Frances Jones reviews the proliferation of PCCs in the captive industry and across key domiciles
Modern technology replaces old. Cars overtook horses, ovens displaced fires and mobile phones surpassed landlines. Now, in the captive insurance industry, are protected cell companies (PCCs) set to eclipse single-parent captives?
PCCs can offer the benefits of a single-parent captive without the need — and necessary time and expense — to create a separate legal insurance entity.
Put simply, a PCC is a single company that has separate and distinct ‘cells’, with each cell operating like a stand-alone company. The cells are connected to a singular core which manages the insurance activities of the other cells.
PCC legislation was introduced in Guernsey in 1997 with the intention of enabling the island’s licensed insurance managers to offer cells to third parties as ‘rent-a-captives’.
Since its inception, the concept has mutated and expanded worldwide, with different domiciles producing their own, although mostly similar, variations. They now exist in more than 40 jurisdictions.
Key domiciles for PCCs include Guernsey, Malta, the Isle of Man, Barbados, Bermuda and the Cayman Islands and, in the US, Delaware and Washington DC.
The names vary, depending on the domicile, including SPCs, segregated account companies (SACs), and incorporated cell companies (ICCs).
For example, the Cayman Islands refer to them as segregated portfolio companies (SPCs), and Vermont calls them ‘sponsored captives’. These are a lot of terms, in essence, for the same concept.
A PCC revolution
Marsh Captive Solutions’ 2023 benchmarking results found that interest in PCCs continues to grow. It says one in four of Marsh’s new formations are cell captives. The company explains that cell captives are cost-effective for its clients, touting up to 50 per cent operating costs compared to a single-parent captive and a set-up time that takes days instead of months.
Considering the numerous benefits, it’s no wonder that the number of PCCs is proliferating worldwide.
Digital insurance companies are launching PCCs. For example, New York-based digital insurance platform Boost launched Boost Re, a US-domiciled PCC, as the latest component of its insurance-as-a-service stack.
For alternative risk capital providers, Boost Re can provide a passage to deploy reinsurance capacity across Boost-powered insurance programmes through dedicated captive cells.
Boost says that these benefits will be attained at a fraction of the traditional cost that comes with building a full-stack insurance business.
In Vermont, Tracy Hassett, president and CEO of edHEALTH, recently converted her group captive edRISK to a sponsored captive for cost benefits.
The drawbacks of PCCs, however, must also be considered. Due to their structure, insurers may have less or no control over the captive cell’s governance, coverage and limits.
The ‘cost-effective’ benefit is not guaranteed and, in some cases, expenses can even be higher than other more traditional alternative risk funding programmes.
Cell captives are cropping up in all regions of the world, including Latin America. Tom Morante, senior counsel at law firm Carlton Fields, explains: “While single-parent captives have historically seen the most growth, there is a gradual interest in cell captives, which are proving particularly attractive as a captive entry-level strategy.”
Legislation for cell captives is fast becoming a key consideration for a captive domicile, with numerous industry participants listing a lack of cell legislation as a drawback.
Guernsey, Bermuda and Malta stand out to CIT as exemplar domiciles for PCCs.
Guernsey
Guernsey is the number one among European captive domiciles, according to AM Best’s 2022 market segment report.
Its pioneering of cell legislation, resulting knowledge and innovation are certainly contributing factors.
Evidence of cell innovation can be seen in 2010, when Heritage Insurance Management (now Artex Risk Solutions) achieved a world first by amalgamating two PCCs — with 17 cells between them — into one.
William Lewis, the UK business development representative for We Are Guernsey, says: “The uses of Guernsey PCCs are incredibly versatile and with Guernsey’s breadth and depth of expertise, the island is the choice of many looking to set up a PCC.
“I continue to see great interest in and field regular enquiries about the use of PCCs for a variety of functions. Having recently become the largest captive domicile in Europe, I hope this trend can continue,” asserts Lewis.
An Appleby publication, ‘Cell Companies in Guernsey’, outlines the developments of Guernsey PCC legislation.
Authors of the report, group partner for Guernsey Jeremy Berchem and partner Stuart Tyler, note: “Nearly a decade later [from its introduction] in 2006, Guernsey introduced a second type of cell company, the incorporated cell company (ICC) to further enhance innovation.”
ICC legislation distinguishes itself from the PCC. Its cells (ICs) are separately incorporated and are therefore separate legal entities with their own board, share capital, memorandum and articles of corporation.
Berchem and Tyler highlight that, crucially, on the board, any director of an ICC must also be a director of each of its ICs; the two are synonymous.
The island has had cellular structures for more than 25 years and subsequently has an adaptable and conducive legal environment for them.
Giving an example, Appleby’s Berchem and Tyler, say: “A minor amendment to the Protection of Investors (Administration and Intervention) (Bailiwick of Guernsey) Ordinance, 2008, made it very clear that the power under the Ordinance to make orders on an application for directions is subject to that part of the law which deals with PCCs.”
We Are Guernsey’s Lewis notes: “Guernsey regulators have a reputation of being ‘user-friendly’ and open to innovative ideas. This environment aids the continued evolution of PCCs and attracts more companies to Guernsey.”
