Michael Whitfield of Atlas Insurance PCC explains how, after the disruption caused by Brexit, the company has worked to ensure UK businesses can continue to have access to its unique protected cell company offering

As the challenges facing the world become ever more impactful and complex, so must solutions proposed by the insurance industry expand in their sophistication and efficacy in order to meet those challenges.

It is therefore refreshing to be able to discuss one particular type of solution which, like most great ideas, is brilliantly simple in concept, but which has the capacity to tackle a broad range of potentially sophisticated needs, even in these difficult times.

To add a degree of extra piquancy to this article, we will describe how the tried and tested protected cell company (PCC) model has now made a re-entry to the UK market in a form which might open up many opportunities, for UK and non-UK based insurance businesses, as well as businesses which wish to set up a captive arrangement to cater for their own insurance capacity needs.

The UK and European insurance markets have been forced to deal with the outcomes arising from the Brexit process. This has been a major shock to those markets and has benefited very few, while causing significant commercial friction for many, especially in respect of crossborder trade.

Therefore, it’s very good to be able to consider a development which can help to significantly reduce those frictions, while also making the PCC cell solution available again to UK-based insurance businesses without there being a need to bolt on “fronting” arrangements, with all their associated costs and complications.

PCCs have been around in various forms for over 25 years and the concept has been adopted in several financial service guises. In respect of insurance, a PCC is a single entity which consists of two parts: a non-cellular “core” and then a number of protected cells, commonly referred to as “cells.”

The cells operate discretely and independently from each other and the core is responsible for ensuring that the PCC maintains its overall Solvency II capital requirement, which is essentially the sum total of the capital requirements of all of the PCC’s cells and its core.

The core (often via a system of cell committees) exercises oversight of all the activities of its cells and bears responsibility for governance and regulatory compliance across the entire PCC entity. The cell’s assets are segregated and shielded at law from liabilities of other cells or of the non-cellular core, providing confidence to cell investors.

The core and its cells have the ability to write insurance and reinsurance business, the extent and scope of which is determined by the classes of business which the PCC is authorised to write in the territories in which it operates.

While the cells operate discretely from each other within the structure of the PCC, the core of the PCC also bears ultimate responsibility for ensuring that the PCC as a whole meets all of its financial obligations.

In the EU, only Malta has established PCC legislation to encompass insurance business. All PCCs established in Malta follow Solvency II capital requirement standards and protocols, while Malta has also adopted the latest International Financial Reporting Standards (IFRS), including the new IFRS 17.

In a UK context, prior to Brexit and the subsequent decision of the UK also to leave the European Economic Area (EEA), there were a number of early-stage efforts to establish PCCs within the UK marketplace via EEA “Freedom of Services” rights.

Freedom of Services enables businesses from EEA territories to trade in each others’ markets without the need to establish separate authorisation within each territory. Businesses already taking advantage of Freedom of Services rights were able to continue to trade in the UK through the course of the post-Brexit interim regulatory regime, which finally expired at the end of 2023.

However, what was only ever a fledgling effort to become established directly in the UK market was rendered practically infeasible for Malta-based PCCs by the knowledge that Freedom of Services would soon cease to apply in the UK.

Since 2016, businesses which might ideally have considered a PCC cell as a capacity solution for their UK-traded business were forced to consider other capacity options, or to seek less comprehensive PCC solutions.

These include establishing a Guernsey based PCC cell, which would then require a “fronting” arrangement to facilitate trading in the UK market (other than for business transacted on a “non-admitted” basis).

Gibraltar (which is not an EU or EEA territory) has also passed PCC legislation, which may provide opportunities to trade directly into the UK market in some circumstances, via its bilateral arrangement with the UK.

A UK base

One of the Malta-based PCCs that had taken advantage of the opportunity to trade in the UK through Freedom of Services was Atlas Insurance PCC (Atlas). Atlas has a long history: it and its predecessors have been established for more than a century, writing a significant proportion of Malta’s indigenous insurance market, as well as business throughout continental Europe.

Atlas set up its PCC business in 2006, so as an early adopter of the PCC concept it has been well-placed to develop its position as a European market leader in the sector. As most of its rivals made reluctant moves to cease their UK business following the Brexit vote, Atlas made a carefully considered decision to follow a different strategic route.

It chose to establish a permanent branch in the UK and to apply for authorisation of that branch by the Prudential Regulation Authority and the Financial Conduct Authority. While the process to obtain authorisation was far from straightforward to achieve, Atlas persevered and proceeded to recruit an experienced UK-based management team.

At the end of 2023 it was finally granted authorisation of its UK branch, just in time for the cessation of the interim regime. The authorisation of Atlas’s UK branch provided a guarantee of continuity for its existing cells, some of which have been successfully trading in the UK for a number of years.

Beyond this, the PCC cell concept is now effectively embedded (via the authorisation of the branch) into the UK’s fully admitted market. For the first time since the vote for Brexit, UK-based businesses can now confidently contemplate setting up a PCC cell to act as either a part, or the whole of their insurance or reinsurance capacity solution.

Since the PCC is based in Malta (which still enjoys Freedom of Services rights across all other EEA territories) it is possible for the PCC and its cells to trade almost seamlessly throughout most of Europe.

The establishment of a cell with Atlas may also represent a means by which non-UK based businesses can enter into and trade within the UK market. Businesses which establish a PCC cell can take immediate advantage of the PCC’s established infrastructures and of its economies of scale.

First, the cell owner has only to provide its “share” of the PCC’s overall Solvency II capital requirement (commensurate to the business that it writes). Second, the cell is able to enjoy the immediate support of the PCC’s existing, fully developed administrative, governance and compliance expertise and structures.

Taken as a whole, this means that many businesses can potentially participate in providing some, or all, of their own insurance or reinsurance capacity requirements at a fraction of the cost and with minimal complexity compared to what would be required to establish a new insurance company in isolation.

For businesses which might be in a period of transition as they prepare to make the quite profound step to establish their own cell, the PCC can potentially offer the facility to “incubate” the business by writing from its core while the necessary preparations for forming the cell are completed.

Doubtless others will be considering following Atlas in its achievement of establishing a UK branch. In the meantime, the ability of Atlas to be able to trade – either from its cells or its core – across a wide spectrum of authorised product types directly into the UK market and across other EEA territories is proving to be of significant interest to potential cell owners, as well as to many other businesses with which it can cooperate to participate as a part of broader capacity solution arrangements.