Mid-market companies with difficult-to-place or expensive risks have another viable option to standard insurance: placing those risks in a cell captive insurer.
Cell captives, in which individual members share a common infrastructure with other members but have legally distinct assets and liabilities, afford many of the same advantages of single-parent or group captives but require less upfront capital investment, said Richard Wood, Johnston, Rhode Island-based risk manager and manger of captive activity at FM Global.
“There are a number of our clients that do not have captives, so we have set up cell companies in both Bermuda and Vermont,” Mr. Wood said. “This way these clients can rent one of our cells and get many of the same benefits they would in a single parent.”
Jason Flaxbeard, Denver-based senior managing director of the captive management practice at Beecher Carlson Insurance Services L.L.C., said companies can establish a cell captive much quicker than other types of captives, but do face a trade-off between ease-of-entry and reduced upfront costs vs. the long-term financial benefits of ownership.
“The "training wheel' aspect of cells is that you don't have many setup costs, but you ultimately face the same issue people face in the real estate market when deciding whether to buy or to rent,” Mr. Flaxbeard said.
David Macknin, Chicago-based president of broker Alper Services L.L.C., said cell captives can be a viable option for certain mid-market companies.
“If you are committed to safety and want to be insured with like companies that outperform the market, your insurance spend is over $250,000 annually and is driven largely by workers compensation or liability premiums, a cell captive is a great alternative,” Mr. Macknin said.
In addition, more supply chain, reputational and medical stop-loss risks are being insured in cell captives, said Gary H. Osborne, Greenville, South Carolina-based president of captive insurance manager USA Risk Group Inc.
“If you have an insurance premium of say $1 million, there's a good chance that we will advise you to form your own captive,” Mr. Osborne said. “But if you are somewhere between $400,000 and $700,000, a cell may be cost-effective because a fully running single-parent captive will cost somewhere around $50,000 in annual operating expenses.”
Mr. Osborne said the choice of captive domicile is an important consideration. As well as Bermuda and Vermont, other popular domiciles that allow cell captives are the Bahamas, Cayman Islands, Delaware, Guernsey, Hawaii, Jersey and Utah.
“When it comes to domicile, we tend to look at where are the headquarters and where are the operations” of the parent company, Mr. Osborne said. “If possible, we like to go home state first. It's not impossible for a California-based company to set up in Vermont, but it's not very likely.”
Publicly traded companies have another consideration: perception perceived by a public mindful of outsourcing and corporate tax loopholes.
“In the middle market, public companies tend to not go offshore just because of the perception issues,” Mr. Osborne said.
“There's no inherent advantage based on your choice of domicile, because each one will have relative advantages and disadvantages,” Mr. Macknin said, noting that ancillary services provided by the domicile, such as legal, banking and claims services, also must be considered.
“The most important service company is the third-party claims administrator,” he said.
Mr. Flaxbeard said companies also should consider differences in laws governing cells, with domiciles such as the Cayman Islands enabling individual cells to have their own boards of directors and individual tax identification numbers.
“A lot of domiciles where cells are becoming popular now treat individual cells almost as if they are stand-alone captives,” he said.
Yet, one question hanging over cell captives is whether their unique structure, which seeks to legally segregate cell owners from liability for losses in adjacent cells, will withstand eventual legal challenges, said Andy Barile, Savannah, Georgia-based insurance industry consultant and founder of Andrew Barile Consulting Corp. Inc.
“The whole industry is waiting for this to be tested in court,” he said. “What will a judge say when he sees five cells in a captive where four of them have a lot of money and the fifth has stopped paying claims?”
Accordingly, Mr. Barile advises to clients to view cell captives as a short-term solution.
“My advice is that if you want to start with a cell captive to learn the business, that's fine,” he said. “But as soon as you accumulate enough capital, you should convert to single-parent captive so as to be free of any of these issues.”