A cell captive is structured as a way for a corporate entity to access the benefits of captive insurance without setting up its own captive insurance company. However, first-party business is not the only application for the cell captive model. The cell captive structure can also be used to cover the risks of the clients or members of the cell owner.
The structure is frequently used by a lot of consulting firms, insurance/reinsurance companies, brokers and insurance agents who use cell captive structures for their clients and prospective clients. However, they are also used by larger organisations that use cell captives to insure and reinsure programmes where, for a variety of reasons, they do not want to commingle assets and liabilities from certain programmes or lines of coverage.
Michael Rogers, chairman and CEO of Risk Services Companies, suggests that firms forming cell captives are usually doing so due to either size or time constraints.
Rogers says: “Firms that are not quite big enough to justify the fixed cost of owning their own captive often choose the cell captive route as a stepping stone to a future owned captive. Many cell captives write fully funded policies for unavailable, unaffordable or uninsurable coverages.”
Richard Eales, managing executive at Guardrisk Insurance, adds that a cell captive facility offers clients “all the benefits of a single-parent captive, without the inherent legislative and administrative burdens”.
Cell captive insurers provide underwriting, reinsurance, claims management, regulatory, investment, actuarial and accounting functions for cell owners, which keeps costs down and gives clients access to a broad base of insurance skills.
An argument can also be made that the cell captive insurer draws on innovation and experience across a wide range of sectors, passing the benefits on to other cell owners. Single-parent captives require a certain economy of scale to make these structures feasible, while cell captives tend to have a much lower entry-level, making them more affordable across a much broader range of clients.
Rogers highlights that speed to market is a “major benefit” of forming a cell captive. He says a cell is a “one-stop-shop whereby the cell facility typically charges a fee that includes all necessary services”.
“For companies forming a captive to reinsure a traditional fronting carrier, a cell captive is a quick and easy solution to providing the necessary reinsurance entity,” he adds.
Another benefit is the use of different cells for different exposures and coverages thus segregating the assets and liabilities from other cells, according to Courtney Claflin, executive director, captive programmes at the University of California.
Claflin explains: “Once the core company is completed, it is very efficient (time and money) to continue to prop up different cells for different reasons versus building multiple stand-alone single-parent captives.”
Promoting innovation
Reflecting on whether cell captives allow for innovation, Eales states that the flexibility inherent in the cell captive structure facilitates the delivery of tailor-made insurance programmes and products to suit the cell owner’s specific needs in the case of self-insurance or the needs of the cell owner’s customers, when the cell is used to sell insurance products to the owner’s customer base.
Although Claflin does not believe that cell captives can promote innovation, he suggests that they can provide the regulatory structure to support innovation.
He explains: “The cell captive structure can support this innovation by giving the parent the ability to segregate different risk financing arrangements to best finance organisational risks.”
“This will then allow the parent the ability to carve out different exposures and place them into different captive cells without exposing them to the assets/liabilities of other cells,” he adds.
Additionally, a cell captive structure can also provide brokers, sponsors, insurers and reinsurers with the ability to not only segregate their risk financing arrangements on a cell to cell basis but to expand their offerings to clients via the cell structure.
He says: “The ability to do this allows both parent organisations and service provider organisations to broaden their risk financing platforms through a cell captive structure. This results in the opportunity to be innovative in just what risk financing opportunities the parent/service provider can offer.”
The opportunities a cell captive offers businesses are endless, as businesses can launch different programmes with the ability to segregate assets/liabilities from cell to cell, according to Clafin.
He explains: “This gives businesses the comfort that if one cell captive fails, the entire cell structure won’t, thus exposing the entire cell structure to one cell’s failure. It also allows a business to quickly and efficiently (financially) put up additional cell captives to address the shifting landscape of new/varied risks and risk financing arrangements.”
An increase post-COVID-19?
With many small- and mid-sized businesses struggling from the financial impact of the ongoing COVID-19 pandemic, could there be an increase in cell captive formations?
Claflin suggests that the cell captive market is no different from the general captive market in that it will grow.
He says: “The pandemic, coupled with a very hard insurance market, is driving business to solutions and potential solutions.”
“As we all know, captives give you a distinct advantage versus traditional insurance in so many ways, and more businesses are looking for solutions (and hurting financially) than at any time in my career. I’m anticipating a significant increase in interest in captives and the industry is poised and well positioned to respond,” he adds.
Also weighing in, Eales says that it’s “difficult to make predictions right now” given the prevailing climate of uncertainty and the extraordinary economic fallout of the pandemic.
However, he explains that the cell captive market has been around for nearly three decades; it is a well-established sector of the insurance market and has the resilience and substance to weather the current storms. He predicts that the cell captive market “will play a major role in assisting clients to insure in times where conventional insurance will either not be available or simply unaffordable”.
