Bedell Cristin’s Mark Helyar on the benefits of cell captives and why Guernsey remains the jurisdiction of choice for those looking for bespoke insurance solutions.

Cell captives, which use the cells in a protected cell company (PCC) or an incorporated cell company (ICC), continue to be popular structures for self-insuring risk and accessing the reinsurance market, particularly as hard markets have led to significantly increased premiums and lack of sufficient coverage.

Cell captives, while having all of the benefits of a captive, also have a number of characteristics which make them different from a captive insurer structured as a standalone company.

• The first difference is cost: As a cell captive will have a central board for all the cells, as well as an auditor appointed to ensure each cell only contributes a proportion of running costs, a cell captive is generally cheaper to run.
• The second difference is that a cell captive can be established more quickly: If you’re looking to form a cell, all of Guernsey’s insurance managers have some form of offering already established. This means no separate long-form application, as would be the case for a new captive, and a much simplified process. Guernsey’s pre-approval regime for PCC cells also allows even more rapid regulatory approval provided cells fall within certain criteria.
• The third difference is that many clients prefer a structure which is held at arm’s length: In the parent company, for example, the cell may be treated as an investment rather than a regulated subsidiary which requires consolidation (given the parent won’t own the majority of the PCC itself and would not usually have any board representation). Cell captives are often used to solve specific insurance/coverage issues and so having a structure ostensibly run by a third party is often seen as a positive.

Forming a cell is a useful way for a company to experiment with the potential benefits of captive insurance without making a permanent commitment, a means of incubating a captive programme and examining what types of cover can work.

A PCC or ICC cell in Guernsey can also become legally detached from their cell companies to be converted into standalone captives if their owners want separation or more control via their own board.

What types of cover?

There is no limitation on what types of cover cell captives can underwrite, but certain types of non-admitted cover require fronting by insurers in the jurisdiction where the cover applies, in the same way as would be necessary for a company captive.

In the UK, for example, fronting would be used for public and employer’s liability cover, so the cell stands behind the fronting insurer in legal terms as a reinsurer, even though it may be accepting and paying claims for ground-up risk layers.

Cells have been used for a wide range of cover, ranging from mortgage and credit indemnity to reinsuring satellites on launch. Hardening markets have seen premiums for certain types of cover like directors’ and officers’/professional indemnity rocket in recent years, and there has been a lack of sufficient market cover for certain types of cover, notably cyber risk, especially where businesses are heavily reliant on internet-based business.

Regrettably, the war in Ukraine and risk of associated cyber-attacks has seen the market become reluctant even to provide pricing in some cases.

Cyber is also an area where there is substantial disparity in types of market policy wording and therefore the effectiveness of cover for different types of business.

As a relatively young cover, cyber is certainly one of the areas where a cell can very easily and quickly provide a bespoke solution for clients.

Cells provide traditional benefits too

The cell captive can also provide the benefits one would expect from a standalone insurance solution.

• Reduced market premiums: By assumption of self-insurance liability and the ability to profit from self-insurance in circumstances where the market has over-priced a risk, whether as a general market movement as seen recently with specific covers like professional indemnity or where underwriters overestimate a risk which is better understood by you and your business.
• Wider and cheaper coverage: As a cell is a licensed insurance vehicle, it can be used to access the reinsurance market. The best example for this purpose was to access terrorism cover following the 9/11 attacks, following the UK government formation of Pool Re.
• Bespoke cover/wordings: Cyber is perhaps the best recent example of a development in this area. Different types of business structure require their cyber policies to react in different ways, some more focused on business interruption, others for example to provide specialist resources to react, counter threats and recover data. It is very difficult for the market to provide generic policy wordings which provide everything a business needs and there have been quite a few examples of cyber-attack where it has come as a shock to a business to find the policy does not respond in the way that was assumed, or indeed required, once an attack is underway. And cyber risk is constantly changing and evolving. Cell coverage can be drafted to be bespoke or it can provide gap coverage between different policies already in force (for example, to cover differences in conditions). It is also possible for a cell to provide cover which doesn’t exist or is unique, for example, funding specialist response resources to resolve a cyber-attack, covering certain types of sports risks or lottery win coverage.
• Better risk management: Since interest rates dropped away years ago and it became difficult to achieve meaningful investment returns from resources tied up in a captive programme, there has been much more emphasis on the value-added, intangible benefits of owning an insurance structure. It provides, for example, a formal structure around which the parent company can educate its board and wider management about risk and focus on sometimes hidden costs and benefits of risk management in the context of its wider insurance programme. A cell captive can also be used to fund risk management programmes, investigate reduction of risk or remediation (for example, by funding physical rehabilitation from workplace injury through insurance, thereby reducing litigation risk). In some structures, particularly large group operations or franchises, the cell programme can be used to incentivise business units’ risk management programmes by payment of no-claims bonuses.

Why Guernsey?

Guernsey’s first captive was formed 100 years ago last year. Guernsey created the protected cell company as a structure in 1996 and it has now become copied and ubiquitous in use across cell captives worldwide in the ILS market and also for certain types of investment fund.

Guernsey continues to be well known for its innovative ‘can do’ attitude and, since 1996, the professional support, management and regulatory approaches in Guernsey have improved and developed into a cohesive and seamless support infrastructure to enable the widest range of insurance applications.

This has enabled several award-winning world firsts in the use of the PCC and ICC, from the first private catastrophe bond to the first Sharia-compliant life insurance securitisations. Guernsey plays host to captives and cell captives for some of the world’s largest companies.

Guernsey remains the pre-eminent jurisdiction of choice for captives and special purpose insurers in the European market and is the ideal choice for those looking to find some truly bespoke insurance solutions.