Family Office Elite Spring_16

insurance”.
The use of a captive insurance company can result
in a meaningful reduction in overall insurance costs,
improved risk management, efficient administration,
and potential tax benefits in some cases.
However, the high operating costs and regulatory
challenges of running you’re own stand-alone captive
insurer have meant that captives have typically been
the reserve of major corporations only.
An alternative structure used by many SMEs, providing
very similar benefits but at a substantially lower
cost is a “rent-a-captive” offered by an insurance
protected cell company (PCC) or Segregated Account
Company (SAC) or Segregated Portfolio Company
(SPC), depending upon jurisdiction and relevant legal
framework.
There are some subtle differences between PCCs,
SACs, SPCs, but in essence, all have accounts (cells)
containing assets and liabilities that are legally
separated from the assets and liabilities of the
company’s ordinary account. For the purpose of this
article, and my preference, I will concentrate on the
Guernsey Insurance PCC.
A PCC Cell
Guernsey pioneered the introduction of the PCC for
insurance companies in 1997 and is Europe’s leading
captive insurance domicile with more than 800
international insurance entities, of which 444 are PCC
cells. Approximately 40% of FTSE 100 companies
have captives in Guernsey.
The structure consists of a “Core”, which has an
insurance license granted by the Guernsey Financial
Services Commission “GFSC”. The Core can issue
an indefinite number of Cells which are separately
approved and licensed by the GFSC to provide captive
insurance to the owners of the individual Cells. As
each cell is legally segregated, it has its own assets and
liabilities and the balance sheet of one cell cannot be
co-mingled or used to meet the liabilities of another.
The physical assets are not held in the Cell. Each Cell is
independently audited with no consolidated reporting
at Core level.
Each Cell has its own captive insurance programme
that is tailored to meet the owner’s individual
requirements. The same Cell can be used for several
categories of insurance. This “bundling” of risks into
a single policy can significantly ease the burden of
administration and benefit from the PCC Core’s overall
reinsurance market pricing and reduced brokerage.
However, if preferred or volume and value justify the
business case, individual Cells can be used for different
categories of insurance.
A Cell must meet specific solvency requirements
based on the risks underwritten and any risk retained
within the Cell. The owner, therefore, has the ability
to fund any smaller losses from the capital of the Cell,
which can accumulate over time from the savings
due to the lower costs of re-insurance. Typically the
owner will continue to pay premiums at the same
level as previously, especially if this is tax deductible,
but as the costs of the re-insurance is lower than the
current premiums, this creates the surplus within the
Cell. The greater the amount of the smaller claims the
owner is prepared to self-fund, the greater the savings
as insurance companies penalise clients that make
smaller claims.
The Cell owner can decide to reinsure all the risks
rather than self-funding the smaller claims. The Cell
is thus used for re-insurance arbitrage to benefit from
the lower insurance premiums available from the reinsurance
market. If no risk is retained in the Cell,
there is no minimum capital requirement at Cell level.
Private Captive Insurance PCC “PCI” is a licenced and
regulated insurance company in Guernsey.
WWW.SATOCONSULTANTS.COM
108