Cell Captives
Date: 19th February, 2010
Nicolai Xuereb is the author of the following article which focuses on the use of cell captives in insurance businesses. Dr Xuereb specialises in financial services, trusts and foundations.
CELL CAPTIVES
Affiliated insurers with relatively smaller premium incomes may not always have the necessary critical mass to support a stand-alone set up. Enter the cell captive. Since 2004, Maltese legislation allows for the insurance business of insurers, reinsurers, captives, managers and brokers to be carried out through Protected Cell Companies (PCCs). PCCs are companies with one or more segregated cells having segregated cellular assets, in addition to non-cellular or core assets.
Setting up
PCCs are regulated by the Malta Financial Services Authority (MFSA) under the Companies Act (Cell Companies Carrying on Business of Insurance) Regulations and by the Insurance Business Act, in the case of insurance companies and captives, and the Insurance Intermediaries Act in the case of managers and brokers, and the Rules and subsidiary legislation issued thereunder.
The advantages of using an onshore cell captive set up in Malta may indeed be quite unique when compared to other models for doing affiliated insurance business, opening up alternative risk management solutions which may otherwise have remained uneconomic to pursue. More common use of the layman’s term “rent-a-captive” is perhaps indicative of the possible potential for the regulated but flexible PCC model.
The PCC requires authorisation from the MFSA to carry on the business of affiliated insurance in terms of the applicable regulatory framework, particularly the Insurance Business (Companies Carrying on Business of Affiliated Insurance) Regulations. The MFSA will specify in more detail any further specific conditions which would be applicable before a new cell within the PCC company is set-up, typically by the issue of non-voting preference shares, depending on the classes of risk to be underwritten, the captive’s business plans and scale of operations.
Segregation
The directors of the PCC are duty-bound to keep cellular assets segregated and separately identifiable from core assets of the corporate entity. Similarly, assets attributable to a particular cell are to be kept separate and distinct from assets attributable to other cells. Legally the cells and the core are one corporate entity as the cells do not have a separate legal personality notwithstanding that they may each be managed by a separate third party insurance manager.
Although normally creditors of a cell unable to meet its obligations may resort to the assets in the core to settle debts due to them by that particular cell, in the case of cells that are used solely for the carrying on of captive business, the cell may prevent recourse to the assets of the core through a written agreement with any third parties who are actual or potential creditors of the cell and if specifically stated in the constitutional documents of the PCC.
Advantages
PCCs offer numerous opportunities including:
- a single corporate body with distinct cells having ring-fenced assets and liabilities;
- transfer of cellular assets to other persons and the extension of the protected cell assets
- concept to the transferee;
- “rent-a-captive” solutions allowing the purchase of a cell within an existing PCC to write
- policies from within that specific cell;
- possibility of being converted into a PCC from a traditional insurance company or captive;
- Setting-up a cell within a PCC (although still requiring a licence) would be a less demanding exercise as the PCC would already be known to and regulated by MFSA.
For those looking to establish a captive insurer, a third party managed cell company may prove to be a very cost effective proposition. Malta offers not only the necessary legal and regulatory framework for captive cells but also experienced insurance managers maximising potential for the benefits of affiliated risk management.
