3 March 2014Analysis

Protected cell companies and their future

Since the enactment of the first captive legislation in 2000, a lot has happened on the protected cell company (PCC) front.

First, there is an ever-increasing number of jurisdictions that have implemented similar regulation. Although the names of such entities might differ (such as segregated portfolio companies or segregated account companies) depending on the jurisdiction, the basic legal principle remains the same: a cell company is a corporate vehicle that is permitted to segregate its assets and liabilities between different cells, for different purposes, with the result being that a creditor’s recourse against the cell company is limited to whichever cell it transacts with. If a cell becomes insolvent, the remaining cells of the structure are not affected and continue to operate as normal.

Cell company regulation addresses the perceived weakness of ‘rent-a-captives’, in which assets are pooled, and users are more insecure about their exposure to unlimited liability in the event of a claim by one or more user. Whereas traditional insurance, through the common fund mechanism, ie, pooling, demands that the premiums of the many fund the losses of the few, PCCs ensure that the premiums of the few are protected against the losses of the many.

There are now more than 50 jurisdictions around the globe that have adopted cell company legislation, and this number is expected to grow further, while established domiciles such as Gibraltar continue to adapt their regulations to the ever-changing environment. This clearly demonstrates that the PCC concept has gained international recognition and that it is becoming an increasing attractive alternative in insurance placements.

Gibraltar at the forefront

Gibraltar has always been at the forefront of PCC promotion and use, being the first EU jurisdiction to promulgate a PCC Act, back in 2001. Before this, only offshore domiciles had similar legislative frameworks and Gibraltar saw the opportunity offered by its EU jurisdiction status to enhance the concept further and combine cell solutions with the ability to write direct insurance across the EU/European Economic Area (EEA) on a freedom of services basis.

This proved to be a wise move for Gibraltar insurance industry stakeholders and the legislator, as is demonstrated by the success of White Rock Insurance (Gibraltar) PCC Ltd (White Rock), the first EU-based PCC. Since its formation in 2002, White Rock has established more than 50 cells and currently has 22 open cells, which makes it by far the largest PCC in the EU.

Other PCCs, both life and non-life, have set-up in Gibraltar to avail themselves of its favourable legal framework and ability to passport across Europe.

Various factors explain this success but one key element remains the unparalleled speed (at least in the EU) at which the Gibraltar Financial Services Commission is able to license PCCs and authorise individual cells. This, combined with the pragmatic and proportionate approach taken by the Gibraltar regulators, gives the visibility and clear framework necessary for the conduct and development of business.

Cell companies can be used in various ways.

Cell captives

Cell captives can be used to assist clients who wish to retain their own risk, as they would do with a standalone captive.

Typically this solution may suit companies that do not wish to meet the minimum capitalisation requirements imposed in the EU because the programme they want to write is too small to leverage the minimum capital required efficiently. There can also be cost efficiencies for companies using a cell captive as opposed to a standalone entity.

A PCC may also suit clients with specific needs or who require a shorter-term solution than the commitment of owning a captive, as they incur lower formation and operating costs and have much faster entry and exit strategies than the captive alternative.

Fronting cells

Participants in the 2013 study conducted by the Captive Insurance Companies’ Association identified the traditional fronters’ requirement for collateral as one of the three biggest challenges associated with owning a captive.

Thanks to the legal segregation of assets and certain contractual arrangements, the need for collateral is not as important for PCCs. For example, Aon-owned White Rock generally does not require collateral for pure fronting arrangements to captives or the reinsurance market.

This partly explains the Gibraltar-based PCC’s success in offering fronting cells to write its clients’ risks across Europe (the company is licensed for all non-life classes of business), allowing them to access the reinsurance markets or their captive. In the latter case, fronting is required either because the captive only has a reinsurance licence (such as a Luxembourg reinsurance captive) or because they are established outside of the EU/EEA (for example in Bermuda or Guernsey) and are therefore not licensed to write insurance across Europe on a freedom of services basis.

The objective for White Rock in this arrangement is to provide access to licensed paper. However, it is important to note that where the cells operate as a pure front, the insured has generally no formal ownership or control over the activities of the cell. The transaction from the insured’s viewpoint is no different from the traditional market.

Other uses

Thanks to the flexibility offered by these vehicles, PCCs lend themselves not just to traditional captive purposes but to much more. For example, cells have been used successfully to facilitate and accelerate the run-off of all or part of some (captive) insurance companies. Cells are also increasingly being used in insurance-linked securities (ILS) to facilitate securitisations and to transform capital market products such as derivatives and catastrophe bonds into insurance products. In the same way—and overwhelmingly—it is insurance risk that is transformed into financial risk or risk that the capital markets can accept.

For their part, life insurance PCCs tend to be used by high net worth individuals who desire control, transparency and security over the management of their assets.

Growth opportunities

Solvency II

The increasing number of new cell company jurisdictions will undoubtedly intensify competition and potentially dilute the revenue streams of established domiciles. Practitioners and legislators in the competing domiciles will persist in attempting to differentiate their cell company product in the hope of creating a competitive advantage, or just publicity.

No doubt the Gibraltar insurance industry and its legislators will continue to work hand-in-hand to bring innovation and improvements to cell companies, instead of resting on their laurels.

Gibraltar, as with other EU jurisdictions, will have to implement Solvency II by 2016. However, although the directive might often appear a challenge, it will also bring opportunities, particularly for existing and new Gibraltar PCCs, which will benefit from the expertise, know-how and resources available locally within the industry and at the regulator.

Indeed, the directive may lead to increased costs that will particularly affect EU-based smaller captives and open market insurers. We have outlined the existing benefit of pooling the running costs of a PCC between its promoter and cell clients. The fact that a PCC is a single legal body, which will have to comply as a whole, is likely to make the pooling even more pertinent when it comes to addressing new requirements under all three pillars of Solvency II, in terms of regulatory capital (Pillar I), governance (Pillar II—risk management, internal audit, investment and other committees and production of an Own Risk and Solvency Assessment [ORSA]) and reporting/disclosure (Pillar III) requirements.

Inevitably, there will be situations where the resulting increase in costs associated with regulatory change will lead to a captive parent’s deciding to exit and shut down its standalone captive. In many cases this is difficult to achieve, so a PCC provides the facility of ‘rump warehousing’ through which a particular block of risk is transferred to a cell in the PCC and the captive owner is effectively able to shut the captive subsidiary down, while being able to continue to self-insure through an EU-based cell.


The government of Gibraltar, in partnership with the local industry, is keen to develop complementary areas of insurance and ILS offer one such opportunity. It is Gibraltar’s ambition to become the ILS jurisdiction of choice within the EU as it believes the EU will see considerable growth in ILS over the next five years.

Gibraltar’s Insurance Companies (Special Purpose Vehicles) Regulations 2009 will be the primary legislation for Gibraltar to enter the ILS market and its 2001 Protected Cell Companies Act will be an attractive part of Gibraltar’s ILS offering. Cells provide an opportunity for a flexible structure, are easy and quick to set up and represent a cost-effective solution to put in place and maintain.

Alain Dufraisse is the director of Aon Insurance Managers (Gibraltar) Ltd and White Rock Insurance (Gibraltar) PCC Ltd. For further information visit: