# Zero Tax, Full Collateral: How Offshore ILS Vehicles Underwrite American Catastrophe Risk Cayman and Bermuda vehicles hold $65.8 billion of catastrophe risk without US insurance licenses. The collateral rule meant to keep them out is what lets them in. Author: J.A. Watte Published: August 6, 2026 Source: https://jwatte.com/blog/ils-offshore-domiciles-us-insurance-market/ --- There is $65.8 billion of catastrophe bond and insurance-linked securities risk capital outstanding right now, and $18.9 billion of it was issued in 2026 alone ([Artemis](https://www.artemis.bm/dashboard/)). A large share of that capital sits in companies incorporated in the Cayman Islands and Bermuda, pays no income tax where it lives, and stands behind American hurricane, earthquake and wildfire exposure. That arrangement sounds like it should require some kind of regulatory sleight of hand. It does not. It works because of a rule written to keep unlicensed foreign reinsurers out of the US market, which these structures satisfy by accident of their own design. The tax part is real but smaller than people assume, and it has changed in the last two years in a way most explanations have not caught up with. Worth separating the two before anyone builds a thesis on either. ## The tax position, stated accurately Start with what is actually true in each jurisdiction, because "offshore equals zero" stopped being a complete sentence in 2025. **The Cayman Islands genuinely imposes nothing.** Per PwC's country summary, last reviewed on 29 May 2026, "corporate income, capital gains, payroll, or other direct taxes are not imposed on corporations in the Cayman Islands" ([PwC](https://taxsummaries.pwc.com/cayman-islands/corporate/taxes-on-corporate-income)). Cayman has not enacted a Pillar Two domestic minimum top-up tax, and as of the same review date there had been "no significant corporate tax developments in the Cayman Islands during the past year" ([PwC](https://taxsummaries.pwc.com/cayman-islands/corporate/significant-developments)). **Bermuda now has a 15 percent corporate income tax, and almost nobody in ILS pays it.** The Corporate Income Tax Act 2023 received assent on 27 December 2023 and took effect for fiscal years beginning on or after 1 January 2025 ([Government of Bermuda](https://www.gov.bm/CIT)). The rate is 15 percent. The scope is the part that matters: it reaches Bermuda Constituent Entities that form part of a multinational enterprise group with annual revenue of 750 million euros or more. Everyone else is untouched, and PwC states it plainly: "Bermuda businesses that are not within the scope of the newly enacted Bermuda CIT will continue to not be subject to income tax in Bermuda" ([PwC](https://taxsummaries.pwc.com/bermuda/corporate/taxes-on-corporate-income), last reviewed 19 February 2026). **The Bahamas did the same thing.** Its Domestic Minimum Top-Up Tax Act was enacted on 29 November 2024, imposing 15 percent on in-scope multinational groups meeting the same 750 million euro threshold in two of the previous four years, applying to fiscal years commencing in 2025 ([Office of the Prime Minister of The Bahamas](https://opm.gov.bs/wp-content/uploads/2024/08/Introduction-of-a-Domestic-Minimum-Top-Up-Tax-in-the-Bahamas.pdf)). So the honest version of the premise is this. A standalone catastrophe bond issuer is a shell with a few million dollars of paid-up capital and one transaction on its books. It is nowhere near 750 million euros of group revenue and is not a constituent entity of anything that is. It pays zero, in all three places, and the new minimum taxes do not touch it. The vehicles that do get caught are the ones nobody was describing as tax-free anyway: Bermuda subsidiaries inside large global carriers. For those, the change is sharp. Bermuda's Tax Assurance Certificates, the written government promises of tax exemption that companies had relied on for decades, do not help, because the Act applies notwithstanding them. That distinction is the whole story, and collapsing it into either "offshore is still zero" or "Bermuda taxes reinsurers now" gets it wrong in both directions. ## The rule that opens the door Here is the part that actually explains how offshore capital reaches American policyholders. A US insurance company that buys reinsurance wants to book the credit for it, meaning it wants to reduce the liabilities on its own balance sheet by the amount it has ceded away. State regulators only allow that if the reinsurer meets certain conditions. If the reinsurer is not licensed in the US, the NAIC framework requires it to "post 100% collateral to secure the transaction, unless they are a Certified Reinsurer or a Reciprocal Jurisdiction