IN205 - Captive Insurance and Protected Cell Companies: The Opportunities

The significant growth in the captive insurance industry reflects a change in the way that many commercial and professional organisations cover and finance their risk.

Companies are motivated by many different factors when considering the use of a captive insurance vehicle. They may find certain types of commercial insurance difficult to obtain or costly. In addition by paying premiums for traditional, directly covered insurance, companies with good records of managing risk may be subsidising others with far poorer risk records. Captive insurance also offers opportunities to share in the potential insurance profits that are available and reduce costs when compared to traditional direct insurance.

What is a Captive Insurance Company?

A captive insurance company is a wholly owned insurance subsidiary of a non-insurance parent, which is used to self-insure the risks of the parent and associated companies.

What is a Protected Cell Company?

A Protected Cell Company (PCC) is a single legal entity but with the ability to create individual “protected cells”. The assets of one cell are statutorily protected from the creditors of another. A variety of organisations can therefore safely use different cells within one PCC.

Managed Risk Insurance PCC Limited

Managed Risk Insurance PCC Limited (MRI) is a protected cell company that has been established in Guernsey to act as a captive insurance company for a number of different organisations. Each cell acts as an insurance company and is managed by insurance specialists, who are regulated by the Guernsey Financial Services Commission.

MRI is managed by directors from Dixcart in Guernsey, and experts from the insurance industry.

Captive Insurance in Guernsey

Guernsey has an outstanding reputation for innovation and professionalism in the world of international insurance and has become the leading European jurisdiction for captive insurance. Guernsey is regulated to international standards by the Guernsey Financial Services Commission.

Regulations, rules and codes of conduct covering captive insurance companies are included in:

• The Insurance Business (Bailiwick of Guernsey) Law 2002.
• The Protected Cell Companies Ordinance 1997 as amended by the Protected Cell Companies (Amendment) Ordinance 1998.

What are the Advantages of Captive Insurance?

The use of a captive insurance company provides a number of opportunities and advantages:

1. By participating directly in the indirect risk, a captive insurance company can enjoy a reduction in the premium cost. An organisation can also make certain that its premiums mirror its own position, rather than reflecting the insurance cost of other organisations with inferior claims records. Any potential premium surplus can be retained as profit in the captive.

2. Investment income received from premiums, until paid out in the form of claims or reinsurance costs, can be retained in the captive by the shareholders. This income can potentially be used to increase the level of risk insured in the captive.

3. The ability of a captive insurance company to deal directly with the reinsurance market may generate additional cost savings.

4. The insurance market can be very cyclical in terms of premium cost and cover availability. The use of a captive insurance company can smooth insurance costs over the medium term.

5. Captive insurance can enable an organisation to provide insurance for risks not easily covered in the conventional insurance market.

What Risks can be Covered?

In principal any risk can be covered through a captive structure.

Popular types of risk covered within a captive structure include professional indemnity and commercial insurance. Other types of insurance, which include the cover of combined risks on a number of individually owned or managed positions, such as property insurance, are also often covered through a captive or PCC.

Why Consider the Use of a Protected Cell Company?

A stand-alone captive insurance company has to meet very specific capital and solvency requirements. The use of such structures is therefore generally limited to organisations with insurance premiums over £500,000.

The advantage of a PCC is that the capital requirements are provided by others. A PCC can therefore provide an easy and cost effective way to benefit from the captive insurance market. Viability is also possible at a lower premium income level than for a stand-alone captive, starting at approximately £200,000.

The directors and insurance managers of a PCC are provided by the owner of the company. These experts can greatly reduce the amount of time that the management of the parent company might need to spend on insurance matters, in comparison to a captive insurance company.

Can Risk be Limited?

A cell in a PCC can reinsure for risks in excess of a defined amount and thereby limit the potential exposure of the cell. Alternatively some cells can be used for top up insurance over and above that available in the insurance market. This type of catastrophe insurance will generate a potentially higher pay out, but with a lower risk factor.

Additional Information

Captive insurance and Protected Cell Companies offer potential advantages to a number of commercial and professional organisations.

If you require any additional information please speak to John Nelson: john.nelson@dixcart.co.gg. Or please call the Dixcart office in Guernsey on: 01481 723996.