EU Protected CellsCaptives on a budget
Ian-Edward Stafrace MIRM FCII PIOR Chartered Insurer
Risk Analyst & International Business Development
Atlas Insurance PCC Ltd, Malta
22 March 2011IRM Global Risk Management Professional Development Forum
Agenda
As a captive risk financing vehicle
&/or
To sell insurance to third parties
Why form your ownInsurance Vehicle?
Why Captive?
100%* of
Premium
Profits
Retained
by
Insurer
Your
Business
Catastrophe
Risk Premium
Self Insured
Premium
Re/Insurer
Your Cell/
Captive
Insurer
Traditional Insurance vs Captive
Risks
beyond
risk
appetite
reinsured
All Profits
Back to You
*On average only approx 65%
of Premium is used to pay claims
Why Captive?
1. Reduce Cost of Insurance
2. Long Term Cover
3. Risk Management Strategy
Why not just self insure?
In Self Insurance
• Reserves treated as profits & taxed
• Usually internal transfer with no reserve for large claims
• Temptation to strip funds
With Captives/Captive Cells
• Premiums tax deductible as expense
• Underwriting & Investment Profit help create reserves allowing higher retention
• Reinsurance market access
Why Sell Insurance ToThird Parties?
1. Underwriting Profits + Investment Income
2. Bolt-on To Non Insurance Sale
3. Knowledge Of Product, Market & Profitability
4. Avoid Market Uncertainty
Only for Large Organisations?
Problem 1: Capital Requirements
Problem 2: Fronting Costs
Problem 3: Costs to run a separate company
PCC
Cell Cell
Cell Cell
Core
SOLUTION:Cell in a Protected Cell Company (PCC)
Purpose
Segregating cellular assets & liabilities
Allow different owners with varying interests to participate in one company
Insurance Cells set up with less capitalas minimum requirements apply to PCC as a whole
Only EU State ToHave PCC Legislation
Approachable Regulator
EU Single PassportEnglish, Time Zone, Flight Connections
EU Compliant Regulations
Tax Efficient
Where? PCC Domiciles
Malta
Over 40 other domiciles have PCC or similar legislation: Gibraltar,
Guernsey, Isle of Man, Bermuda, Cayman Islands, various US states...
No Minimum Guarantee Fund (MGF) Required
• Complying with EU directives through PCC core capital
• Example: General insurer with €1 million annual premium
EU Standalone Insurer EU Protected Cell
Minimum capital needed:
Protected Cells: “Low-cost” AlternativeTo Owning A Stand Alone Insurance Company Or Captive
No Fronting Required for EU/EEA Risks
Reinsurance access for smaller investors
Lower Running Costs vs. Stand-Alone companies
Protected Cells: “Low-cost” AlternativeTo Owning A Stand Alone Insurance Company Or Captive
Insulation from other Cells/Core
Cell has its own income and expenses
Where cell liability arises:
1. Assets of that cell used
2. If insufficient PCC‟s core assets used
3. Use of assets of other cells prohibited
Cellular dividend & tax independence
Cell Cell
Cell Cell
Core
Benefits of Protected Cells (in Malta )
Lower CapitalDirect Writing Into Europe
No Setup of Separate Company
Easier Access To „Captive‟
Solution
Cell Assets
SegregatedNo Board Of
Directors
Reinsurance For Smaller
Entities
FavourableTax Regime
Shared Administration
Cell Management
PCC Board of Directors
Cell A
Cell Underwriting & Investment committees
Cell B
Cell Underwriting & Investment committees
3rd Party InsuranceManager
CaptiveCell
Commercial / affinity groups looking for a captive risk financing vehicle
FrontingCell
Captive owners
wishing to reduce EEA
fronting costs
Third Party Writing Cell
Any business planning to
sell insurance to third parties
…and any combination of the above
Why own anEU based Protected Cell?
