Owners using captive cells to manage difficult markets

Cell captives can provide a quick and effective solution for buyers facing difficulties in placing coverage in the commercial market, a panel of experts said during a session at the recent World Captive Forum. The vehicles can be used to build funds to pay large court awards owners may face in the future, add options during hard markets and provide coverage for businesses in rapidly growing parts of the economy. So-called nuclear verdicts are being awarded more frequently and insurers have retracted capacity for risks that might be subject to large awards, said Jeff Simpson, partner at US law firm Womble Bond Dickinson. Captive owners can carve out the risk from their commercial programmes and build a “war chest” for it in a captive, he said. “You probably will want to use a cell for that because of the convenience that’s associated with cells,” Simpson said. Companies can enter and exit a cell captive easily, take advantage of the cell company’s capital and achieve the benefits of economies of scale, he said. Cells can also be used to provide coverage for emerging risks that the commercial market is not comfortable with, said Joe Marcantel, director of Talisman Casualty Insurance, a protected cell captive. “You can tweak your coverages, tweak your pricing, and the great thing about a cell is it’s regulated by a domiciliary regulator, so you don’t have regulators all over the country that are having to deal with the oversight of that captive,” he said. Cells can also be used to provide alternative coverage when the commercial market is tough. For example, Marcantel said he put together a programme within a cell for smaller construction contractors that could not obtain surety coverage after the 2008 financial crisis. The programme allowed the participants to continue their businesses, said Renea Louie, chief operations officer for Pro Group Captive Management Services, who moderated the session. “It makes a significant impact on their ability to get jobs and build their companies,” she said. Cells can also be used to offer coverage for risks associated with companies operating in fast-growing sectors, Marcantel said. For example, the pet services sector, such as grooming and training services, has boomed since pet ownership increased during the Covid-19 pandemic. “It’s growing so fast and is so dynamic that it’s challenging to insure when you try and do it on an admitted basis,” he said. Marcantel said he has also set up a cell to cover a largely uninsured risk for real estate developers and building owners, covering financial loss that companies face if renters default. The cell provides tenant default coverage, and the captive manager handles the eviction and finding a new tenant. “There’s not a motivation to file a claim and recover on that claim for an indefinite period,” he said. This article first appeared on our sister website Business Insurance. For further news from Business Insurance, please click here.

Owners using captive cells to manage difficult markets

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