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Captives

Corporations Get Creative With Cells

Cell captives are innovating, and some risk managers use them to drive business relationships.
By: | August 3, 2016 • 6 min read

Cell captives have become extremely popular self-insurance tools for companies of various sizes across all sectors, with cell legislation enacted in more than half of U.S. states and cell formations now outstripping stand-alone captive formations in many onshore and offshore captive domiciles.

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Protected cell companies (PCCs, also known as a segregated accounts companies or segregated portfolio companies) consist of a core company that writes and administers ring-fenced insurance policies in underlying cells, whose policies and accounts are segregated from other cells in the PCC.

The recent development of incorporated cell company (ICC) legislation in a handful of jurisdictions enhances PCC features by granting each cell distinct legal status.

As well as being quick to set up, cells require significantly less capitalization than stand-alone captives, while shared costs among the participants and core lead to economies of scale. It is little surprise that since the first PCC was formed in Guernsey in 1997, they have proliferated and broadened.

“Risks written through cells are becoming more sophisticated, expanding beyond traditional medical malpractice, workers’ compensation and property insurance,” said Paul Scrivener, a partner in the Cayman Islands’ law firm Solomon Harris.

Cells are being touted, for example, as a potential solution to cyber risk, one of the insurance industry’s great challenges.

Cells for Every Risk

“If you have a structure with different risk profiles within different cells, it may make sense to put cyber risk in a separate cell rather than co-mingle it with traditional lines of insurance as it is very different and unique,” said Scrivener.

Paul Scrivener, partner, Solomon Harris

Paul Scrivener, partner, Solomon Harris

“Some have suggested using a cyber cell because you are looking at low frequency, high severity situations,” added Tom Jones, partner with McDermott, Will and Emery. Questions remain, however, over how best to address coverage terms, exclusions and payout limits, he said.

Cells are also growing in popularity in the health care space, particularly for medical malpractice risks.

“Hospitals may set up cells for independent physicians or group faculty plans if they want to assist them with insurance but don’t want to co-mingle the loss reserves,” Jones said.

Scrivener recently converted a single parent health care captive to a cell structure so it could put its existing hospital program into one cell and create a second cell to insure the risks of the self-insured physicians within the hospital.

Ascension Insurance Services set up Cayman’s first portfolio insurance company, AARIS, in 2015 to offer workers’ compensation solutions to agribusinesses, but now intends to roll out flexible workers’ comp cells to other sectors including the trucking and automobile racing industries.

“We’re getting calls from all around the country,” said Paul Tamburri, Ascension’s West Coast risk management practice leader, adding that the next step could be to write employee benefits stop loss through AARIS.

Cells can offer a fast route into captive insurance for employee benefits programs, while many regulators have yet to find a comfort level with stand-alone employee benefits captives.

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“Getting the whole cell structure approved up-front makes it relatively easy to add cells. Instead of taking six months to get approval, we can get a cell approved in a matter of weeks,” said Karl Huish, president of captive services for Artex Risk Solutions, which runs a PCC-like employee benefits series business unit named Sentinel Indemnity in Delaware.

“Getting the whole cell structure approved up-front makes it relatively easy to add cells. Instead of taking six months to get approval, we can get a cell approved in a matter of weeks.” – Karl Huish, president of captive services, Artex Risk Solutions

“The cells in Sentinel each have different employee benefit captive structures, including one that is for a group of credit unions who want to pool risk together for their health insurance,” he added.

According to Guernsey Finance, multinational corporations can use cells as fronting vehicles through which to gain access to the reinsurance market. A cell can be used to issue an insurance policy to the insured that is mirrored by a policy between the cell and a reinsurer, and while the cell retains no risk, the corporation benefits from access to cheaper wholesale reinsurance cover.

The ability for numerous small companies to group their insurance risks in a cell means the self-insurance business is no longer reserved for big corporations. Huish believes a group of insureds must have projected annual losses in the region of $5 million or above to justify forming a cell, while that figure would be closer to $3.5 million for individual cell owners.

Insured Turns Insurer

More than simply participating in their own risks and enjoying greater control and premium savings from self-insurance, an increasing number of companies see PCCs as an opportunity to generate cash flows while strengthening bonds with business counterparts. Indeed, any company comfortable with the self-insurance concept can set up its own PCC to offer insurance solutions to third-party clients, suppliers or partners.

Not only does the sponsor of the PCC get closer to the risk of companies that affect its own risk profile, but it can also add value to its service propositions by offering valued third parties a quick, cheap route into self-insurance.

R8-16p44-46_11Cells.indd“Setting up your own PCC is a way of locking in clients, strengthening relationships and generating revenues, while also offering profit sharing opportunities between the PCC owner and its clients,” said Clive James, consultant at Artex Risk Solutions.

While this may be a natural fit for financial services firms, the concept can be applied to any sector, and may be particularly useful for those that operate on a project-by-project basis.

Construction firms, for example, are setting up PCCs through which the underlying cells write segregated insurance coverage for distinct projects, partners or groups of subcontractors. Freight storage unit owners are already using cells to self-insure the fire, theft and flood insurance they provide to licensees of the units, and there are myriad opportunities for health care organizations to offer insurance across their networks via cells.

