Cell captives
Innovation and creation drive cell growth
Protected cell captives are going from strength to strength, with a constant stream of new forms of cells. Captive International investigates.
Protected cell captives are going from strength to strength, with a constant stream of new forms of cells. Captive International investigates.
“There is more growth from cells set up specifically for property and catastrophe risk.”
Donna Weber, Marsh
Protected cell captives—and indeed cells as a whole—are booming, with activity in this area of the captive insurance market up in response to keen interest from the market.
Jeff Simpson, partner at Womble Bond Dickinson, told Captive International that from his perspective, he’s seeing a constant stream of new projects, for new structures and a variety of different lines of cover. There are different types of protected cell companies, in several domiciles, and he’s seeing activity in quite a few of them.
Donna Weber, senior vice president and managing director at Marsh, says: “In 2022, Marsh had a banner growth year in our captives practice, with one in four of the captive entities being cells.
“Additionally, there was a sizeable growth in premium within those cell facilities, with almost 69 percent growth between 2021 and 2022 in our eight facilities around the world. Challenging market conditions are a contributing factor.
“We’re seeing a continued trend of growth so far in 2023. The ‘normal use’ situations are still there, but there is more growth from cells set up specifically for property and catastrophe risk, for example.
“More cells are being set up to respond to special situations: for example, large companies setting up cells for spinoffs—by doing so they aim to isolate the risk associated with the business before that division is spun off. We have also had some new cells for unique warranty-type businesses and continued growth in managing general agent/managing general underwriter cells.”
What has been driving this growth? According to Simpson, there are three traditionally attractive features of protected cells.
“First is that they’re convenient, easy to get into and out of. Second is a cost saving, usually from economies of scale. And third is capital relief, meaning that cells generally are not subject to the same kinds of statutory minimum capital amounts as other captive insurance structures,” he says.
“As a result, you can often do things in a cell while tying up less capital than you would need if you did them in another type of captive vehicle.
David DiMayo, chief executive of Oxford Risk Management Group, says that cell captives were fairly new when his company entered the marketplace in 2010. The administrative efficiencies of cells in implementation and ongoing management created costs efficiencies which Oxford passed along to its clients.
It was not uncommon to see pricing twice as high or greater on formation and management for standalone captive structures. The reduction in formation time allowed Oxford to move quickly on to the next captive and its clients to move swiftly back to their day-to-day business.
“This efficiency can continue with management of the cells,” he told Captive International. “The ‘core’ can be typically set up to manage the cells beneath it, thus reducing the time a non-common cell owner may spend on the day-to-day management of running an insurance company.
“In preliminary discussions with a newer advisor or client, I often compare this efficiency to the concept of industrialisation, the Ford Motor company with the Model-T in 1913. Cars were no longer having to be built by hand, but could be manufactured on an assembly line that changed the landscape of the auto industry.
“Cells can provide important managerial oversight and checks and balances from a regulatory perspective, creating a sense of comfort for that domicile’s regulators that the rules laid out are being followed by knowledgeable and licensed managers of these cells, with fewer points of contact,” DiMayo adds.
“Beyond the traditional features, people are getting more innovative and creative with respect to cells,” says Simpson. “In particular, advisors are beginning to recognise opportunities to use cell structures to solve niche business problems or broader industry-wide issues. And there are now more knowledgeable sponsors, more people who are behind the programmes, and are thinking they could form a cell company for the benefit of their clients.
“These creative sponsors are offering their clients convenience, benefits and risk management solutions that would not previously have been available to them.”
In addition, Weber points out, cells are now found all over the world.
“Marsh’s biggest cell facility in the US is in Washington, DC, and the company is also seeing growth in Guernsey. For Marsh, these two facilities have grown the most over the past year. The fact that the broader insurance market remains challenging is certainly a contributing factor for that growth, as it makes it more compelling to have a cell facility,” she says.
“Cells can provide important managerial oversight and checks and balances from a regulatory perspective.”
David DiMayo, Oxford Risk Management Group
A continuum of cell choice
Simpson explains that there’s a variety of types of cell that run along what he calls a continuum. At one end of the continuum is essentially a mere segregated account: nothing more than an account on the books. At the other end of the line are incorporated cells, which are altogether separate entities that are linked together by some kind of participation agreement that makes them part of the larger enterprise. In between, there are traditional unincorporated protected cells and hybrid structures such as series.
“In pretty much any jurisdiction you’ll find in its captive insurance statutes something that is basically a cell—whatever it is called in that domicile—that lands somewhere on the cell continuum,” he says.
“This broad spectrum of options that are similar, but not the same, drives some of the creativity, by offering many ways to solve a problem.”
Simpson agrees that as cells have these varying natures, people are becoming more used to the way they operate and familiar with the various types. “Viewing cells as tools in the toolbox, whereby you use the correct one at the correct time for the correct purpose, is a great way to describe it,” he says.
“More people now understand the distinctions between the tools and how to identify the right one for their particular purpose, than ever before,” he adds. “And there are more tools than ever.”
Simpson thinks the market is going to see even more iterations and that they are here to stay. He compares cells to condominiums: “A pure captive is like a house, but sometimes you don’t want a house, you’d be happier in a condominium. Asking ‘if cells ever go away, might the need for them disappear?’ would be like asking whether we will see the demise of apartments and condominiums—of course not.
“There’s always going be someone for whom this is an ideal solution.”
“Viewing cells as tools in the toolbox, whereby you use the correct one at the correct time for the correct purpose, is a great way to describe it.”
Jeff Simpson, Womble Bond Dickinson
One outstanding issue
However, Simpson concludes, there is one possible cloud on the horizon for cells, or perhaps one uncertainty that needs to be cleared up.
“The one thing we probably need to talk about is the segregation of assets and liabilities between the protected cells,” he explains. “This hasn’t been tested in court yet. Practitioners generally believe that if you follow the formalities, you respect the provisions of the statute, when the time comes the segregation of the assets and liabilities between the cells will be respected. To the extent there have been cases, that’s generally true.
“But there’s always the threat that you get into some weird situation where you have a state or a jurisdiction that just doesn’t care, doesn’t have cells, or a cell is being sued somewhere that doesn’t distinguish between a cell and the company of which it is a part.”
In that case, Simpson said, a court might disrespect that segregation of assets and liabilities. Another concern is an equitable reason that would drive the court to conclude: “I’m not going to respect the segregation of assets and liabilities because it’s not fair to this particular party.”
Simpson added the caveat that he thinks that is a low risk, but still a real risk. However, as long as a client is working with the right professionals when it sets up a cell company, that will be managed and planned for, and how those kinds of exposures might fit in the cell programme and what a client needs to do to make sure they minimise the risk of getting in that kind of situation will be considered.
He agrees that it would be helpful if there were some form of eventual legal precedent to set against that potential risk, and he thinks that such a case is inevitable.
“As we get more cell companies, there’s eventually going to be some pretty serious disputes,” he concludes. “Then we’ll get some good legal precedent. But for the time being we don’t have that, at least not in any significant way.
“People are relying on structuring correctly, following the formalities and making sure that the parties they’re dealing with are on notice that they’re dealing with a single cell, so they don’t have a basis for trying to challenge that segregation of assets and liabilities.”
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