Michael Whitfield, head of UK relationships at Atlas Insurance, talks to John Savage about the rising opportunities for protected cell company in the UK market
Navigating UK market post-Brexit
As the world's challenges become ever more impactful and complex, the solutions proposed by the insurance industry must expand in sophistication and efficacy to meet them. It is, therefore, refreshing to discuss the unique features of the protected cell company (PCC) model. Like most excellent ideas, this model is brilliantly simple in concept but can tackle a broad range of potentially sophisticated needs, even in these difficult times.
The tried and tested PCC model has now made a re-entry to the UK market in a form that might open up many opportunities, both for UK and non-UK-based insurance businesses, as well as businesses that wish to set up a captive arrangement to cater for their own insurance capacity needs.
The Brexit process has forced the UK and European insurance markets to deal with its outcomes. This has been a significant shock to these markets, benefiting only a few while causing significant commercial friction for many, particularly in the context of cross-border trade. Therefore, it is beneficial to consider a development that can significantly reduce these frictions and reintroduce the PCC cell solution to UK-based insurance businesses, eliminating the need for additional ‘fronting’ arrangements and their associated costs and complexity.
For over 25 years, financial services have adopted PCCs in various forms. Regarding insurance, a PCC is a single entity consisting of two parts: a non-cellular ‘core’ and a number of protected cells, commonly just called ‘cells’.
Each cell operates independently from the others, and the core is responsible for maintaining the PCC's overall Solvency II capital requirement, which is the sum of the capital requirements of all the PCC’s cells and its core. The core, usually through a system of cell committees, oversees all cell activities and ensures governance and regulatory compliance across the entire PCC entity. Legal segregation and shielding of the cell's assets from the liabilities of other cells or the non-cellular core instils confidence in cell investors.
The PCC's authorised business classes in its operating territories dictate the extent and scope of the insurance and reinsurance businesses that the core and its cells can write. While the cells operate discretely from each other within the structure of the PCC, the core also bears ultimate responsibility for ensuring that the PCC as a whole meets all of its financial obligations.
In the EU, only Malta has established PCC legislation to encompass insurance business. All PCCs established in Malta follow Solvency II capital requirement standards and protocols. Malta has also adopted the latest International Financial Reporting Standards (IFRS), including the new IFRS 17.
In the UK context, before Brexit and the subsequent decision by the UK to leave the EU and the European Economic Area (EEA), there were some early-stage efforts to establish PCCs within the UK marketplace via EEA Freedom of Services rights. This enables businesses from EEA territories to trade in each other's markets without the need to establish separate authorisation within each territory.
Businesses already taking advantage of Freedom of Services rights could continue to trade in the UK through the post-Brexit interim regulatory regime, which finally expired at the end of 2023. However, the imminent cessation of Freedom of Services in the UK rendered the fledgling effort of Malta-based PCCs to establish themselves directly in the UK market practically infeasible.
Re-entrance to the UK market
Since 2016, companies that wanted to use a PCC cell as a capacity solution for their UK-traded business had to look at other options or look for less complete PCC solutions. For example, to set up a Guernsey-based PCC cell, they would need a fronting arrangement to make trading in the UK market possible (except for companies that trade on a ‘non-admitted’ basis). Gibraltar (which is not an EU or EEA territory) has also passed PCC legislation, which may provide opportunities to trade directly into the UK market in some circumstances via its bilateral arrangement with the UK.
One of the Malta-based PCCs that took advantage of the opportunity to trade in the UK through Freedom of Services was Atlas Insurance PCC. Atlas boasts a rich history, with its predecessors having been in operation for more than 100 years. The company writes a significant portion of Malta's indigenous insurance market and conducts business throughout continental Europe.
Atlas converted to a PCC insurer in 2006. As an early adopter of the PCC concept, it has been well placed to develop its position as a European market leader in the sector. Most of its rivals made reluctant moves to cease their UK business following the Brexit vote, yet Atlas carefully considered a different strategic route. It chose to establish a permanent branch in the UK and to apply for authorisation of that branch by the PRA and the FCA.
While obtaining UK authorisation was far from straightforward, Atlas persevered and recruited an experienced UK-based management team. Just in time for the end of the interim regime, Atlas finally received authorisation for its UK branch at the end of 2023.
First and foremost, Atlas' UK branch's authorisation guaranteed continuity for its existing cells, some of which have been trading successfully in the UK for several years. Beyond this, the branch's authorisation has effectively embedded the PCC cell concept into the UK's fully admitted market.
Rising opportunities
For the first time since the vote for Brexit, UK-based businesses can now confidently contemplate setting up a PCC cell to act as either a part or the whole of their insurance or reinsurance capacity solutions.
Furthermore, since the PCC is based in Malta (which still enjoys Freedom of Services rights across all other EEA territories), the PCC and its cells can trade almost seamlessly throughout most of Europe.
Establishing a cell with Atlas may also represent a means by which non-UK-based businesses can enter and trade within the UK market on a fully admitted basis.
Businesses establishing a PCC cell can immediately take advantage of the PCC’s established infrastructure and economies of scale.
First, the cell owner typically only needs to contribute their ‘share’ of the PCC's overall Solvency II capital requirement, which is determined by the size of the business they are writing.
Secondly, the cell can enjoy the immediate support of the PCC’s existing, fully developed administrative, governance, and compliance expertise and structures.
Taken as a whole, this means that many businesses can potentially participate in providing some or all of their insurance or reinsurance capacity requirements at a fraction of the cost and with minimal complexity compared to what would be required to establish a new insurance company in isolation. Furthermore, the PCC can potentially provide a facility to ‘incubate’ businesses that are in a transitional phase, preparing to take the significant step of establishing their own cell, while they complete the necessary preparations for cell formation.
There is a high likelihood that other PCCs will take into account Atlas's successful establishment of a UK branch.
Meanwhile, potential cell owners and numerous other businesses, with whom Atlas can collaborate to participate in broader capacity solution arrangements, are showing significant interest in Atlas's ability to trade a wide spectrum of authorised product types directly into the UK market and other EEA territories.
