A Risk Management Strategy With Protected Cell Captive Insurance

Captive Management: The Roles and Responsibilities

Protected cell captive (PCC) insurance has been traditionally used by small to midsize companies, but even large multinationals are utilizing it as a risk management strategy nowadays.  What attracts these businesses to PCC’s?

Organizations and businesses that are currently using the PCC insurance scheme have gained benefits like its ease of implementation or administration and the lower cost it entails because of shared services and potentially lower premium tax.

How Businesses Use the PCC Insurance Strategy

Businesses and organizations of all sizes are using the protected cell captive insurance in so many ways including financing risks and optimizing programs and profits.  They have also utilized the scheme in:

  • Gaining access to the global reinsurance market.  With policy limits using a cell, you can obtain specialty coverages.  A capital is typically not required if the PCC is structured properly and is 100% reinsured.
  • Accessing alternative reinsurance coverage through investors of capital markets.  Insurance-linked securities (ILS) are used as a source of fully collateralized risk transfer.
  • Facilitating participation in customer insurance programs.  A PCC can be utilized as a reinsurer to allow the company to participate in program risk to cover underwriting profit and income in investment.  This is one way that this customer insurance program is integrated into offerings for clients through products and services.
  • Seeking risk financing benefits of a solo or single parent captive without having to own an entity or subsidiary company.
  • Achieving optimal program structure without having to go through the lengthy and challenging process of creating a new entity.
  • Using PCCs in other domiciles because of potential tax mitigation or other domicile-specific benefits. 

Key Features of a Protected Cell Captive Insurance

As PCC grows to become the most popular alternative to the conventional commercial insurance that offers benefits similar to its counterpart captives, it is also used by many clients to avoid the challenges that come along with insurance market cycles.  The key features of a PCC technology that makes it a key catalyst in the fusion of banking and insurance are:

  • It operates in two parts:
  • A non-cellular part or the core
  • Unlimited number of cells

The structure of the PCC strategy depends on the needs of the sponsor and the user which can be adjusted to tailor the future needs of the business.  A typical structure would involve minimum establishment costs and administration.

  • Creditors of a PCC cell can only have access to cellular assets of that particular cell and the company’s non-cellular assets, if applicable.  If the assets are insufficient to discharge the cell owner’s liabilities, creditors have recourse to the non-cellular assets.  In most cases, the cell owners are expected to collateralize any underwriting risk within their cell.
  • A PCC can be established in two ways:
  • Newly incorporated
  • Conversion from an existing company to a PCC
  • It is a single legal entity with its core and its cells that is managed as a whole.  A committee can be formed to oversee the operations of a cell.
  • It files a single annual return from a regulatory perspective.  However, regulatory approval can be given for the business plan for each cell.
  • It has a tax status in the domicile in which it is located.

Benefits of a PCC Insurance

Cells in the PCC scheme are created and owned by the same or separate cell users where the assets and liabilities of each cell are legally segregated from each other.  Similar to what standalone insurance companies offer, PCC’s can also issue insurance policies and access reinsurance markets.  Other benefits include:

  • Low set-up and administrative costs
  • Quick set-up and exit
  • Flexible allocation of capital (no minimum for each cell)
  • Enhanced risk management
  • Flexibility in designing the program
  • Provides greater control over one’s insurance
  • In most jurisdictions, there are no restrictions to the type of business that can be undertaken by a cell

Increased Funding Deductibles with PCC Insurance

Any business that is too small to create their own captives and companies that do not want to establish a group captive can experience reduced costs for expensive company insurance expenditures on property, automobile, and employers’ liability through a protected cell captive insurance.  Be in a better position to control your finances, manage your risks, and the destiny of your business with the PCC insurance strategy.