Protected cell companies
The rise and rise of cells
Protected cell companies offer some of the benefits of captives to companies that cannot afford a single parent captive of their own, but they do have their critics. Captive International reports.
One corner of the captive insurance universe in which Europe does not lag behind the US is in protected cell companies (PCCs), structures that allow multiple collections of assets and liabilities to be held on a segregated basis in individual cells within a single structure.
The idea is that different companies can own their own cells within a shared structure, keeping costs down. The concept is predicated on the segregation being legally watertight: if one cell runs out of money there is no recourse to other cells within the same structure.
PCCs, or variations on the theme, have become a common feature of the captives landscape all over the world. Legislation allowing cell captives had already been passed in the key offshore and US jurisdictions, as well as in Asia and South Africa. However, it was Guernsey that created the world’s first legislation permitting the formation of PCCs, with the Protected Cell Companies Ordinance in 1997.
“Most regulators agree that each separate cell should be fully capitalised, but the whole point of cells is to provide greater flexibility.”
Guenter Droese, ECIROA
A useful vehicle
Guernsey is still very much at the forefront of the PCC industry. The jurisdiction saw so much interest in cell captive formations in 2020 that it introduced a fast-track pilot at the end of the year to streamline and accelerate the application process.
The scheme, which is due to run to the end of 2021, applies exclusively to cells, which it says can now be formed within 48 hours.
Eligible cells must be hosted by a PCC that is owned by a licensed insurance manager. The created cell must write a single line of general insurance business to meet an urgent business need and must meet the standard formula, minimum capital requirement and prescribed capital requirement, with no regulatory adjustments available. The first formations using the scheme took place immediately on launch.
Nick Frost, president of captive management at Davies, says cells constitute a significant part of its business in North America, and he expects that this will also be the case as it expands into the UK and Europe.
“Cells are being used more and more these days as a vehicle for accessing re/insurance, for insurance-linked securities and collateralised re/insurance deals, and as a risk-bearing entity for managing general agents,” says Frost. Cells are also increasingly seen as a viable substitute for a captive, because of the speed of setup and exit and reduced operating costs.
That is a significant selling point for cells. In the US, smaller companies that do not have the size, and which do not pay enough in premiums to justify the running costs of a single parent captive, will often turn to a group captive or a risk retention group as a more affordable option.
There are few opportunities for group captives in Europe, although they are possible in principle: EMANI, a group captive for the nuclear industry, has been around for more than 20 years.
“In Guernsey, PCC legislation makes directors personally liable for the decisions taken in their cells.”
Oliver Schofield, RISCS
Pros and cons
“Group captives are viable in Europe, but not used very much,” says Oliver Schofield, managing partner of Risk and Insurance Strategy Consultants (RISCS). Some European insureds fear group captives would risk diluting their own successful claims records by associating with competitors with inferior records, he explains. This fear is largely misplaced, since groups are free to set membership criteria to ensure this does not happen.
Despite this, the relative scarcity of groups in Europe means PCCs offer a lifeline to companies that cannot afford a single parent captive but want some of the benefits that a captive can offer. The price they pay for this is sacrificing some of the control a single parent captive would give them.
PCCs have their critics, however. Guenter Droese, representative advisor at the European Captive Insurance and Reinsurance Owners Association (ECIROA), worries that cell legislation is relatively untested, given that there has never been a full-throated legal challenge to them.
“Most regulators agree that each separate cell should be fully capitalised, but the whole point of cells is to provide greater flexibility. A cell owner could find itself unable to get access to cash if a legal challenge is made. It is a serious concern and is something that managers should be advising their clients,” Droese says.
Schofield is more sanguine. “In Guernsey, PCC legislation makes directors personally liable for the decisions taken in their cells, which ensures that cells are managed properly and within the relevant fiduciary and capitalisation rules.
“I have always been a huge fan of cells. For some clients and in some circumstances they are perfect. They can be set up quickly, especially in Guernsey and Bermuda under the new pre-authorisation rules. I have no concerns about the protection they offer regarding the segregation of assets and liabilities.”
He downplays the risk that a legal challenge to a cell could be upheld, an eventuality that would throw the entire business into chaos.
“While lawsuits can be brought anywhere in theory, in practice the jurisdiction where the cell itself is located is hardly going to support an overseas request to overturn its own segregated account or protected cell legislation, as this would effectively destroy its own industry,” he concludes.