Capable, compelling, and with lower costs than a single-parent captive, Mark Dugdale looks at renting captives as an alternative risk financing strategy
Rent-a-captives have many names. Depending on where they are domiciled, they are known as protected cell, sponsored cell, segregated account or segregated portfolio companies.
‘Sponsored cell company’ arguably does this form of captive the most justice, because they involve the ‘sponsor’ establishing separate, segregated cells or underwriting accounts for each risk.
As Nick Frost, president of captive management at Davies, which provides technical solutions to captives in Europe, the US, Latin America, Canada, Asia, Guernsey, Australasia, and the UK, along with full-service captive capabilities, explains: “The sponsor is usually a captive manager or broker who ‘rents’ the licence of the facility to their clients for a fee, and they are generally used when the insurance programme is considered too small to justify the incorporation of a wholly owned captive.”
A rent-a-captive is able to write any type of business, as a single-parent captive can, but generally one line of business will go through a cell.
Frost continues: “The main difference between cells and regular captives is that the exposures are normally fully funded in each cell. Fully funded is understood to be funded to an actuarially determined loss pick.”
As the names differ from domicile to domicile, so too do the rules around them, but Frost says that rent-a-captives registered under the Bermuda Segregated Accounts Companies Act, for example, must provide statutory legal division to protect the assets of one segregated account from the liabilities of another. Other jurisdictions have similar legislation protecting the assets in one cell from the liabilities of another.
Rent-a-captives are “very hot and trending right now”, likely among most captive consultants and managers, “because they are so user-friendly, versatile, inexpensive, simple and easy”, says Michael Serricchio, managing director and the Americas consulting leader for Marsh Captive Solutions.
Marsh, which operates rent-a-captive facilities under the Mangrove brand in domiciles around the world, including Bermuda, Barbados, the Cayman Islands, Malta, the Isle of Man, Guernsey, Delaware and Washington DC, is witnessing strong client appetite first-hand.
Within the last three years alone, the number of cells in Marsh sponsored-facilities more than doubled.
In 2023, cells accounted for approximately 25 per cent of Marsh’s new captive implementations.
Rent-a-captives enable organisations to “dip their toes” into captive insurance and learn what these entities are and how they work, says Serricchio.
“Using the cell of a rent-a-captive is, as the name suggests, like renting before you buy. I’d liken it to renting a condo on the shore before committing to building a 10,000 square-foot house in the same location. And it’s a great way of gaining knowledge, experience and critical mass.”
Anything a captive can do, a cell can do too
The many benefits of renting a cell are best demonstrated in comparison to setting up a single-parent captive.
Serricchio says organisations “really can do anything in a cell that they can do in a very large single-parent captive, as long as local regulations permit it”.
“And you can do it a little easier, simpler, and in a more streamlined way, usually in the best domiciles because they are where all the best builders put their captives, like Marsh.”
Rent-a-captive cells can write a single or multiple lines of business. “There are billions of dollars going through our cells to access reinsurance,” says Serricchio — and there is less administration involved than single-parent captives, with a formal board meeting not required in the domicile every year, if permitted.
They are also very portable. Serricchio explains: “Organisations can have a cell operational for a few years and then ‘port’ it into a regular single-parent captive in the domicile of their choice, whether it’s Bermuda, Vermont, New Jersey, Connecticut, Utah or Hawaii. We have a lot of clients that do that. The process is so simple, it’s almost like, why not start as a cell?”
Aside from their flexibility, the biggest attraction of cells in a rent-a-captive is cost. Serricchio says: “Cost is always a driver and cell costs are much lower than a single-parent captive. In some instances, it could be 30-50 per cent cheaper to do it in a cell.”
For Frost, the benefits of a rent-a-captive are ease of entry and exit. He says: “As the rent-a-captive facility is already set up by the sponsor, there is no need to set up a new company. All that needs to be done is to set up a new segregated cell or account, which can be done very quickly. This means that it is cheaper, quicker and easier to set up. The ongoing costs tend to be cheaper as well.
“In a captive, there are ongoing legal fees, audit fees, corporate admin fees, and annual meeting and board of directors expenses, which are not needed in a rent-a-captive scenario.”
