The first party cell captive as a risk management technique

Alfons van der Vyver Executive Head: Risk Finance Solutions at Centriq Insurance Company Limited is talking about a very interesting concept of cell captives, but more particular about first party cell captives, which is a whole different animal by itself.

Risk finance in the insurance industry is a broad concept that encompasses risk management techniques that are offered through various products and structuring solutions, of which a cell captive is one – more specifically, the first party cell captive for corporates. Then there are also some other techniques and products like a structured insurance policy.

The typical client of ours in this case is a commercial enterprise – anything from medium to large to very large corporates and groups of companies.

The need for a business to consider insurance is very obvious. That’s where it starts; it is in the space of considering your risks and what perils you’re exposed to. It starts with a bit more guided thinking about risk management and risk management techniques and how to think about the risk appetite of your company or group of companies.

It’s about how much risk a company is prepared to absorb; it’s about thinking of risk management in that context, risk appetite, the cost of risk, what you’re prepared to spend on managing your risks, etc. It’s about the trade-off between covering the risk in a conventional method, through conventional insurance, and utilising a formal structure to set aside funds to manage your own insurance risks.

It is a formal and legal mechanism of doing self-insurance in a way. So every person, every company is his own insurer to an extent, if you just think about deductibles and excesses. But this is a formal risk management technique, utilising a cell captive insurer’s license and its capabilities in order to do it at a more advanced level.

A cell captive in its legal form is a preference share. A client buys a preference share in our company and that goes with a contract. The preference share agreement (the contract), has rights and obligations. The client has the right to ask us to issue them with insurance policies. That goes with the obligations to effectively provide the risk capital to support the risks taken and in practice it is like owning a mini insurance company, without all the burdensome requirements of having a separate license. There are lots of governance requirements in running your own licence. The cell captive mechanism gives clients access to all the benefits of running their own licence without taking on all of the burdensome requirements.

The benefits of a cell captive include the ability to build up risk taking capital in a separate and formal structure. Another benefit would be the access that it provides to different insurers or reinsurers. So it is a formal facility to set aside risk capital with a benefit of accessing a wider range of markets via the cell captive insurer’s licence, or via intermediaries. There are also different types of investment structures that are available for a client to cover their risks effectively. So these things combine to create a good formula to think more about insurance risk management in a more advanced way.

The client, effectively via the structure, still carries some of the risk.

One of the disadvantages (if you want to see it that way) is that the client effectively provides all the risk capital. However, some see this as an advantage, and that’s the reason why they enter the structure. It requires the client to set aside dedicated risk capital – and that’s the whole idea!

The aim is to find the balance between the cost of risk cover and risk appetite, and risk bearing capacity. A company’s financial position, its balance sheet, does not necessarily permit it to carry unlimited or unmitigated exposure. There might be a difference between what the board sees as their appetite to take risk and what they can actually carry, or what the cost would be to lay off that risk. This type of structure facilitates striking that balance, hitting that sweet spot, between these trade-offs.

Centriq Insurance provide this offering via our intermediated corporate insurance channels. So clients, corporates, businesses, talk to your insurance broker, who can help you to facilitate the setup of the structure with us. The first party cell is a tried and tested method of insurance risk management. It has served large corporates in South Africa very well over time, through the cycles of hard and soft markets.

By Alfons van der Vyver, Executive Head of Risk Finance.

Published in Cover Magazine.

Click here to watch the full video on Cover magazine.