Lower access point to captive solution
Special purpose applications
Access to reinsurers & specialist risk-bearers
A protected cell in Malta allows cell owner to:
Insure Directly Own Risks In EEA
Sell Insurance To Third Parties In EEA
Insure on Non-admitted Basis Risks Globally
Where Allowed
Reinsure Risks Outside EEA
A) Captive Cell
Example 1French Manufacturer
Desire
Reduce insurance cost & improve risk financing
Facts
Multiple Factories, Stores & Offices in France
Classes: Property & Non Compulsory Casualty
Premium €1,000,000 (approx 30% Property)
Loss ratio < 35% past 5 years
A) Captive Cell
Possible Solution:
A) Captive Cell
PCC
Cell owned by Manufacturer
Injects capital of €410,000
Property:
- Excess €50,000
- Reinsured above €200,000 any 1 loss/event
Casualty - Reinsured above €100,000 any 1 loss &
€300,000 in aggregate
Third Party
Manager?Cell Agreement: PCC + Manager + Cell Owner
Management Agreement: PCC -> Manager
Cell Agreement
PCC + Cell Owner
Cell Committee/s Members1 PCC + 1 Cell Owner + 1 Manager
Cell Committee/s Members1 PCC + 1 Cell Owner
Yes
No
PCC Manages Cell
Example 1French Manufacturer
A) Captive Cell
Example 2Association of Medical Professionals
Desire
Wants more control over PI cost for members
Facts
Premium €900,000
Loss ratio < 35% past 4 years
Single event/series exposure
A) Captive Cell
Possible
Solution
PCC Manages Cell
Agency Agreement
PCC + Association
Cell owned by Association
of Medical Professionals
Injects capital of €370,000
Reinsured above
- €30,000 any 1 loss
- €350,000 in aggregate
Third Party Claims Handler
Agency Agreement
Cell Committee/s Members
1 PCC + 1 Association Official
Example 2Association of Medical Professionals
Cells in Malta can be used as fronting facilities
Fronting cell reinsures most/all of the risk
Reinsurer could be a non-EU captive
Fronting Cell Example
€1 Million Annual Premium
-- Required Cell Capital €90,000 --
B) Fronting Cell
• Bolt-on products to non insurance sales
• Short tail risks - E.g. Extended warranty, property damage, theft, marine cargo, travel cancellation…
• Long-tail risks also possible
Possible Products
EU cells offer direct access to European market
Policyholder Protection Ensured
C) Third Party Writing Cell
ExamplePortable Electronics Retailer
Desire
Retain underwriting profit & have greater control over pricing / commissions / availability
Facts
AD & Theft cover sold to purchasers
Placed with external insurer in return for commission
Premium €750,000
8 year claims history - Loss ratio < 40%
No event or single large risk exposure
C) Third Party Writing Cell
C) Third Party Writing Cell
Possible
SolutionPCC Manages Cell
Agency Agreement
PCC -> BrokerBroker
Intermediary?
Agency Agreement
PCC -> Retailer
Claims Handling Agreement
PCC -> Third Party (E.g. Broker)
Cell owned by Retailer
Injects capital of €135,000
Yes
No
Retailer HandlingClaims?
No
Claims Handling Agreement
PCC -> RetailerYes
ExamplePortable Electronics Retailer
Next Steps to consider Cell Route
Engage the industry to determine viability & options available Brokers, PCCs (Independent/Managed), etc
Domicile Choice
• Ideal: €1m+Premium
• Loss Ratio = Profit Retained &/or Insurance SpendLoss Ratio
(Claims/Premium)
• Typical minimum 18% of Gross Annual Premium
• ↕ depending on risk, inclusion of liability, loss ratio, reinsurance, buffers
Available Capital/Collateral(To Capitalise Cell)
• Lower risk appetite may mean higher reinsurance purchase but at lower cost than primary market
Risk Appetite
• Fluctuating primary insurance prices, terms & availability
• Risk financing flexibility
• Improved risk information flow, etcOther Factors
Indicative Back of the Envelope Study – Some Key Considerations
Website: www.atlaspcc.eu
Email: [email protected]: (+356) 23435255
Atlas Insurance PCC Ltd47-50 Ta' Xbiex SeafrontTa' XbiexXBX 1021Malta