“Following the Vesttoo event, relating to fraudulent LoCs, people are looking more closely at the small print of legislation surrounding PCCs and their equivalent in other jurisdictions,” he adds. “They are discovering material differences, which appears to be another advantage for Guernsey.”
Bermuda
In Bermuda, where PCCs are known as SAC structures, recent legislation updates have incorporated segregated accounts companies (ISACs) into the equation.
The SAC structure was formalised in 2000, replacing Private Act structures, but Bermuda’s ISAC only came into operation on 15 January 2020.
Walkers law firm deems the SAC to be “well-known and widely accepted Bermuda vehicle, both as a standalone structure and as a ‘rent-a-captive’ model.”
It lists the advantages to include “statutory ring-fencing of assets and liabilities, which has been upheld by the Bermuda courts, a tax-neutral environment, and a cell structure familiar to many onshore clients.”
Partners — Sarah Demerling, Peter Dunlop — marketing and business development manager Madison Petty and senior associate Shaela Rae at Walkers elaborate further:
“The SAC remains a popular and common vehicle in Bermuda, particularly for captive and commercial (re)insurers as well as collateralised insurance. The ISAC, while still relatively new, is starting to gain more popularity as the advantages of hybrid structures in the same vehicle become more apparent in practice.”
The ISAC Act is an independent but complementary statute from the pre-existing SAC Act which aims to enhance Bermuda’s offering for segregation accounts.
Fundamentally, the ISAC is Bermuda’s equivalent to Guernsey’s ICC legislation.
Walkers’ Demerling says: “The uptake of ISACs has been mostly outside the captive space, for now.”
This suggests that there is untapped potential for captives to take advantage of Bermuda’s updated legislation.
Malta
Located between Sicily and the North African coast, Malta launched its PCC legislation in 2004 through the Companies Act (Cell Companies Carrying on Business of Insurance) Regulations.
Notably, the country is the only EU member with PCC legislation. The PCC offers benefits under Solvency II with reduced costs due to shared governance, risk management and reporting.
Ian-Edward Stafrace, chief strategy officer at Atlas Insurance PCC, says: “A significant advantage for Maltese insurance cells is direct EU market access, bypassing fronting requirements. Atlas’ recent UK branch licensing extends this reach to the UK market, offering unmatched access from a single cell structure.”
Fronting requirements involve using a fronting insurer which can incur fronting fees and the cost of letters of credit requested as support by the fronter.
Malta also has EU and OECD-compliant requirements attracting an increasing number of insurance and captive insurance operators. The granting of a licence by the Malta Financial Services Authority enables a Maltese captive to write business for EU states for which they have been authorised.
This differentiates Malta from other EU member states, as most EU countries otherwise require domestic risks to be insured by a local insurance company or one based in the EU.
Stafrace comments: “Cells can also be capital-efficient, with EU Solvency II recognising cells as ring-fenced funds. There are no absolute floor minimum capital requirements for individual protected cells having recourse to the core, as these apply at an overall company level.”
Developing the cell concept, Malta has introduced new legislation and structures including reinsurance special purpose vehicle legislation and securitisation cell companies. This has enabled Malta to position itself as a key onshore domicile for insurance-linked securities and cat bonds.
Looking ahead
While PCCs don’t appear to be on track to fully replace single-parent captives, they are still a fast-growing, modern and potentially more convenient option.
Their growth has been aided by strong well-established knowledge in key jurisdictions, and cell legislation has proven to be a point of attraction for domiciles.
The number of jurisdictions with PCC legislation is projected to continue to increase, with Singapore being one of many looking to introduce cell legislation in the region.
Atlas’ Edward-Stafrace considers: “As the world continues to grapple with ESG challenges and opportunities, the role of protected cells in driving positive outcomes is becoming increasingly evident. By leveraging the unique advantages of these structures, organisations can meet their ESG objectives and drive improved risk management.”
A flexible and efficient alternative to single-parent captives, PCCs have the potential to bolster their parent organisations’ ESG strategy. Captive Insurance Times has explored how captives can be used as a tool to accelerate a parent company’s transition to net zero.
In Bermuda, the jurisdiction anticipates ISAC structures will continue to grow. The partners at Walkers say: “As the ISAC structure becomes more common, and the structure is eventually tested in the Bermuda courts, we anticipate that the ISAC will become an increasingly popular choice for stakeholders from various industries.”
They add that this will be particularly attractive “for those seeking innovative ways to manage risks and optimise operations. Emerging technologies in the fintech and insurtech sectors may also further shape the way that businesses leverage ISAC structures in Bermuda.”
The uses for the cell structures are almost limitless and there is vast potential for their use. In particular, against the rise of emerging technologies amid challenging market conditions and the looming threat of the climate crisis.
We Are Guernsey’s Lewis concludes: “Due to the versatility of PCCs and the introduction of ICCs, they have developed beyond the original concept of a ‘rent-a-captive’ to being used for anything from insurance transformer transactions to the investment fund sector.
“The general attitude of both Guernsey advisors and regulators continues to be ‘how can we do this?’, as opposed to ‘it cannot be done!’”
