Medium-sized enterprises: Could you achieve more effective and efficient risk management with a cell captive?

Medium-sized enterprises can find themselves in a difficult position when it comes to risk management and insurance programs. You may not have the same financial and people resources as large corporations, but nevertheless face similar complexities around managing the risk you retain versus transfer to insurance markets in the most effective and efficient ways.

When traditional insurance solutions aren’t always well-aligned to your specific needs or financial capabilities, cell captives offer a forward-looking and cost-effective alternative, with captive feasibility projects allowing you to clarify how much risk to retain, pricing and other choices.

Below, we take a closer look at cell captives, explaining what they are, their potential advantages for medium-sized enterprises and what you’ll need to consider carefully when evaluating if a cell captive is right for you.

Understanding cell captives

Protected cell companies (PCC) solutions are offered by a number of jurisdictions – including Malta, Guernsey, Isle of Man, Gibraltar, Bermuda, Cayman and Vermont, to name a few – as part of their legal and regulatory framework. While single parent captives are, as the name suggests, an insurance company owned and operated by one entity, PCC facilities via a cell captive give multiple entities access to the core benefits of captives.

Cell facilities are typically structured to create, under local statutory law, separation of assets and liabilities between the individual cells. Those companies participating in cell captive facilities are insulated from the loss experience, liabilities and credit risks of the other participants. Each cell operates independently, allowing companies to retain control over their insurance program while benefiting from the shared administrative and regulatory services provided by the PCC facility provider, or ‘host.’

Advantages of cell captives for mid-size companies

There are a range of advantages your mid-size company could gain from using cell captives:

• Tailored risk management solutions – With a cell captive, you can design customized coverage that aligns precisely with your risk profile, strategic objectives, governance and other internal requirements. That’s because cells form part of a broader single entity which secures governance and key functions.
• Cost efficiency – By retaining a portion of the risk and bypassing traditional insurance overheads and profit margins, you can potentially reduce your insurance costs over time. Audit, captive management, legal and other fees associated with a cell captive are lower when compared to single parent arrangements. With cell captives, all cell users within the PCC share in the overall administration costs and these economies of scale can drive further cost savings.
• Risk control and mitigation – Cell captives can enable your organization to take a more proactive approach to risk management. By assuming a portion of the risk, your organization will have a stake in implementing robust risk control and mitigation measures as well as claims management protocols. The shift can promote a culture of safety and loss prevention. This discipline and attention to risk management can contribute to more stable claims frequency and reduce the severity of losses with ultimate benefit for the group cash flow position.
• Financial flexibility and stability – In addition to providing coverage for traditional property and casualty risks, cell captives offer flexibility in funding and managing emerging risks and exposures.
• Potential access to the European Economic Area single market – You could consider domiciles such as Malta for your cell captive, which is the only European Union member state with insurance protected cell legislation providing cells with direct access to the European Economic Area single market.

Considerations and challenges around cell captives

While cell captives offer compelling benefits, they are not without challenges you’ll need to consider:

• Regulatory compliance – Cell captives, as part of a PCC, operate within a highly regulated environment and must comply with various requirements imposed by insurance regulators. Regardless of where your cell captive is domiciled, you will need to navigate regulations to optimize capitalization and operational ease before making the final decision to set up a cell captive.
• Risk assessment and underwriting – Effective risk assessment and underwriting are essential to the success of a cell captive. You must be confident in your ability to accurately evaluate your risk exposures and implement underwriting practices to maintain the financial integrity of any cell captive.
• Capitalization and solvency – Cell captives require adequate capitalization to absorb potential losses and maintain solvency. You’ll need to carefully assess your capital requirements, establishing robust financial controls and risk management frameworks to safeguard your captive's long-term viability.
• Ongoing governance – Ultimate governance of your cell captive rests with the PCC and, as such, a ‘foreign board’ outside of your organization’s control.

Next steps for considering a cell captive for your mid-size company

As mid-size companies face an increasingly complex risk landscape, we expect cell captives to become more popular. Leveraging the advantages of captive insurance could help enhance your risk management capabilities, achieve greater financial stability and unlock new opportunities for growth and innovation.

However, the decision to pursue a cell captive requires careful consideration and strategic planning. You’ll need to assess your risk tolerance, evaluate the feasibility and cost-effectiveness and develop a comprehensive risk management strategy tailored to your specific needs and objectives. Captive feasibility studies can guide your decisions about which risk financing option best suits your needs, both in the short and long term.

Bear in mind, implementing and managing a cell captive, while less onerous than opting for a single parent structure, still requires professional planning, forecasting and continuous guidance to realize its full potential and elevate your current risk and insurance approach.

To discover a smarter way to address your risk and insurance needs using a cell captive, get in touch.

Authors

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Vittorio Pozzo

Director, Europe & Great Britain
Captive Advisory Team
Alternative Risk Transfer

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Rafael Gil-Albarellos Jiménez

Captive Consultant, Europe & Great Britain
Captive Advisory Team
Alternative Risk Transfer

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