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Actuaries of the Caribbean

What do these actuaries do?  For the most part the ones that I met with were busy evaluating potential reinsurance deals with US companies.  The difference in the methods for accounting for certain liabilities makes it advantageous to cede those liabilities to an offshore environment where the liabilities are accounted for on a GAAP basis in lieu of the statutory methods used for state financial reporting.  The assuming company then provides a letter of credit for the reserve credit taken by the ceding company and the ceding company realizes a ceding commission representing part of the difference between the GAAP and the statutory reserves.  Two likely candidates for this type of reinsurance are Reduced Paid Up life insurance reserves and Long Term Disability (LTD) reserves.  Actually a sizeable portion of the LTD reserves of US companies has already found its way offshore, mostly to Bermuda.  Another advantage to ceding the LTD reserves offshore is that US statutory accounting for investments does not make is easy to match assets and liabilities on this business which has extremely long durations.  Theoretically there should be more common stock in the mix.  Forget the fact that the market has done poorly recently.

Some of the offshore insurance companies have been set up solely for the purpose of reinsuring US business and earning a profit on the differences in US Statutory accounting and International GAAP accounting.  Some have been set up to allow wealthy individuals to create self- directed insurance policies with self -directed investments for income tax or estate tax purposes.  Others have been established to provide an insurance company structure for a hedge fund or other investment fund.  This later purpose is an outgrowth of some of the tax treaties and allows for the sheltering of hedge fund profits from federal income tax.

The offshore actuary’s typical workday begins with a breakfast of the local fruit and maybe a glass of very expensive milk followed by a trip from the company rented apartment to the downtown office on the motor scooter.  The work attire my be a suit on some of the islands or Bermuda shorts with a white short sleeve shirt and tie, white socks and dress shoes.  Lunch will be at the restaurant with all of the other expatriates, insurance executives, bankers, investment bankers, etc.  After a long day at the office, the actuary might retire to a nearby pub for more quality time with the other expatriates.  Often the expatriate actuary will fly back to the states on the weekend since the family did not follow them to the island.  The schools are not what we are used to in the states and most expatriates leave the children behind.

As you can imagine the lifestyles are more limited when it comes to dining and theater.  Distance becomes relative since, at times, it only takes 30 minutes to drive as far as you can go on an island.

The pace is a little slower and the temperature a little higher in most of these countries.  The mode of dress is generally casual, but you do find the British influence on a few islands.  In at least one of these countries, Cayman, you can find the occasional businessman wandering about on a hot day wearing a full dark suit which brings to mind the saying about “only mad dogs and Englishmen” going out in the heat of the day.  In another country, Bermuda, they actually do wear the Bermuda shorts with the knee socks and, at times, even a tie and a sports jacket along with the combination.  Also, in Bermuda, you encounter a stronger British formality in the accepted dress codes in restaurants and on the street.  Restaurants are generally casual but they are “smart casual” and the local police  will speak to you if you wander around in beach attire while not on the beach.  In addition, the wearing of tennis shoes is a fashion faux pas in Bermuda unless you are actually playing tennis.

Let’s not forget the hurricane risk and the more remote volcanic action risk.  The hurricane risk has become more well know in the past few years due, in part, to the Weather Channel and the increased availability of all forms of news and possibly even more as a result of the change in weather patterns caused by el nino or la nina which are, in turn, caused by global warming, or so the theory goes.  As I was sitting in Bermuda writing my first draft of this article last year, a hurricane was about 400 miles south of this island and wandering around.  That year’s weather pattern caused hurricanes to meander around a lot.  The forecasters weren’t sure if it was going to hit or not.  It was scheduled to hit on the day that I was to leave but, luckily, continued it’s wandering for another day and I made it out of town.  One of the actuaries who I had visited with didn’t even know there was a hurricane off the coast.  The previous month I missed hurricane Debbie by a week when I was in the British Virgin Islands.  Debbie may have dispersed over Cuba but it whacked the island that I had been on with 70 MPH winds.  Then more recently when I was in the Caymans, I was caught at the mercy of a hurricane whose name I forget when the airports were shut down.  The only option was to sit in the bar and hold a hurricane party as the tidal surge came in and the power flickered on and off.  Again, luck, spared me the direct onslaught when the hurricane split into two storms which both missed the island.  The diving was terrible, however, since the fish have more sense and head to deeper water.  Some of the underwater stills and video can be seen at my website www.sealifepix.com. 

So what does the prudent actuary do when weather threatens? 

A)    Put your head between your legs.

B)     Head back to the mainland by the fastest route.

