What are Protected Cell Captives?

Insurance is a fundamental part of the business environment. Commercial insurance products like general and professional liability or so-called “property and casualty” coverage protects the assets and members of any company. Not all traditional insurers are equipped to provide coverage for unique risk exposures, leading many companies to seek their own insurance solutions. Captive insurance programs are a form of self-insurance, and represent a viable alternative to traditional insurance coverages. Within captives are protected cell captives, or PCC captives; in this guide, we will explore what advantages PCC captives have and how they may make sense for business owners.

Protected Cell Captives: The Basics

Captive insurance programs often pool the risks between members – members with similar business structures, risk profiles, and insurance needs. This is particularly the case in group captives. If one member experiences a claim, the entire group shoulders the burden. Groups also share profits and losses.

As a self-insurance solution, captive insurance programs are owned by the companies they protect. Establishing a captive and meeting the regulatory and licensing requirements may be prohibitively expensive for smaller companies. As a solution, protected cell company captives (PCC captives) were created. These have all the advantages of a stand-alone captive without the expenses involved in forming a captive.

It can be useful to envision a PCC captive as a honeycomb filled with individual cells. The sponsoring “parent” company establishes the captive (the main body of the honeycomb), and each cell represents a member business that either buys or rents coverage within it. The parent company handles the administrative aspects of insurance, including claims processing, fronting services, and reinsurance placement. Because each cell is separate from the others, the PCC captive provides a risk-insulating layer between members.

Advantages of PCC Captives

In addition to the cost advantages associated with captive formation illustrated above, PCC captives offer several other advantages and benefits for those businesses which use this self-insurance model. Advantages include:

• Due to its individualized nature, risks are walled off between the cells. This insulates the assets and liabilities of the independent businesses (insureds) occupying the cells.
• The individual cell structure of a PCC captive provides an additional amount of protection of assets. Assets are protected from the creditors of the other cells within the parent captive.
• By creating a regulatory and accounting “wall” between cells, any unusual losses or adverse insured selections cannot harm the other cells.
• Smaller insureds need not struggle with the administrative and management burdens of a captive; these aspects are handled by the parent company.

Buying vs. Renting PCC Captives

Insureds have two choices in the PCC captive model – they can either buy a cell, or rent it. In other words, buyers of a cell pay capital toward the formation and management of the captive, effectively becoming part of the parent company, while renters are simply charged an access fee to gain the advantages of the cell structure.

As with any insurance solution, there are both advantages and drawbacks inherent in renting a cell. Advantages of renting include:

• Substantially reduced expenses associated with administration of the cell when compared to cell ownership.
• Greater flexibility; rental cells may share risks in certain structures, or may share no risks.
• Profit from underwriting and investment income.
• Any claims reserves are not required to be reported on company balance sheets.
• Provides insurance coverage to programs that are sensitive to losses.

Drawbacks of renting a cell include:

• Insureds may have no say in governance, coverages, and coverage limits in their cell or in the parent company.
• Because PCC captives must be domiciled in a specific location, not all areas allow for the formation of this reinsurance solution.
• Many parent companies require cell renters to provide letters of credit and pay the full annual premium upon rental, which can be difficult for smaller businesses.
• Expenses tend to be higher in a PCC renting model than captive ownership or conventional risk funding programs.
• Any profits returned to renters may be subject to fee deductions by the parent company.

It can be difficult for a smaller company to understand what the best course of action is for their insurance needs. Businesses must balance the advantages against the drawbacks. Despite these difficulties, PCC captives remain an attractive and advantageous solution for many smaller businesses who wish to self-insure but simply cannot afford the administrative and financial burdens associated with captive formation.

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.