Challenging insurance market ignites increased interest in protected cell companies
A consistently more challenging pricing environment for traditional insurance is leading to increased interest in protected cell companies (PCCs) as organisations attempt to lower costs and to attain coverage that is more in line with their needs.
In 2020, Marsh Captive Solutions saw a 53 percent rise in formations of PCCs, also known as segregated portfolio companies (SPCs) and segregated account companies (SACs). Increases were registered across all regions offering Marsh’s Mangrove and Isosceles cell facilities, a trend that has continued in 2021.
Why is there an increased interest in cells?
As insurance market pricing, terms, and conditions remain challenging, more organisations are seeking alternative solutions. Pure captive insurers remain a popular choice, and the surge in captive formations in 2020, when Marsh set up more than 100 new captives, is continuing this year.
But not all companies are interested in setting up an owned captive. Some may not be willing or able to commit the time and cost needed to maintain a captive legal entity. Others need a solution they can establish quickly.
A cell facility is a single legal entity made up of a core and several cells. The sponsor contributes the core capital to license the cell, and generally makes up the board of directors for the core (Figure 1). Each cell is segregated, with no asset or liability-sharing taking place between cells or between cells and the core.
A cell facility is a single legal entity made up of a core and several cells. It offers its owner the majority of benefits of a pure captive but with reduced time commitment and associated expenses.
“A feasibility study will consider the optimal risk retention vehicle for an organisation’s specific needs.”
What are the advantages of a cell?
Cells offer the majority of benefits of captives, although cell owners do not have the same control as they do when they set up a pure captive. Cell owners typically can secure many self-insurance advantages as opposed to buying from the commercial market. Cell owners also own any profits in the same way they would under a full captive.
However, the time commitment and associated expenses are greatly reduced, allowing companies to test the waters in the captive insurance environment. The time of establishment is also generally faster, although it varies between the different regions depending on legal requirements. In Guernsey and Bermuda, for example, it is possible to set up a cell quickly, insuring one line of business in as little as one to two weeks.
Figure 1: Cell company structure
However, the time commitment and associated expenses are greatly reduced, allowing companies to test the waters in the captive environment. The time of establishment is also generally faster, although it varies between the different regions depending on legal requirements. In Guernsey and Bermuda, for example, it is possible to set up a cell quickly, insuring one line of business in as little as one to two weeks.
Challenging D&O market fuels increased cell interest
D&O pricing increases, more onerous terms and conditions, and challenges obtaining sufficient capacity are fuelling increased interest in captive solutions to write this risk. D&O premiums written by Marsh-managed captives increased by 50 percent in 2020, following a 25 percent increase in 2019.
Side B and C D&O coverage is popular within pure captives, but side A D&O coverage is rarely written through a single parent captive due to potential conflict in case a claim is non-indemnifiable by the captive’s parent owner. Because cells are largely independent of the company seeking to insure its directors and officers, the current insurance market conditions are leading to increased interest in cell solutions to write a portion or all of their side A D&O coverage.
While the use of a cell captive facility might be a better fit to fund side A D&O, this remains relatively untested.
Increased interest among multinationals
Traditionally, interest in cells predominantly came from medium size organisations. But there is now increased interest from multinational organisations that recognise the cost and time advantage of a cell.
Cells, however, are not suitable for all companies. Some prefer the full control, flexibility, and increased choice of domiciles that a captive provides. A feasibility study will consider the optimal risk retention vehicle for an organisation’s specific needs.
Although cells are often relatively quick to set up, it is a best practice to start planning well ahead of time, especially when a feasibility study is preferred.
Cell updates
Marsh Captive Solutions has cell captive facilities in Barbados, Bermuda, Guernsey, the Isle of Man, Malta, Vermont, and Washington, DC. Each region has specific nuances that may determine the suitability and benefits to each company in choosing whether to establish a cell there.
- Washington, DC, is Marsh’s biggest cell region, with most US parent companies establishing cells there. Washington and Vermont have gained popularity with managing general agencies (MGAs) wanting to set up cells to retain some of the risks they are underwriting.
- Guernsey, which allows for a quick cell establishment, is popular with companies based in the UK, Asia, and the Pacific. The quick set-up time is leading to growth in activity around many lines of business, including directors and officers liability (D&O) insurance, a market that is undergoing significant challenges.
- Bermuda is also seeing much interest in D&O. Formations are coming from a mixture of industries due to the placement challenges in this market.
- The Isle of Man is popular with companies based in the UK and the Pacific, and has seen recent formations from a number of industries with a mixture of financial lines and property coverages.
- As the only EU domicile with PCC legislation, Malta’s cells allow companies to directly write coverage across the EU on a freedom of services basis and is seeing a lot of activity from companies with large European operations.
Companies from 15 countries—including in Europe, the US, Asia, and the Pacific—own cells in the seven Marsh Captive Solutions cell regions. Cells can be a suitable solution for companies in all industries, with our portfolio under management split across 17 industries.
Robert Geraghty is international sales leader at Marsh Captive Solutions. He can be contacted at: robert.geraghty@marsh.com
