The interest in cell captives continues to gain momentum with the help of the continued hard market and the COVID-19 pandemic
A cell captive is a flexible risk management solution that provides many of the benefits of a standalone captive insurance company, including features that allow the insured to retain a certain proportion of its risks and better manage the associated expenses but without the operating costs of a standalone captive.
Cell captives and the use of cells is a growing trend in the captive industry and they have grown remarkably in recent years. Growth in cell captives has been reported in domiciles around the world, including Malta.
In 2020, Malta reported a 5 per cent increase in licensed insurance carrying cells to 63 while insurance broker cells grew by a net 20 per cent to 12.
As a result of this, some domiciles have started initiatives to improve on their cell captive legislation. Earlier this month, Guardrisk, South Africa’s largest cell captive insurer, was granted South Africa’s first micro-insurance cell captive licence by the Financial Sector Prudential Authority (FSPA).
With the continued hard market and the effects of the COVID-19 pandemic, companies are turning to captives, causing a significant increase in cell captives.
Outlining why companies would choose a cell captive over a single-parent captive, Dustin Partlow, senior vice president at Caitlin Morgan Captive Management, notes that the main considerations are the size and complexity of both the proposed captive programme and then also the parent company. Partlow explains that for many small-to-middle sized companies, the costs to set up and operate a captive along with the administration and capitalisation have always been barriers to entry to the captive market.
“However, a cell captive affords them the opportunity to realise the vast benefits a captive can afford without the significant up-front costs, annual operating costs, administration and capitalisation that a stand-alone single parent would require,” Partlow adds.
It would be remiss not to note that protected cell companies (PCCs) have grown beyond just providing insurance solutions and are now used in other financial sectors such as investment funds, private wealth structuring and special purpose vehicles (SPV’s) and longevity transactions.
Justin Upson, director at Robus Group (Guernsey), highlights that cell captives are mostly used by most corporate types including small and medium-sized enterprises (SMEs) and large corporate entities as well as insurance-linked securities (ILS) fund managers. Explaining the main use for a cell captive, Upson, explains that they can be used in a variety of ways including, but not limited, to fronting arrangements, risk retention for most lines of business such as professional indemnity, property, trade credit and cyber risk.
The cell captive structure has proved to be a very convenient and efficient structure for fronted group captives whether they are medical stop-loss (MSL) group captives or even standard A-fund, B-fund type primary property/casualty group captive structure.
“The cell captive structure has also proved to be a valuable tool for existing group captive structures such as risk retention groups (RRGs) where the RRG is looking to put together different insurance programmes to enhance value for the membership,” Partlow adds.
Innovation
The biggest trend in the cell space is just innovation, in terms of the uses of the cell captive facility.
Commenting on how cell captives promote innovation, Partlow states one of the primary areas he believes cell captives promote innovation is by reducing the barriers to entry.
He explains: “For a new innovative insurance product, where it could take a number of years to really get the premium volume built up and where a captive is required to assume risk, without the availability of a cell captive solution, the required capital, start-up fees, and time required to get a stand-alone facility licensed could be real deal-breakers.”
“However, having a cell facility where the up-front costs, capitalisation, etc. are reduced, lead to more of these innovative new programmes taking a chance and launching,” he adds.
Earlier this year, Guernsey-based Robus Insurance PCC had a cell captive pre-authorised for a client for their professional indemnity programme.
Robus used the Guernsey Financial Services Commission (GFSC) pre-authorisation pilot scheme for cell captives, which was introduced in December 2020.
Robus Guernsey’s PCC, Robus Insurance PCC, was approved in December for participation in the GFSC pilot scheme.
The scheme applies to insurance-licensed PCCs owned by an insurance manager and is available for captive cells writing a single line of general insurance business to meet an urgent business need.
It must meet the standard formula minimum capital requirement and prescribed capital requirement, with no regulatory adjustments available.
Upson highlights that this innovative move has allowed Robus to act quickly to meet urgent client needs.
An example of this, he explains, was when a client is experiencing challenges around its renewal due to increased premium rates or a shortfall in capacity and this is despite the client’s good risk management framework and loss history.
Upson states: “The ability to set up in as little as 48 hours on a pre-authorised basis, providing that the appropriate documentation is submitted to the GFSC within 14 days of commencement of the business, has been extremely helpful to clients who may have a statutory or regulatory obligation to ensure that no break in the continuance of cover occurs.”
Challenges
Although cell captives have their benefits, some in the industry may feel slightly uncomfortable due to the loss of governance and control that is inherent in a PCC structure. As an example, Upson says: “Cell owner representatives will not be a component part of the board structure and its governance and control. However, we usually find that the benefits of a cell far outweigh any challenges and these types of concerns are usually mitigated once the structure is explained in more detail.”
Partlow expands on the challenges by outlining one of the biggest challenges he is seeing is the regulation of cells.
The regulatory scrutiny of each individual cell is nowhere near as stringent as that of a stand-alone single-parent captive, he explains.
All of the traits that make a cell more attractive in terms of less capitalisation, easier to set up and shut down, etc. also add additional regulatory risk.
Partlow continues: “A lot of the responsibility in terms of scrutiny of each cell lies with the cell captive facility owners, which in general I think just opens up the possibilities further of these cells that are less regulated on an individual basis than a stand-alone captive running into regulatory issues.”
Partlow suggests that the regulation of cell captive facilities is an area that will take some time to adapt.
“There are some added complexities to regulating a cell captive facility that will take domiciles and regulators some time to fine-tune their processes specifically for these facilities,” he adds.
