Segregated Cell Captives

With insurance prices on the rise, coupled with terms and conditions tightening, many businesses seeking to take control of their own risk are looking to captives or, alternatively, segregated-cell captives. Where a business does not have enough of its own capital to start a captive, or where a license to sell a particular type of insurance is required, the business may enter into an arrangement with an existing and licensed captive to borrow the captive’s facility so that the business can enter into a captive-like arrangement.

Known by different names in different jurisdictions–including sponsored captive, protected-cell company, and segregated-portfolio company–a segregated-cell captive is a single legal entity that operates in two parts: a core and an unlimited number of individual accounts, or cells. A single policyholder’s assets and liabilities are placed into a separate cell, which is protected from other cells.

Unlike a pure captive, which is an insurance company owned and operated by a noninsurance-related business that uses the captive to write its own insurance, the segregated-cell captive can act as a “rent-a-captive” and rent its capital, surplus and license to the policyholder for a fee. The policyholder of a segregated-cell captive is insured by the captive without owning or controlling the captive. Originally, many rent-a-captives were structured so that different clients’ assets and liabilities were lumped together in the same account. Some have argued that left a policyholder’s assets at risk if another participant in the captive depleted its own capital. But the new segregated-cell legislation is designed to protect clients from each other’s liabilities, experts said, by placing them in their own “cells” or accounts.

Segregated-cell captives also can be owned by a single parent that has elected to place different risks into different cells, or owned by a group captive that has separated its individual members’ risks into different cells.

The core benefit of a segregated-cell captive is the legal separation of liabilities and assets and protection for the participants. They are responsible for paying their losses and company expenses. If they control the losses, they get an underwriting profit and the investment income that is held in the captive. Each cell can have its own reinsurance policy, with a different reinsurer.

Rapid Solution

Segregated-cell companies are well-suited for companies that need a quick solution. They’ve already set it up. Eeverything is in place except for the reinsurance. Braxton also offers loss control and claims management.

Costs Benefits

Segregated-cell companies are cheaper because the businesses in the cells share administrative costs. The capital requirements also are generally not placed on the cell itself, but placed on the sponsor.

An insurance company has one license fee, and while a cell has a marginal extra cost, it doesn’t have an insurance fee unto itself. There are some economies of scale.

Flexibility

Segregated-cell captives also offer a greater flexibility to companies.

Segregated cells can also be a “reusable special-purpose vehicle. For instance, an insurer that launches a catastrophe bond now establishes a special-purpose vehicle to issue the bonds and hold the proceeds from them. That vehicle then either releases the proceeds to the insurers if a catastrophe occurs or returns the funds to the investors if one does not. However, instead of the expense and time to establish a special-purpose vehicle, an insurance company could utilize a pre-existing cell of a segregated-cell company. This gives some advantage over rent-a-captives or special-purpose vehicles.

The cells also could be used for new types of securitization. For instance, an insurer could place the assets and liabilities of an accident-and-health portfolio into the cell, and in turn, sell notes to investors. The debt service under the note would be funded by the future cash flow of the block of business, which would allow the insurer to accelerate its receipt of cash today, although it would likely be at a discount.

Who can be intersted in a segregated-cell captive?

Any line of insurance can find an alternative in a segregated-cell company, but the most common line may be professional liability, general liability and worker´s compensation. In some countries,  traditionally about a third of the overall captive business has been professional liability for health-care related businesses, including hospitals and doctors.

There’re no restrictions to the type of risk, although laws may require you to separate general property/casualty from life and long-term business. Typically, is not possible commingle long-term and general business in the same cell.

Less Control from Policyholders

Unlike pure captives, cell captives aren’t owned by the policyholder, which can lead to disadvantages.

The relationship between the renters and the owner of a rent-a-captive is contractual. Often, it’s governed by a shareholder agreement. The captive issues preferred stock for the cell, which the policyholder receives. That way, the policyholder has a stake in how the cell performs and can receive dividends if the cell makes money.

Getting into a segregated-cell captive is a good first step  to get into a captive. You can let the cell accrue income, and then use the earnings to purchase your own captive.

Other alternatives

  • Rent-A-Captive. In a rent-a-captive arrangement, the captive usually issues a new class of preferred shares to the business owner. The business then purchases insurance from the captive and the business makes payments to the captive. The business owner may also be required to issue a letter of credit to the captive to protect the captive against any underwriting losses. At the end of the policy period, any excess cash above underwriting losses is distributed to the business owner by way of dividends paid to the preferred stock shares, less of course whatever fee was charged by the captive to rent it. Thus, the business owner was able to realize the benefits of a captive in terms of the deduction within the business and to share in underwriting profits, but without having to bear the expense of creating a new captive.  The renter, because is issuing stock to the user, may faces securities laws issues, if a U.S. person is involved. The involvement of securities counsel to work out these issues is critical.
  • Captive Series entity. The serialization of the captive entity to serve as a customized risk management solution. Some US states’s laws allow each series to hold different liabilities and assets that permits “ring fencing” of the series.  A series captive entity may provide similar or greater flexibility and advantage than other traditional structures, including protected cell structures.
  • Segregated Portfolio Captives. Within each portfolio, often called a “cell” or “series”, that the assets and liabilities will be segregated from other assets and liabilities of the insurance company. Thus, if a particular cell underwrites risks but suffer losses in excess of its assets, then only that cell will be cleaned out and not the other cells of the company. The most serious problem is that the segregation of cells will probably not be respected outside the jurisdiction where the company is formed, and thus the other assets of the company could be exposed to creditors. Moreover, despite the restrictions on liability of the rent-a-captive agreement, the creditor could still asset claims against all the assets of the company. This is because the creditor is not a party to the rent-a-captive agreement and not bound by its restrictions. The creditor may thus pursue all the assets of the rent-a-captive regardless of what the rent-a-captive agreement says.

Braxton´s Captive Services

Your company can work with Braxton´s captive management team to set up international captives.  

Whether your captive or rent-a-captive has been structured by Braxton or a third party, you can take advantage of our management services.  To help you maintain control over your coverage while easing your administrative burden, we offer the following management services:

  • Choice of domicile
  • Claims management, loss control, and risk assessment
  • Feasibility studies conducted by specialists consultants
  • Organization, incorporation, and licensing of the company
  • Preparation and maintenance of financial management information
  • Professional  management
  • Coverage for selected property and casualty lines of business including workers compensation, professional liability and general liability.

While these fronting services relieve you of the required administration, you maintain all financial and decision-making control.

To learn more about how we can help you take advantage of our alternative risk services, contact us today.