How Does Cell Captive Insurance Work?

Captive insurance is a proven way for companies to take charge of their own risk management needs. These stand-alone insurance entities, typically owned by a parent company or group of related companies, offer significant benefits. Not all captive insurance companies or models are the same, however, and smaller companies may not be able to afford the finances or time needed to establish their own self-insurance operation. Cell captives were created to overcome the challenges smaller businesses face; in this guide, we will explore what a cell captive is and the advantages they provide.

What is a Cell Captive?

Cell captivesare a type of captive insurance entity where one sponsor (the “parent”) sets up and owns the company and then sells or rents “cells” to those businesses that need it. Cell captives are primarily designed to serve the insurance needs of smaller businesses that do not have the financial assets needed to set up their own stand-alone captive.

The sponsoring company handles all the claims and administrative services as well as providing working capital and licensing for the cell renters or buyers. Unique to cell captives is that there is no risk pooling between participants; each cell is shielded from the others, so each participant’s assets are protected from creditors or excessively high insurance claims. This feature is sometimes referred to as ring-fencing and is typical of a type of captive known as a Protected Cell Captive (PCC). Another type of cell captive is the Incorporated Cell Captive (ICC), where each cell is considered its own legal entity. In each of these arrangements, participants’ assets are protected from the others.

Participants in a cell captive may choose from one of two primary cell arrangements:

• First-party cells – where the insured is the preference shareholder, or the company/company subsidiary to which an insurance policy has been issued.
• Third-party cells – where the insured is not the preference shareholder but rather a party that provides third-party insurance services to others.

What are the Benefits of a Cell Captive?

As discussed earlier, cell captives offer small business owners all the advantages of a stand-alone captive insurance firm, but without the expenses associated with establishing a single-parent captive. There are many other benefits, including:

• Lower premiums than may be found in the traditional insurance market
• The potential for dividends or profit-sharing for cell owners/renters
• Tax savings and significant tax advantages for participants

More importantly, the individualized nature of each cell means that participants are shielded from one another. In traditional single-parent or group captives, risk pooling is a common practice. Smaller companies are concerned with sharing risks and assets with others, so the cell captive is designed to protect against losses of assets.

Finally, cell captives are tremendously flexible. Once they are set up by a sponsoring entity, they are easy to expand, adding new participants as needs arise. The insurance coverages are also flexible in terms of addressing the specific needs of each cell. In the traditional insurance market, policies may be prohibitively expensive or unavailable, particularly for smaller companies with unique or high risk profiles. Captive insurance, in general, offers more comprehensive coverage and for lower premiums. Cell captives share this benefit with larger single-parent captives.

Cell Captives: Growth in the Captive Insurance Sector

Insurance industry analysts have seen increased interest in cell captives over the past decade. Larger corporations are not forming pure captives at the same rate as in the past, opening the door for smaller firms to establish and sponsor cell captives. Another factor that is influencing interest is the rise of so-called “high severity, low frequency” risk profiles, such as those associated with professional liability, employment practices, cyber liabilities, and errors & omissions (E&O). Cell captives are ideally suited to these emerging risks; while claims may be rare, when they do happen the losses tend to be extremely high. Shielding cell assets from one another protects smaller business participants, which may otherwise be in jeopardy if excessive losses occur.

Finally, cell captives, just like other captive insurance models, are a cost-effective alternative to the rising premium costs and reduced coverages available in the traditional insurance market. Captives serve as a viable insurance alternative for businesses of every size and type, and their growth will continue well into the future.

About Caitlin Morgan Captive Services

Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (855) 975-4949.