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1 November 2017Analysis

Protected cells: from captives to insurtechs

The flexibility and ever-growing uses of protected cells never cease to amaze me. In the EU, Malta is enabling cells to be used not only in traditional captives, reinsurance or insurance-linked securities models, but also in directly writing consumer business or as fronting vehicles.

Cell formations in Malta, and globally, already outnumber those of standalones. Budding insurtechs are learning the opportunities of protected cells as platforms to experiment with, incubate or launch new technology-driven business models. These are exciting times to work in this sector, surrounded by so many innovative ideas that would not have been possible just a few years ago.

As a full EU member state, Malta enjoys the freedom to provide services and directly cover risks throughout the EU and the European Economic Area (EEA). It is already common for captives and cells in Malta to be profit centres by including customer and ancillary business. As well as added revenue, the diversification enables capital efficiencies.


Capital is flooding into the hundreds of new insurtech startups around Europe and the world. Technology has the potential to transform the entire insurance value chain including product development, customer acquisition, underwriting and claims management.

Insurtechs can accelerate the disintermediation of traditional distribution channels. While the strategy of large incumbent carriers has tended to include acquisition or investment in such ventures, protected cells are helping those with an intermediary or technology background to take over the primary risk carrier role. The desire from some brokers and intermediaries with successful profitable schemes to move from a focus on commissions and fees to a focus on underwriting profits through protected cells has been further boosted by the introduction of the EU Insurance Distribution Directive (IDD).

When an organisation realises that it has more data, risk or technology knowledge and ideas than the primary carriers, and it is confident in the potential profitability, it leads to the question: why not become the principal and tap into the reinsurance market for support? This is an old idea for captives but one that is dawning on intermediaries, insurtechs and organisations outside the insurance sector.

With the increasing purchasing power of millennials and digital natives, more insurance is being purchased directly online. With full access to the EU single market, cells based in Malta are ideal digital insurers.


Cells can enable new ideas to be incubated or new business models to be attempted at a far lower cost than a standalone insurer, and without the dependence on a third party principal. This helps organisations that are often wary of indirectly providing intellectual property to insurance principals or fronters in their home country.

In order to spur innovation, insurtechs often adopt a philosophy of ‘fail fast, fail cheap, and learn continuously’. Fitting with this philosophy, should ventures turn out to be unviable in practice, despite different model iterations, these can typically be closed faster in a cell than a standalone company, and the whole enterprise would have come at far lower cost and up front capital commitment.

Breaking barriers

Protected cell companies (PCCs) help break the barrier to entry for new captives or startup insurers unintentionally created by regulation. A new breed of regtechs are emerging in time to reduce such burdens, but no solution presents as much promise as protected cells thanks to their capital, cost and governance efficiencies especially in a Solvency II environment.

Well-resourced PCCs can provide cells with the regulatory expertise, infrastructure and economies of scale only usually found in well-developed incumbent insurers.

Well-resourced PCCs can provide cells with the regulatory expertise, infrastructure and economies of scale only usually found in well-developed incumbent insurers.

Common key functions including actuarial, risk management, compliance and internal audit typically apply across the PCC together with common processes such as the Own Risk Solvency Assessment required under Solvency II. The same applies to reporting and disclosure requirements, with one Regulatory Supervisory Report and Solvency Financial Condition Report and all resources in place to meet other quarterly and annual reporting as one single legal entity.


Under Solvency II, a cell owner will typically only need to invest own funds equivalent to the cell’s notional solvency capital requirement which, with small undertakings, often falls far below the typical standalone insurer minimums.

Subject to their risk appetite, PCCs may also lend unrestricted surplus core funds to cells. At all times, cells retain full protection of their assets, from liabilities of the core or other cells per legislation.


The prolonged soft market and increased regulatory requirements could on the surface reduce the captive appeal. Cells, however, can enable more efficient risk financing. Thanks to current lower reinsurance prices and wider capacity, risk managers are reviewing which risks to retain and which to cede. Diversification with additional lines helps improve capital efficiency, whether targeting own or third party risks for added profits.

Captives also help better manage deductibles, claims handling processes and data on risks and losses. Improved control extends to policy terms and choice of claims service providers. The built earnings create further capacity for greater risk-taking for the parent.


The uncertainty surrounding Brexit, particularly over what market access UK and Gibraltar will be granted, is an opportunity for Malta to provide support and solutions. In the medium term, Malta will likely be the only member of the EU single market with insurance protected cell legislation. UK and Gibraltarian companies can ensure they maintain direct access to the 30 member states of the EEA through Maltese cells. Such could retain or reinsure back the risks.

Where there are barriers to entry for captives and startups including insurtechs, PCCs are enabling such new entrants into the insurance market promoting innovation. With such flexibility, and the various solutions PCCs can offer to challenges not even yet identified, this structure has only scratched the surface of its full potential.

Ian-Edward Stafrace is chief risk officer and executive committee member of Atlas Insurance PCC.