C)    Go to the south beach and watch it come in – I’ve met people that have done this – they weren’t actuaries, however, and yes, the hurricanes typically approach from the south in the Caribbean and, yes, they did end up in the hospital.

D)    Wait it out.

The answer given was generally D.  Although, many of the actuaries that I spoke to had not experienced a hurricane.  The recommended approach is to do what people in the Midwest do.  During the storm, find the safest place in the house and open the windows facing south to avoid implosion and then after the eye of the storm passes (if this happens in the Midwest, it’s too late), close those windows and open the windows to the north.  Having spent a bit of time in the Caribbean and the Florida Keys, I raised the question of dealing with the tidal surge which, we as actuaries know, causes the great majority of deaths in a hurricane.  This is an issue that wasn’t always well thought out.  The risk actually varies with the terrain of the island and the location of your home.  For example, the Virgin Islands which can be visualized as a group of mountainous peaks sticking out of the ocean are not as subject to tidal surges while Grand Cayman which is formed on an old coral reef and, where the highest point of the island is about 15 feet, has in the past been literally covered by tidal surges.  When you hear about the old disasters that occurred before the current sophistication of storm watching, the large numbers of deaths in the Keys, Galveston and Mississippi were due to tidal surges.  However, a few years ago some people stayed around Key West to watch a 12 foot tidal surge that occurred during a hurricane.  Over 6000 people were killed in the Galveston Hurricane in 1900, most of them by the tidal surge, Camille produced a 25-foot tidal surge in Mississippi and Hugo in 1989 generated a 20-foot tidal surge in South Carolina.   A 20 to 25 foot storm surge would completely cover Grand Cayman.

Regarding the volcanic risk, remember, many of these islands were formed by volcanic action.  So, if you’re on an island that has no hills, you need to worry more about tidal surges while if your island has lumps you need to factor in the volcano risk.  One of the islands, Montserrat, as devastated in 1995 by volcanic eruptions.

Another issue is cost of living.  When almost everything that we need to survive as 21^st century human beings has to be shipped to the island, you can expect to pay pretty much by weight and volume.  Some examples that I was given were $7.50 for a gallon of milk if you could find it by the gallon and $12 for a watermelon.  Bananas and other island fruit are cheaper, however.

One of the byproducts of the higher cost of island living is the higher cost of gasoline and the limitations on the use of automobiles.  An example of this is one island where the residents where limited to one car per household and the other members of the household either walked or rode around on a scooter.  This is not all that bad.  You may also have to take another drivers test and, remember, many of these people drive on the wrong side of the road.

Finding a place to live can also be a problem in some of the more popular islands, real estate ownership is limited to citizens and, as we now know, that’s probably not going to happen for you.  This, actually, is also an issue in Hawaii.  As you can tell, I’ve been pricing real estate and the prices are actually about the same for Hawaii and the Caribbean – LOTS.  So you’re typically limited to renting a place which might cost something comparable to a place in Manhattan.  There are some Islands that do allow non-resident purchases of real estate but there are typically price limits and high taxes or duties associated with this ownership.  For example in Bermuda, a non-resident can only purchase real estate valued in excess of $1.7 million and there is a 30% or so tax on top of that.  The situation in the Caymans is similar except for Cayman Brac, a sister island.

Let’s list some of the tax havens here including – Bermuda, Cayman, BVI, Barbados, Turks and Cacos, Grenadine, Panama.  Note that Bermuda is apparently a two Letter of Credit (LOC) domicile which means that you have to buy a LOC to back your reserves in the US and if you don’t have the capital in Bermuda, you need another LOC.  This is why some reinsurance companies choose the Barbados. Depending on the reigning tax treaties, some islands require two letters of credit and some require one.  The cost of letters of credit have been going up and it is getting more and more difficult to obtain them as banks realize that there is actually a risk associated with these instruments.  It is also virtually impossible to obtain one that renews year after year. There are some alternatives to letters of credit including using actual assets.

The tax, banking and Insurance havens were often created initially through tax treaties with Great Britain and have continued through similar tax treaties with the US and Canada. 

The banking lure is the confidentiality of the account holders identity and information.  However, some of this is breaking down in some of the offshore havens.  For example, a recently negotiated tax treaty between the US and the Caymans opens up bank records to the IRS in several years.  So, if you have any money there, move it soon. Will this affect the actuaries?

This is just one more example of unusual opportunities for actuaries.  You don’t have to drink the rum, although I recommend it, and you don’t have to wear the saber earring, I’ll let you know how that goes, but you do have to know the international GAAP accounting requirements.