Reinsurer" ([NAIC](https://content.naic.org/cipr-topics/reinsurance)). For a conventional foreign reinsurer, that requirement is punishing. Posting a dollar of collateral for every dollar of assumed liability destroys the capital efficiency that made the business worth doing. Decades of trade negotiation went into reducing it. For an insurance-linked securities vehicle, it costs nothing at all, because full collateralization is what the structure already is. A catastrophe bond works by having investors buy notes, with the proceeds deposited into a collateral account. The vehicle writes a reinsurance contract to the sponsoring insurer, and the collateral account is what pays the claim if the covered event happens. If it does not happen, the collateral returns to investors with interest. The money is sitting there from day one. Nobody is being asked to post anything extra, because the entire structure is pre-funded by construction. Cayman built a licence class around exactly this. A Class C insurer's licence permits reinsurance "in respect of which the insurance obligations of the class C insurer are limited in recourse to and collateralised by the class C insurer's funding sources or the proceeds of such funding sources," including the issuance of bonds ([CIMA](https://www.cima.ky/upimages/regulatorymeasures/1559151821RegulatoryPolicyLicensingClassCCompanies_1559151821_1599572882.pdf)). Limited recourse and fully collateralised are written into the licence definition. So a barrier designed to make unlicensed foreign reinsurance uneconomic turns out to be free for the one kind of foreign reinsurance that was always going to hold the cash anyway. ## Bermuda gets the collateral waiver. Cayman does not. Cayman does not need it. This is where the two domiciles genuinely diverge, and where a lot of commentary gets muddled. Bermuda is a Reciprocal Jurisdiction. The Bermuda Monetary Authority, along with the Japanese Financial Services Agency and Swiss FINMA, was placed on the NAIC list effective 1 January 2020 ([NAIC](https://content.naic.org/article/news_release_bermuda_japan_switzerland_added_naic_list_reciprocal_jurisdictions.htm)). European Union member states qualify through the 2017 bilateral covered agreement and the United Kingdom through the 2018 agreement. All 56 US jurisdictions had adopted the enabling revisions by September 2022. A qualifying Bermuda reinsurer can therefore write US business with zero collateral. The Cayman Islands is not on that list. You would expect that to be decisive, and for a traditional reinsurer it would be. For ILS it is close to irrelevant, which is why Cayman remains a dominant domicile for catastrophe bond issuance despite lacking the status Bermuda fought to obtain. The zero-collateral waiver is worth a great deal if your business model depends on not posting collateral. If your business model is posting collateral, the waiver is a benefit you have no use for. Cayman competes on the things that do matter to a single-transaction shell: a licence class purpose-built for limited recourse deals, segregated portfolio companies that let one legal entity hold multiple ring-fenced transactions under the Companies Act, and a regulator that turns around catastrophe bond approvals quickly. ## What "without the exposure" actually means The phrase does a lot of work, and it is worth being precise about which exposure is being avoided, because it is not primarily tax. **The ceding insurer avoids credit risk.** In a normal reinsurance relationship, the cedent is exposed to the possibility that the reinsurer cannot pay when the claim arrives. That is the risk the collateral rules exist to manage. With a fully collateralized vehicle, the money is already in the account. There is no counterparty to fail. **The investor's exposure is capped and defined.** Limited recourse means the vehicle's obligations cannot exceed its funding sources. An investor can lose the principal committed to that transaction and no more. There is no residual liability, no calls for further capital, and no exposure to the sponsor's other business. **The sponsor gets capital that does not behave like insurance capital.