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11 January 2017Analysis

PCCs flourish in uncertain times

The use of protected cell companies (PCCs) could be set to flourish in the coming years in the Europe, Middle East and Africa (EMEA) region as more companies embrace the concept and regulators allow its use.

Since the concept was first developed in Guernsey in 1997, many other domiciles including Malta, Gibraltar, Jersey and Ireland now support similar legislation in EMEA, as do the Cayman Islands, Bermuda, Labuan and various US states further afield.

The use of a PCC allows companies to take advantage of the risk transfer and other benefits of a captive without having to form their own. A PCC is a single legal entity subdivided into ‘cells’ each of which can act as a captive for third party companies. Most important, a claim against one cell cannot be covered by the assets of another cell.

Especially in recent years, the concept has become more widely used for two main reasons. First, more corporates are grasping the benefits of PCCs and looking to use them.

Nigel Feetham, a partner at Hassans, a Gibraltar-based offshore finance and corporate practice, explains that this is because PCCs offer certain advantages including flexibility and the segregation of assets and liabilities within a single umbrella.

“PCC legislation offers certain features that an ordinary corporate cannot—primarily these are flexibility and segregation of assets and liabilities within a single umbrella,” he says.

“Promoters, professional advisers and finance directors of large corporates are increasingly becoming aware of the benefits they offer.

"As insurance and capital markets continue to converge, PCCs enable the transfer of insurance risk to institutional investors." Stewart McLaughlin, White Rock

“Quite apart from the above and being an additional product to make available to clients, PCCs also provide the benefit of economies of scale. The proposition is quite compelling, especially for structured transactions and captive insurance business.”

Stewart McLaughlin, head of White Rock PCC and incorporated cell companies (ICCs) in Guernsey, agrees that the use of PCCs will continue to rise.

“PCCs are coming of age,” he says. “It will be the 20th anniversary of PCC legislation in Guernsey next year. When PCC legislation was introduced it was described ‘as one of the most innovative developments in corporate legal technology since the Limited Liability Act of 1855’.”

He adds that their appeal will endure regardless of market conditions in re/insurance or any wider political or economic uncertainty.

“I have no doubt that their flexibility and speed of cell set-up allows organisations to react quickly to market conditions,” he says.

“They exist in both offshore and onshore jurisdictions. If a client needs a front for European Economic Area (EEA) territories but their captive is based in an offshore jurisdiction, it is simple to establish a cell in a Malta PCC and pass the risk back to the captive.

“There are many examples of how our expanding knowledge of PCCs has broadened their use and of course they are an extremely cost efficient solution.”

Copycat legislation

As well as companies increasingly recognising their benefits, more domiciles are passing legislation to allow the use of PCCs.

McLaughlin notes that original legislation has since been replicated in more than 50 jurisdictions including numerous US states. Even countries such as the UK are now also exploring the possibilities of such legislation.

“The London Market Group and the UK government have also expressed intent to use PCCs as a key tool in creating an insurance-linked securities (ILS) market in London,” McLaughlin says.

“This is a clear indication that the ‘things just work’, to borrow a phrase from Honda. They are now also used widely in the fund sector, arguably being the vehicle of choice for umbrella funds, some of which are listed on the London Stock Exchange. In one sense PCCs have become instituted into the world of corporate finance.”

Feetham agrees, noting that the fact that the UK is considering such a move bodes very well for the sector and could boost the captives sector more generally.

“If the UK implements PCC legislation, as UK Treasury has indicated it will do, the future for PCC legislation looks very bright indeed. They are now commonly used in many states of the US. It is only a matter of time before they become as recognised as limited partnerships are across jurisdictions,” he says.

There are also other reasons to believe the use of PCCs will continue to proliferate. Simon Walker, CEO of Robus Group, says that the rise and rise of interest in (if not always execution of) ILS and other risk transfer instruments is rooted in the capital markets.

“From a personal point of view, the reason I would expect there to have been a recent increase in the formation of cells in Europe where the business is insurance-related will be primarily the result of further ILS deals being done by ILS fund managers and managing these transactions through their established PCC vehicles,” he says.

“Aside from this, the use of PCCs as opposed to pure captives is sometimes the result of a desire to use a cellular structure on account of lower operating costs or the desire to incubate risks before moving towards the formation of a full captive.”

Walker believes that beyond the driving force of such innovations, the prospects for growth in this space are very similar to those of recent years, with little change.

“The continuing soft cycle means that the attraction of establishing entities to facilitate an increased level of self-retained insurance risk is diminished,” he says.

Opportunity in convergence

McLaughlin at White Rock agrees that the ongoing convergence between insurance and the capital markets will lead to more companies using PCC structures.

“As insurance and capital markets continue to converge, PCCs enable the transfer of insurance risk to institutional investors. They offer the path of least resistance and continue to innovate in bringing financial instruments to market in both non-life and life risks. Recent use of cells to transfer longevity risk and mortality risk are further developments,” he says.

He also notes that a main reason for this market’s continued development has been the fact that, while Guernsey became the pioneer of the structure, it never sought to protect the idea from being utilised by others—something that has benefited all.

“Guernsey remains at the forefront in the rise of PCCs in Europe. As the inventor of the PCC it never sought to ‘copyright’ the idea and this is to its credit as the legislation has been embraced globally,” McLaughlin says.

“The industry continues to innovate, for example using ICCs, and maintains a constructive dialogue with a pragmatic regulator who is perceptive of market convergence and reacts accordingly. If further evidence were needed the recent proposal to introduce Special Purpose Insurer Rules to Guernsey confirms it.”