November 2007)

Summary

This is a CIMA regulatory policy dated November 2007 explaining how the Authority applies section 7(1) of the Insurance Law (2007 Revision) to Approved External Insurers writing domestic (Cayman) business. Section 7(1) requires such insurers to place and maintain, on trust with an Authority-approved trustee in a segregated account at a Cayman 'A'-licensed bank, funds at least equal to specified reserves (for general business) or actuarially determined policyholder liabilities (for long-term business), unless the Authority approves otherwise. The policy sets out the criteria CIMA will use when approving the trust deed and trustee arrangements, and separately the circumstances and criteria under which it will approve alternative arrangements instead of a standard trust.

Trust Agreement Requirements

• Trust agreement features: Must specify purpose, beneficiary class, trustee powers and duties, require approval of any termination notice, provide a 30-day cure period before the Authority can direct the trustee to act for policyholders, and allow record access.
• Acceptable trust assets: Cash, certificates of deposit, qualifying debt securities, letters of credit, or alternative instruments accompanied by a legal opinion.
• Trustee requirements: The trustee must be Cayman-based, licensed under the Banks and Trust Companies Law, independent of the insurer, and responsible for oversight of any custodian or investment manager it appoints.

The policy also allows an insurer to withdraw excess trust assets quarterly with CIMA approval, subject to an up-to-date actuarial valuation.

Alternative Arrangements

Existing and new Approved External Insurers may apply for approval of alternative arrangements to the standard trust structure where the legal structure makes compliance impossible or impractical, or where existing or alternative arrangements are equally effective at ring-fencing policyholder assets.

• Factors CIMA will weigh: Financial strength, the home jurisdiction's legal framework, the home supervisor's powers, the licensee's history and cooperation, group affiliation, and type of business.
• Reserved right: CIMA reserves the right to still require a trust where necessary to protect local policyholders.

Key obligations

• Approved External Insurers carrying out domestic business must place and maintain trust funds with an Authority-approved trustee in a segregated account at a Cayman 'A'-licensed bank, equal to specified reserves (general business) or actuarially determined policyholder liabilities (long-term business), unless otherwise approved by the Authority.
• The trust deed must be approved by the Authority and must restrict use of funds exclusively to discharge domestic policyholder obligations and prohibit any charge, security interest, mortgage, assignment or lien over the funds without the Authority's prior written consent.
• Notice of termination of the trust by either party must be approved by the Authority, and any new trust deed or transfer of assets on termination must also receive Authority approval.
• If the Approved External Insurer fails to rectify a notified failure to meet its obligations within 30 days, it must facilitate the Authority's request to the trustee to apply discretion in favour of policyholders.
• The trustee must be Cayman-based, licensed under the Banks and Trust Companies Law, and independent of the Approved External Insurer.
• The trustee must allow the Authority access to relevant trustee records for enquiries and inspection.
• The trustee must report to the Authority if the insurer instructs payout of 5% or more of the market value of trust assets within one calendar month, and must provide asset reports to the Authority on request in a prescribed form.
• Approved External Insurers must maintain internal controls to facilitate trustee reporting of asset movements.
• Any withdrawal of excess trust assets above the section 7(1) requirement at the end of a quarter requires Authority approval, potentially subject to an up-to-date actuarial valuation.
• If a trustee appoints a custodian or investment manager, the trustee must satisfy itself as to their independence from the insurer and fitness to perform the role, and must be able to demand immediate withdrawal of assets from a custodian.
• Insurers seeking approval of alternative arrangements instead of the standard trust must apply to the Authority and demonstrate the applicable criteria (e.g., legal structure impediments, equal effectiveness of existing arrangements, financial strength, home jurisdiction legal framework).

Applies to

Approved External Insurers, trustees licensed under the Banks and Trust Companies Law, custodians, investment managers

Deadlines

• within 30 days of such notice: Period within which an Approved External Insurer must rectify a notified failure to meet its obligations before the Authority may direct the trustee to act for policyholders.
• within one calendar month: Trigger period for trustee reporting obligation if 5% or more of the market value of trust assets are instructed to be paid out.
• at the end of any quarter period: Point at which excess trust assets above the section 7(1) required amount may be assessed for possible withdrawal, subject to Authority approval.