Companies that lack the insurance expertise to run a PCC themselves would outsource this responsibility to an insurance manager in the same way stand-alone captive administration is outsourced — at a similar cost.

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As PCC sponsors must ultimately compete with guaranteed cost options in the commercial marketplace, Tamburri noted it is essential to educate potential clients that participation is both a long term commitment and also an opportunity to recoup underwriting profits they would otherwise lose if they stayed with commercial insurers.

“One hurdle is getting data from prospective clients,” said Tamburri. “It’s a lot of work for them to get together historical loss and exposure information. Smaller companies may wish to join the group but fear that they will do a lot of work only for the cell not to get off the ground.”

Such is the decision all companies must make when considering self-insurance, whether taking an individual cell or going a step further by forming a full PCC for third parties to join. What is clear is that cells give risk managers more options than ever before. And when insured becomes insurer, it is surely a sign of insurance industry evolution and innovation.

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

The Profession

Curt Gross

This director of risk management sees cyber, IP and reputation risks as evolving threats, but more formal education may make emerging risk professionals better prepared.
By: | June 1, 2018 • 4 min read

R&I: What was your first job?

My first non-professional job was working at Burger King in high school. I learned some valuable life lessons there.

R&I: How did you come to work in risk management?

After taking some accounting classes in high school, I originally thought I wanted to be an accountant. After working on a few Widgets Inc. projects in college, I figured out that wasn’t what I really wanted to do. Risk management found me. The rest is history. Looking back, I am pleased with how things worked out.

R&I: What is the risk management community doing right?

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I think we do a nice job on post graduate education. I think the ARM and CPCU designations give credibility to the profession. Plus, formal college risk management degrees are becoming more popular these days. I know The University of Akron just launched a new risk management bachelor’s program in the fall of 2017 within the business school.

R&I: What could the risk management community be doing a better job of?

I think we could do a better job with streamlining certificates of insurance or, better yet, evaluating if they are even necessary. It just seems to me that there is a significant amount of time and expense around generating certificates. There has to be a more efficient way.

R&I: What was the best location and year for the RIMS conference and why?

Selfishly, I prefer a destination with a direct flight when possible. RIMS does a nice job of selecting various locations throughout the country. It is a big job to successfully pull off a conference of that size.

Curt Gross, Director of Risk Management, Parker Hannifin Corp.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Definitely the change in nontraditional property & casualty exposures such as intellectual property and reputational risk. Those exposures existed way back when but in different ways. As computer networks become more and more connected and news travels at a more rapid pace, it just amplifies these types of exposures. Sometimes we have to think like the perpetrator, which can be difficult to do.

R&I: What emerging commercial risk most concerns you?

I hate to sound cliché — it’s quite the buzz these days — but I would have to say cyber. It’s such a complex risk involving nontraditional players and motives. Definitely a challenging exposure to get your arms around. Unfortunately, I don’t think we’ll really know the true exposure until there is more claim development.

R&I: What insurance carrier do you have the highest opinion of?

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Our captive insurance company. I’ve been fortunate to work for several companies with a captive, each one with a different operating objective. I view a captive as an essential tool for a successful risk management program.

R&I: Who is your mentor and why?

I can’t point to just one. I have and continue to be lucky to work for really good managers throughout my career. Each one has taken the time and interest to develop me as a professional. I certainly haven’t arrived yet and welcome feedback to continue to try to be the best I can be every day.

R&I: What have you accomplished that you are proudest of?

I would like to think I have and continue to bring meaningful value to my company. However, I would have to say my family is my proudest accomplishment.

R&I: What is your favorite book or movie?

Favorite movie is definitely “Good Will Hunting.”

R&I: What’s the best restaurant you’ve ever eaten at?

Tough question to narrow down. If my wife ran a restaurant, it would be hers. We try to have dinner as a family as much as possible. If I had to pick one restaurant though, I would say Fire Food & Drink in Cleveland, Ohio. Chef Katz is a culinary genius.

R&I: What is the most unusual/interesting place you have ever visited?

The Grand Canyon. It is just so vast. A close second is Stonehenge.

R&I: What is the riskiest activity you ever engaged in?

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A few, actually. Up until a few years ago, I owned a sport bike (motorcycle). Of course, I wore the proper gear, took a safety course and read a motorcycle safety book. Also, I have taken a few laps in a NASCAR [race car] around Daytona International Speedway at 180 mph. Most recently, trying to ride my daughter’s skateboard.

R&I: If the world has a modern hero, who is it and why?

The Dalai Lama. A world full of compassion, tolerance and patience and free of discrimination, racism and violence, while perhaps idealistic, sounds like a wonderful place to me.

R&I: What about this work do you find the most fulfilling or rewarding?

I really enjoy the company I work for and my role, because I get the opportunity to work with various functions. For example, while mostly finance, I get to interact with legal, human resources, employee health and safety, to name a few.

R&I: What do your friends and family think you do?

I asked my son. He said, “Risk management and insurance.” (He’s had the benefit of bring-your-kid-to-work day.)

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]