Due to their many benefits, rent-a-captive cells are in fact utilised for lots of different purposes, from “stretching your legs a little and learning from your mistakes”, to “growing it as you see fit, as the needs of the organisation change”.
Serricchio says: “We have some clients that have a single parent and a cell. Some clients have an offshore Cayman captive that is in the healthcare arena, but then they also have a US cell for some US business, such as terrorism, employee benefits or medical stop-loss, which they feel more comfortable doing in cells so they can wall it off.
“Organisations can even have multiple cells for different businesses. For example, we talk to private equity funds about their different funds and portfolio companies. They are able to structure it in such a way that each fund or portfolio company can have its own walled-off cell and it’s still cost-effective to do that.”
Frost adds: “We just formed a cell in our segregated accounts facility for a client looking for a solution for their property insurance. The insurance rates were so high so we helped them to place the first US$20 million in a cell, they purchased US$15 million excess of US$20 million in the London market and then placed a further US$15 million excess of US$35 million in the cell.
“Also agents and MGAs tend to use rent-a-captives to take risk on books of business that they have, and they can provide an advantage of helping the broker to retain the business by offering cells to their clients. Cells are also popular for medical stop-loss programmes and we have seen a growth in this area.
“Almost anything can be put into a rent-a-captive structure.”
New rent-a-captives on the block
The rent-a-captive concept is well-proven, with facilities available around the world from household names, including Marsh (Mangrove), FM Global (Watch Hill in Vermont and New Providence Mutual in Bermuda) and Aon (White Rock in Guernsey), along with offerings from Liberty Mutual, AIG and many others.
One relatively new facility is Macquarie Insurance Facility’s (MIF) rent-a-captive, which was launched in late 2024 for property and casualty-related risks.
MIF is one of the largest global aggregators of insurance, accessed by both Macquarie-related assets and third-party financial sponsors. It aggregates a combined premium spend of around US$1.8 billion annually from participating private equity, infrastructure, energy and real estate firms.
Those clients approached MIF about captive insurance solutions, as a result of “increasing uncertainty in the world and the insurance market,” says its global head, Nick Wilski.
Wilski explains: “Clients are driven by the appeal of cost savings, risk management customisation and enhanced opportunities for cash flow. Establishing the rent-a-captive offering is a way for MIF to utilise its existing structures that will bring further benefit to clients. By offering clients the opportunity to leverage the benefits of captive insurance, without the operational burden, we’re providing an efficient, flexible and tailored insurance solution.”
MIF’s rent-a-captive is a segregated accounts company domiciled in Bermuda, so individual accounts (or cells) are able to make gains or losses strictly within that account and be insulated legally from those of other accounts and the captive itself, which protects the assets of a particular account from the activities of creditors in the event of insolvency of either another account or of the captive.
The rent-a-captive can be accessed using any broker and clients are free to build their programme how they see fit with regards to fronting, risk retention and reinsurance. Captive fronters must be ‘A-’ rated or higher.
Much like other rent-a-captives, MIF’s solution “offers clients all the benefits of a captive without the large upfront investment and ongoing expense associated with establishing and operating a single-parent captive insurer,” comments Wilski.
“In addition to cost effectiveness, it also offers clients a greater speed to market and flexibility. MIF’s rent-a-captive offering is fully broker-independent and competitively priced compared to similar offerings in the market.”
Where MIF’s rent-a-captive differs is its sponsor. Wilski says: “MIF also has a track record of providing purchasing power benefits to participating buyers. Utilisation of MIF’s rent-a-captive enhances the leverage that [we] can bring to the insurance market to drive further improved insurance outcomes for clients.”
Taken all together, this new rent-a-captive on the block is a compelling proposition.
Wilski comments: “As a Macquarie Group-owned entity, the counterparty risk associated with using [our] rent-a-captive is mitigated given Macquarie’s long track record of financial stability. MIF is also offering its rent-a-captive solution at below market rate fees for MIF clients.”
