Cell captives provide advantages but require careful consideration

SCOTTSDALE, Ariz.—Cell captives offer several advantages as alternative risk transfer mechanisms, but before entering these arrangements, participants need to be aware of potential downsides, speakers told the 16th World Captive Forum.

Referred to by a variety of names, including "protected cell captives," "segregated cell companies" and "segregated portfolio companies," cells continue to expand and now are one of the fastest-growing areas of captive business, the speakers said during an educational session at the conference in Scottsdale, Ariz., earlier this month.

Cell facilities operated by sponsoring entities that allow individual cell participants to insure their risks in the captive. Typically through legislation, each cell is protected from liabilities incurred by other cells and participants.

A cell captive is easier to create than a new single-parent captive because the cell's sponsor has already established the facility and paid some startup costs, said Lawrence Bellinger, president and chief executive officer of Bellhomme, a Barbados-based protected cell captive company. Some operating costs also can be borne by multiple cell participants, he said.

In addition to the capital needed to insure the risks placed in a cell captive, participation in a cell requires costs such as management fees, government fees and taxes, Mr. Bellinger said. Fronting fees and collateral may be required, depending on the risks written.

Advantages

Similar to how single-parent captive owners can retain value that accumulates in their facilities, cell participants also can keep accumulated value. That is an advantage over traditional insurance, Mr. Bellinger said.

Unlike a single-parent captive, however, cells let participants focus on their coverage arrangements rather than on the administration of a subsidiary insurance company, said Callum Beaton, principal at Callum Beaton Insurance Consulting Ltd. in St. Peter Port, Guernsey.

"You are not having to address the fact that you own a subsidiary company," Mr. Beaton said. "What you actually have is participation. Whether by shareholder agreement or participation agreement, you have participation in someone else's company."

Cell captives are also advantageous because participants generally don't have to attend board meetings, though that can vary by domicile.

Cells also can help owners allocate premiums among different business units and subsidiaries because there are no limits to the number of cells in which a parent company can participate, Mr. Beaton said.

That strategy can be particularly helpful for "large, unbundled corporations" that aggressively approach new markets and the acquisition of new business units, Mr. Beaton said. The parent can insure its new business units in separate cells, keeping them segregated until the parent company understands all the exposures the new subsidiary faces.

"You can keep them isolated from the rest of the program until such time as you truly understand what exactly is there in terms of risks," he said.

Disadvantages

Mr. Beaton also cited potential disadvantages. For one, the cell captive facility belongs to someone else, not to the cell participants.

Therefore, while it is an "extremely remote" possibility, the captive company's board can make decisions that "go completely against what you wish," Mr. Beaton said.

Another consideration is that the legislation that has created cell captives in various domiciles has not been tested yet, and someone could legally challenge whether cells should be allowed to segregate their assets from one another, he said.

Also, cell participants can't control the captive sponsor, Mr. Beaton said. "The sponsor may be owned by a management company that you have chosen, selected and identified," he said. "But they are at liberty to sell their shareholding, and therefore your cell collectively, to their best friend or your worst enemy. That exposure is there."

Nicholas M. Frost, senior vp for Quest Group of Cos. in Hamilton, Bermuda, moderated the discussion.