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As businesses face uncertainty, risk volatility, and changing conditions in the insurance market, risk finance options are more important than ever. Captives have long been a valuable, flexible solution to meet business needs, and one type of captive is attracting increased attention: cells.
During what has been a challenging insurance market in most coverage lines, the number of new Marsh managed cell entities grew by 49% in 2021 — and double-digit growth is expected to be seen again for 2022. Property, cyber, professional liability, and general liability were the top coverages written in cell facilities formed during the past three years.
As risk-bearing entities, cells can support loss control programs, prefund losses, provide access to reinsurance, and retain profitable insurance business.
With many insurers holding firm on or increasing pricing, reducing capacity, and/or adding exclusions in certain lines over the past few years, many companies have explored alternatives for their risk transfer needs. Economic trends suggest businesses in 2023 will continue to see higher costs for goods and services, supply chain challenges, lower or even negative profit growth, and litigation.
Captives come in a variety of structures, from single-parent to group, and cells themselves exist in different forms. Cells are known in various domiciles globally as protected cell companies (PCCs), incorporated cell companies (ICCs), segregated account companies (SACs), and segregated portfolio companies (SPCs). All of them, however, have a common structure comprising a core entity with individual cells insulated from the liabilities of other cells.
With a cell, the necessary captive infrastructure to operate already exists. Therefore, cell captives can write risks quickly, typically within weeks of filing a business plan with the domicile regulator and providing capital.
In many cases, the capital requirements for a cell are less than those for a standalone captive. In some domiciles, the core capital of the larger entity may satisfy domicile solvency requirements, meaning owners of individual cells can supply lower amounts of starting capital, and scale that to meet underwriting needs.
As regulated insurance entities, cells have flexibility to write traditional or new forms of insurance. This can be particularly helpful to cell owners that need customized risk financing to protect their exposures or fill in gaps in their insurance programs. In addition to traditional coverages, Marsh managed cells are increasingly used for cyber risk, directors and officers (D&O) liability, affinity business (MGAs/MGUs), and insurance linked securities (ILS).
Standalone captives are proven tools for parent organizations seeking financial flexibility and lower risk transfer costs. But, standalone captives require time and resources to establish and maintain. They are not short-term solutions — they have capital commitments and ongoing operating expenses. Cells offer the same financial flexibility and risk transfer capabilities without the need for onsite board meetings or the creation of a subsidiary legal entity. As an organization’s risk needs evolve, so too can its approach to captive insurance. Cells offer both an easy set-up and exit plan.
If your organization is interested in using a cell, a few questions to consider include:
For more information about captive insurance, please contact your Marsh representative.