MIF’s rent-a-captive is attracting interest from businesses contending with the increasingly challenging market environment for insurance within their industries or jurisdictions. This includes interest from clients in the waste industry in the US, for example. Wilski says: “Increased premiums and reduced coverage are passed onto the whole industry, regardless of the individual performance of better risk-managed businesses. A captive strategy allows businesses to retain some risk within the captive, which they can price according to their individual risk performance. This can lead to increased coverage and underwriting profits to the business.
“The establishment of a captive can be a costly and time-consuming process; so the MIF rent-a-captive is a faster and cheaper option to establish the strategy for businesses within these industries.”
Wilski adds: “In addition, MIF has also been speaking to a number of clients who are interested in utilising the rent-a-captive as a way to access the reinsurance market. This provides clients with further capital solutions to insure specialty products and lines of business.”
“Since launch, enquiries have come from a range of differing industries and risk classes but all looking to explore different ways to approach risk management and cost reduction,” Wilski concludes.
“Looking to the future, MIF is constantly evolving and looking at new ways it can build and develop structures that further benefit its clients.”
Another new offering is ReadyCell from Marsh. This ‘insurance-company-as-a-service’ (ICaaS) launched at the beginning of 2024 after a few years in development and in response to a need for a “creative, innovative, cost-effective, user-friendly and flexible” solution.
ReadyCell is not like other rent-a-captive facilities out there. This solution enables no fronting or reinsurance.
Serricchio says: “It has its limitations but there are a lot of organisations that need a captive for just one thing. ReadyCell could be their solution.”
Indeed, ReadyCell is a Washington DC-based cell captive that “can form in just a few seconds”. It’s a rapid-response captive insurance solution, capable of being “ready for any renewal”.
It’s also as low-cost as they come and able to be left in dormancy until its owner is ready to utilise it. Serricchio says: “We can do as low as US$10,000 to start up a cell and organisations have 18 months to use it. In those 18 months, we do a one-line feasibility study for the client and we recommend what they do with it.
“The good news is if they decide not to do anything with it, the cell just shuts down and they walk away. The better news is that most clients find a use for it with our help. And now they have a fully operational cell ready to go for their renewals, perhaps for a property line, an excess liability line, or a deductible for wind, flood or quake.
“It’s very user-friendly and it’s as cheap as US$10,000 a year to run. That cannot be beaten anywhere; no-one else can compete with ReadyCell.”
Like the rent–a-captives that came before it, ReadyCell cells are portable. Clients that want to do more with a cell, perhaps two lines of coverage, fronting and reinsurance, can simply work with Marsh to transfer it to a regular cell in any domicile where Marsh runs traditional rent-a-captives.
Serricchio says: “And now they can do all the great things that a regular captive can do. ReadyCell is about being user-friendly, portable, cheap, easy, but also low-touch and low-admin, that’s why we’re able to keep the cost so low. It’s only a light-touch.”
The AI and blockchain technology behind ReadyCell are why it is so low-cost and light-touch. They enable Marsh to super-streamline the regulatory process.
Serricchio explains: “If it wasn’t for the technology, where we give a risk score to an organisation and it searches the web and pre-populates a streamlined application and submits it to the regulator, there is no way we could get an application for a cell set up in a week, let alone minutes or seconds.”
He adds: “We used it for a client with a renewal coming up and at the last minute they needed it and within a day we had the cell ready to go. They got the policy instituted and then they actually ported it into a single-parent captive. So it was a speed to market that no-one else has that we are really excited about.”
Marsh is aiming to promote ReadyCell as much as possible this year, especially to small and medium-sized businesses, given its position as the solution “for the right company, at the right time” and their typical lack of expertise in and experience of captive insurance.
And future versions of ReadyCell are being planned, taking it beyond the current single-line 1.0 iteration. Serricchio says: “Let’s say we had a 100 clients that needed a specialised insurance policy type and there was one fronting carrier. We could coin that a version 2.0 or 3.0 and bring all those 100 clients into ReadyCell, leverage the economies of scale we have and keep the costs way down — not as low as US$10,000 but even if it’s US$20,000 or US$30,000, that could be a great way for volume business to come into ReadyCell and create something new.”