** Catastrophe risk is largely uncorrelated with equity and credit markets, which is why pension funds and asset managers buy it. The capital is not coming from another insurer's balance sheet, so it does not concentrate risk inside the insurance system the way a traditional reinsurance tower does. None of those three things is a tax outcome. They are structural. The tax neutrality of the domicile matters for a narrower reason: it stops the vehicle from becoming a taxable layer between the American policyholder's premium and the investor's return. A pension fund investing through a Cayman vehicle is taxed, or not taxed, according to its own status. The vehicle does not add a tax of its own. That is what "tax neutral" means in this context, and it is a more modest claim than "tax free." ## Where the US does reach in The idea that these structures sit entirely outside the US tax system is wrong, and the gap is a specific one. Section 4371 of the Internal Revenue Code imposes a federal excise tax on premiums paid to foreign insurers and reinsurers. The rates are four cents per dollar on casualty insurance and indemnity bonds, one cent per dollar on life, sickness and accident insurance and annuity contracts, and **one cent per dollar on reinsurance** covering either of those categories ([26 U.S.C. § 4371](https://www.law.cornell.edu/uscode/text/26/4371)). So a US insurer ceding risk to a Cayman or Bermuda vehicle generally pays one percent of the premium to the Treasury. Sixteen countries have treaties that exempt their insurers from that tax, available through a closing agreement under Rev. Proc. 2003-78: Cyprus, Finland, France, Germany, India, Ireland, Israel, Italy, Japan, Luxembourg, Mexico, Netherlands, Spain, Sweden, Switzerland and the United Kingdom ([IRS](https://www.irs.gov/businesses/international-businesses/exemption-from-section-4371-excise-tax)). Bermuda is not one of them, and this is the correction worth carrying away, because the belief that the Bermuda treaty solves this is widespread. The IRS states that no provision of the US Bermuda income tax treaties prevents application of the excise tax on premiums allocable to coverage for periods after 31 December 1989. Congress put that beyond argument in section 6139 of the Technical and Miscellaneous Revenue Act of 1988. The Cayman Islands has no US income tax treaty at all, so the question does not arise there. One piece of good news for the structures, and it took litigation. The IRS spent years asserting that the excise tax applied every time a US risk moved, including between two foreign reinsurers, so a single risk could be taxed repeatedly as it was retroceded. That was Revenue Ruling 2008-15. The D.C. Circuit rejected it in *Validus Reinsurance, Ltd. v. United States*, 786 F.3d 1039, decided 26 May 2015. The IRS revoked Rev. Rul. 2008-15 through [Rev. Rul. 2016-03](https://www.irs.gov/pub/irs-drop/rr-16-03.pdf) and no longer seeks to impose the tax on reinsurance or retrocession between two foreign parties. The cascading theory is dead. The first cession from a US cedent still bears its one percent. ## The election that runs the other way There is a provision that lets a foreign insurance company volunteer for US taxation, and understanding why anyone would take it clarifies what the offshore structure is actually buying. Under [26 U.S.C. § 953(d)](https://www.law.cornell.edu/uscode/text/26/953), a foreign insurance company can elect to be treated as a domestic corporation for all purposes of the tax code. It must be a controlled foreign corporation under a 25 percent ownership test, it must be the kind of company that would qualify under the insurance provisions of subchapter L if it were domestic, and it must waive every benefit granted to it by the United States under any treaty. The election is generally irrevocable. Captives take that election routinely, because being taxed as a US company is simpler than living with the controlled foreign corporation and related person insurance income rules that would otherwise apply. It buys certainty. ILS vehicles do not, and the reason is instructive. A catastrophe bond issuer has no US owners to worry about, no related party insurance income, and no interest in being inside the US tax net. Its investors are institutions across many jurisdictions with their own tax positions. Adding a US corporate layer would create the exact taxable intermediary the structure exists to avoid. ## What to take from this The premise that offshore ILS vehicles are zero tax entities participating in US insurance markets with limited exposure is substantially right, with three corrections worth making. The zero is real but it is no longer automatic. Cayman remains a genuine no direct tax jurisdiction. Bermuda and the Bahamas both introduced 15 percent taxes that bite only above a 750 million euro group revenue threshold, which the typical ILS shell will never approach and a large carrier's Bermuda subsidiary will. The market access has almost nothing to do with tax. It comes from full collateralization satisfying a rule written to be a barrier, and Cayman's success without Reciprocal Jurisdiction status is the proof. And the exposure is limited in a structural sense rather than a jurisdictional one. It is limited recourse and pre-funded collateral doing that work, not