Adam Miholic of Hylant Global Captive Solutions
20 March 2023ArticleAnalysis

The growing third party-focused cell captive market

It’s no surprise that much of the growth in cell captives has been in facilities established by agents, managing general underwriters, and carriers for the benefit of their clients. After all, companies well steeped in the insurance world have a deep understanding of the many benefits of the cell captive structure.

But what is a little surprising—and quite interesting—is the number of organisations with zero connection to the insurance industry that are establishing facilities for the use of third parties. They may be created by an industry association of members with insurable risks for whom a cell captive might make sense, or they may be created by a company organisation to serve affiliated businesses such as its vendors or peers.

Either way, the organisation behind the cell captive recognises the benefits of captive arrangements and wants to make the strategy easily available to others. While some operators of cell facilities may charge “rent” for the use of the facility, others view it as a value-added benefit they can provide and don’t charge anything beyond the normal expenses and fees.

A great example of the latter is a cell facility we helped a large industry association create. The association had long been helping its members leverage group purchasing of equipment and services that are commonly used in the sector, allowing them to obtain deeper discounts than they could on their own. The association thought it made sense to approach the members’ insurance needs in a similar way.

About half of the association’s members participate, taking advantage of the affordable expertise and service relationships negotiated with providers and professionals supporting the operating and compliance needs of captives. The association essentially functions as a cooperative, so any savings flow back to the members.

Cell captive principle

If you’re not familiar with the cell captive framework, think of a traditional captive insurance company as a building constructed specifically for the needs of just one tenant, the organisation that established it. A cell captive is then similar to a multi-tenant office building. The cell captive’s owner and operator (called the “core”) covers the costs of creating and maintaining the “building,” renting out individual spaces (known as the “cells”) in the building to organisations seeking the benefits of a captive programme without the complications associated with starting a single parent captive of their own.

Cell captives are a remarkably flexible tool that can be implemented in a fraction of the time required for a traditional captive. Responsibility for all administrative tasks and compliance with regulatory requirements falls to the core captive owner. In addition, managing relationships with service providers or becoming familiar with the legal intricacies of domicile requirements makes cells more attractive. Often, organisations that are capitalised enough to pursue a captive of their own may find the cell approach better suits their near-term needs, based upon their risk tolerance and willingness to share risk.

In most cases, the motivation behind making a cell captive facility available to members of whatever kind of group considers it is simply to make it possible for those members to access a higher-quality risk management programme than they could establish on their own.

If creating this kind of cell captive facility sounds like an ideal approach for your organisation, invest some time in educating yourself about the requirements and benefits of captives. Before you present the idea to the entire membership of the organisations you hope to aid, you need to have a clear understanding of everything involved. Once you’re confident in your knowledge, it’s time to explore the idea. You might present the concept at your association’s quarterly meeting and see whether there’s any interest in developing a formal plan for consideration.

Assuming your members are enthusiastic about the concept and eager to learn more, you might begin conversations with your broker or captive insurance consultant to get a better sense of the steps and requirements involved in creating a cell captive. If they’re lukewarm, it may not be the right approach at this time. If you’re determined to proceed with a cell captive, drill deeper to understand their hesitancy.

Education is key for advancing the concept. Humans are inherently wary of things that are new, and it’s possible some in your group are unfamiliar with captives. You may need to take some time to go through the basics and present potential scenarios. Your broker, carrier, or captive consultant may be able to help you share knowledge.

As awareness of the cell captive facility approach spreads and organisations become more creative in their efforts to manage risk, expect to see continued growth in the use of cell captives to support the needs of third parties. It’s a proven way to provide added value by helping other organisations improve their risk management and save money for the long term.

Adam Miholic is senior consultant, global captive solutions, at Hylant. He can be contacted at:"