Non-traditional risks increasingly addressed in cell captives

Interest in cell captives, also known as protected cell companies (PCC), is growing rapidly as more organisations look to these facilities to fund non-traditional risks, experts say.

Cell captives aren’t new but are seeing “tremendous growth” to write different lines of coverage, said Nick Frost, president of Davies Captive Management, part of Davies Group.

He was speaking during a session at the World Captive Forum, which was held in Miami by our sister publication Business Insurance.

Organisations are using cell captives to write property risks and access reinsurance markets, said Frost, who moderated the session.

Between 2020 and 2021, Marsh-sponsored cell facilities saw an almost 50% growth in cell formations, said Donna Weber, head of pooling and PCC strategy at the broker.

The largest growth was seen in Marsh’s Washington, DC, facility, with more than 70% year-on-year growth. Bermuda and Guernsey also saw substantial growth in 2021.

There is high demand globally for cells, Weber said.

“While we’re seeing traditional cells set up for what would be single-parent risks, we’re also seeing a lot of these more non-traditional cells,” she said.

Less than half of the cells formed in 2021 wrote traditional risks such as excess liability, product liability, property, voluntary benefits and cyber risk, she explained.

Some 20% of the new cells Marsh set up last year wrote Side-A D&O liability coverage. “It seems like we’re going to see a lot more Side-A D&O written in captives and in cells,” said Weber.

In addition, 25% of new cells in Marsh’s DC facility were set up for managing general agents and underwriters, and 30% of new cells were set up to help facilitate insurance-linked securities, she added.

One of the primary motivations for forming cells is to write third-party business and as a profit motivator, to retain profits, Ms Weber said. Cells are also set up for “unique situational needs” that may go away in a year or two years as the markets change, she said.

Rich Serina, director of risk at Canon USA, said the company chose a PCC structure initially to finance the third-party risks of its equipment leasing business. Canon leases out large pieces of equipment to lessees such as printers and scanners.

Because the loss ratio was very low on the machines Cannon leased out, it decided to form a captive to reinsure 15% of the third-party risk via a fronting arrangement with an insurer, Serina said.

“That was the non-traditional way we got into the business,” but it took years to get to that point, she added.

The company first completed a feasibility study to consider the viability and structure of the PCC structure versus a single-parent captive, and then worked to gain the buy-in of corporate leaders in the decision-making process.

The first risk the corporation put into its captive needed to be something it was confident would be highly profitable, said Steven Himelstein, vice-president, legal, Canon USA. That success would “pave the way for other things”, he said.

Last year, Canon added medical stop-loss coverage to its captive and is now exploring writing other risks, such as voluntary benefits, and life and disability business.

Cyber is another risk that organisations are looking to manage in their captive insurer, Serina said.

After recent ransomware attacks, companies are looking at how they can utilise their captive to benefit their finances and “protect their organisation”, he added.

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