the flag on the building. The one percent excise tax on the first cession applies regardless of where the vehicle sits, and there is no treaty out of it for either Bermuda or Cayman. If there is a general lesson, it is that the interesting part of these structures is rarely the tax rate. It is that a compliance requirement designed to make something uneconomic can be free for a business model that was going to do it anyway. ## Fact-check notes and sources - Market size: [Artemis catastrophe bond and ILS dashboard](https://www.artemis.bm/dashboard/), reporting $65.8 billion of risk capital outstanding and $18.9 billion of 2026 issuance at the time of writing. Artemis updates continuously, so re-check before quoting. - Cayman tax position: [PwC Worldwide Tax Summaries, Cayman Islands](https://taxsummaries.pwc.com/cayman-islands/corporate/taxes-on-corporate-income) and [significant developments](https://taxsummaries.pwc.com/cayman-islands/corporate/significant-developments), both last reviewed 29 May 2026. - Bermuda corporate income tax: [Corporate Income Tax Act 2023](https://www.gov.bm/CIT), assented 27 December 2023, effective for fiscal years beginning on or after 1 January 2025, 15 percent, applying to Bermuda Constituent Entities of MNE groups with 750 million euros or more of annual revenue. Out of scope treatment and the point about Tax Assurance Certificates: [PwC Bermuda](https://taxsummaries.pwc.com/bermuda/corporate/taxes-on-corporate-income), last reviewed 19 February 2026. - Bahamas: [Domestic Minimum Top-Up Tax Act 2024](https://opm.gov.bs/wp-content/uploads/2024/08/Introduction-of-a-Domestic-Minimum-Top-Up-Tax-in-the-Bahamas.pdf), enacted 29 November 2024. - Collateral requirement and the Reciprocal Jurisdiction framework: [NAIC, Reinsurance](https://content.naic.org/cipr-topics/reinsurance). Bermuda, Japan and Switzerland added effective 1 January 2020: [NAIC news release](https://content.naic.org/article/news_release_bermuda_japan_switzerland_added_naic_list_reciprocal_jurisdictions.htm). - Cayman Class C licence definition: [CIMA, Regulatory Policy on Licensing Class C Insurance Companies](https://www.cima.ky/upimages/regulatorymeasures/1559151821RegulatoryPolicyLicensingClassCCompanies_1559151821_1599572882.pdf). - Federal excise tax rates: [26 U.S.C. § 4371](https://www.law.cornell.edu/uscode/text/26/4371). Treaty exemption list and the Bermuda position: [IRS, Exemption from section 4371 excise tax](https://www.irs.gov/businesses/international-businesses/exemption-from-section-4371-excise-tax). - Cascading excise tax: *Validus Reinsurance, Ltd. v. United States*, 786 F.3d 1039 (D.C. Cir. 2015), decided 26 May 2015, and [Rev. Rul. 2016-03](https://www.irs.gov/pub/irs-drop/rr-16-03.pdf) revoking Rev. Rul. 2008-15. - Election to be treated as domestic: [26 U.S.C. § 953(d)](https://www.law.cornell.edu/uscode/text/26/953), including the treaty waiver condition and irrevocability. Two things I could not source and therefore did not claim. There is no published breakdown of catastrophe bond issuance by domicile on the Artemis dashboard, so the statement that Cayman holds a large share of issuance is directional rather than a cited percentage. And I found no official register comparing the number of active Cayman Class C licences against Bermuda special purpose insurer registrations, so this piece makes no claim about which domicile is larger by count. ## Related reading - [How deathless money invests](/blog/how-deathless-money-invests/) covers capital that is structured to outlive its owners, which is the same instinct at work here. - [Indian reservation taxes for members and non-members](/blog/indian-reservation-taxes-members-and-non-members/) is another case where jurisdiction determines the tax result and almost everyone states the rule backwards. - [Silent partner real estate deal structure](/blog/silent-partner-real-estate-deal-structure/) looks at limited recourse and capped exposure in a much smaller setting. - [Quant desks and the family office tax advantage](/blog/blog-quant-desks-tax-advantage-family-office/) examines who actually gets to use structures like these. --- *This post is informational, not legal, tax or investment advice. Insurance regulation is state by state and tax treatment depends on facts specific to each entity and investor. Statutory, regulatory and case citations are to publicly available primary sources. Mentions of third parties are nominative fair use and no affiliation is implied.* --- Canonical HTML: https://jwatte.com/blog/ils-offshore-domiciles-us-insurance-market/ RSS: https://jwatte.com/feed.xml JSON Feed: https://jwatte.com/feed.json Hero image: https://jwatte.com/images/ils-offshore-domiciles-us-insurance-market.webp