Ian-Edward Stafrace of Atlas Insurance PCC outlines what to consider beyond typical captive and protected cell domicile comparisons.
When evaluating captive and cell domiciles, the academia and guides often only just scratch the surface of features and characteristics.
These can assist in shortlisting alternatives when there is a wide choice. However, some essential aspects are often missed in the initial shortlisting and considerations.
This article covers aspects and needs that can emerge in the setup journey or years later. These aspects include the:
- need for substance in the domicile
- potential to write risks directly
- flexibility to change and adapt
- accounting standards and ease of group consolidation
- evolving expectations of stakeholders.
New pain points emerge over time, driven by changes in stakeholder expectations, mergers and acquisitions or the organisation’s strategy or risk financing needs.
Protected cells should be considered, even by large organisations with established captives. Cells are more than capital and cost-efficient solutions for organisations not large enough to have a standalone captive company.
Organisations should delve deeper into the solutions some cell hosts can offer to address the above needs and pain points.
Broadening the considerations, one should determine whether the domicile has host protected cell companies that:
- have significant substance with premises and people in the domicile
- can cover risks directly in the territories in which the organisation is or may be active in future
- cover risks inside rather than just outside the captive domicile
- are long-established contributors to the domicile’s local economy
- are not restricted to hosting fully funded cells and take an underwriting approach to assess the cells they host
- have experience with cells writing direct third-party consumer insurance products
- have non-cellular cores well capitalised beyond regulatory requirements
- can rapidly incubate or front risks through their non-cellular core
- are independent of global brokers.
Organisations are often unaware that there are protected cell companies with these features. Hence protected cell companies like Atlas provide solutions ordinarily not thought possible.
Changing stakeholder expectations
With an elevated focus on broader sustainability and ESG considerations, the domicile preference, particularly onshore versus offshore, often also depends on stakeholders’ expectations, whether regulators, tax authorities, investors, customers or employees.
Ireland, Luxembourg and Malta are EU member states that have tailored themselves to better understand and proportionally enable captives while adhering to EU minimum standards and requirements, including Solvency II and the Insurance Distribution Directive.
Malta is also the only EU member with protected cell legislation. Cells can be capital efficient, with Solvency II recognising cells as ring-fenced funds.
Reinsurance cells do not need to be domiciled in the EU to cover EU risks. Offshore jurisdictions can offer lower capital and cost-base. However, growing stakeholder pressure has increased the interest in establishing reinsurance cells within the EU, including for organisations headquartered outside the EU, like Switzerland.
Malta adopts the latest International Financial Reporting Standards (IFRS), including the new IFRS17.
While implementation may be challenging for standalone insurers and captives, protected cell companies help facilitate compliance as they implement it for their other cells, and in Atlas’ case, for its active core.
Compliance with IFRS can help owners consolidate their cells in their groups with more transparency to stakeholders.
Need for substance in the domicile
Stakeholders are raising the bar for captive substance. With their shared economies of scale, Maltese protected cell companies give confidence in being onshore in the EU, yet without a standalone company’s complexities, costs and time, potentially saving capital too.
Insurers are increasingly expected to have adequate on-the-ground staff and employed key function holders.
Protected cell companies can help address substance requirements as cells form part of a broader single entity that provides shared board, governance and key functions in Malta.
Some protected cell companies additionally actively write business through their core. Atlas’s core, for example, is a long-established contributor to its local economy as a traditional nonlife domestic insurer with multiple branches and offices in Malta, naturally providing ample substance to the protected cell company.
Protected cell companies that actively cover risks in their domicile also address arbitrage objections from stakeholders on insurance companies that only cover risks outside their domicile.
Potential to write risks directly
As the only EU member state with cell legislation, Maltese protected cell companies offer cells with direct access to the European Economic Area single market. Following Brexit, some protected cell companies continue to provide access to the UK market.
Atlas was one of the first protected cell companies to submit a branch application to the UK Prudential Regulation Authority. Fronting partners can offer added value and simplify compliance requirements. However, they can be increasingly selective. Fronters also add costs to the programme, affecting feasibility, especially when premiums are below their rising minimums.
EU direct writing cells are slightly more costly than pure reinsurance cells. However, the saving of fronting fees can make them more cost-effective, notably where local compliance and outsourcing needs in the country of risk are limited.
Maltese protected cell companies with an active core can also rapidly front and incubate risks, giving more time to assess and set up a cell. For example, a global captive manager had a client with a US captive who wished to set up a protected cell to cover its EU-based risks.
As discussions progressed, it was clear in December that there would not be sufficient time to license a cell for its 1 January renewal.
As Atlas was already passported to all the countries where the risks were situated for the required classes of insurance, it underwrote the renewal through its core, reinsuring back to the US captive.
Atlas provided a quick solution within a couple of weeks during the holiday season while allowing much more time for the setup of a cell to be considered within the same protected cell company.
Flexibility to change and adapt
Many offshore domiciles are well suited for reinsurance captives and cells. They may have lighter regulatory environments, lower taxation and more rapid application and setup timelines.
Other jurisdictions have a more rounded and robust environment catering for the possibility of consumer distribution or potential third-party protection.
Solvency II and equivalent jurisdictions also help reduce the capital cost for insurers fronting unrated captives, which can help fee, collateral and capacity negotiations.
Most protected cell companies are owned by intermediaries who restrict the cells they host to fully funded programmes without theoretical risk gap or potential secondary recourse to the non-cellular core.
The cores of these protected cell companies tend to cover the absolute minimum capital needed for a core without any insurance activity.
There are then the exceptional protected cell companies with a broader appetite, experienced with writing consumer and third-party business across several countries.
Their cores are inherently exposed to risk, so the extent of their resources and surplus capital beyond regulatory requirements becomes an important factor to consider.
Such protected cell companies with active cores could be used to initially set up a reinsurance cell with the option to extend the cell’s licence to write third-party business eventually.
With the pace of change continuously increasing, organisations really do appreciate the ability to adopt an agile, iterative approach to setting up their insurance vehicles with real options to scale and evolve.
Atlas hosts multiple insurtechs. Occasionally, startups with promising models need more data or capital to set up a cell. They may have reinsurance lined up or wish to run a contained pilot to help them attract investors and better estimate projections.
Through its core, Atlas has assisted insurtech ventures in micro-testing parametric and other business models, for example, using blockchain smart contracts to automate underwriting and claims processes.
The non-cellular core can provide a sandbox facility that improves time-to market and the gaining of actual market data.
Business plans and projections can then be revised based on experience. With these considerations, it should be clear that the organisation’s strategy and domicile choice can significantly be shaped not by the domiciles but by providers in those domiciles, particularly the well resourced and experienced protected cell companies that foster sustainable innovation, delivering new solutions to emerging challenges.
