Structure and nature of the cell
The cell is owned and controlled jointly by the client and the cell captive insurer. It is brought to life through a contractual relationship formed by the insurer, and a separate class of preference shares issued to the cell owner, following an infusion of capital from the cell’s side.
The nature of the cell captive is governed by a cell shareholders’ agreement, which sets out the rights and obligations of the preference shareholder, namely the cell owner, and the insurer. This includes, amongst others, details of the insurance business transaction.
Tailored to meet specific needs
Aside from the fact that the cell captive has always suited certain types of insurance, especially third-party insurance by taking on the form of i.e. non-self-insurance business, some of the most pertinent aspects that impact cell captives today include:
- The recent changes in legislation as it delineates the types of businesses that may own a cell captive. Examples include bona fide affinity type insurance schemes and underwriting managers. (As an aside, the cell captive structure eminently suits both the affinity type scheme and the underwriting manager.)
- The clearer rules that have been set regarding cell captives and the ownership thereof as it helps third parties and the cell industry to focus their attention on the right type of cell ownership opportunities out there.
Associated challenges and benefits
The main driver for the majority of prospective cell owners considering cell ownership is the opportunity to ‘own’ the insurance underwriting result of their business in terms of underwriting, pricing and administration.
Not only does the cell facility allow the cell owner access to the underwriting profit they are required to create in a structured and legitimate manner, but deploy capital to underwrite whole risks or a portion thereof without having to be an actual insurance company … this is advantageous in the sense that it’s usually not feasible for an individual cell owner to become an insurer due to size, scale and complexity adherence requirements.
In the underwriting manager space, our market has numerous commoditised as well as niche underwriting managers that have over the years consistently produced good underwriting results. We have also seen first-rate often highly specialised product offerings on the back of outstanding service delivery.
Therefore, underwriting managers who are confident in their ability to produce good underwriting margins for their business would typically benefit from a cell structure; the reason being that it enables them to share in the underwriting profit they generate.
Market outlook and demand
Recent experience seems to indicate a hardening in the reinsurance market on the back of worldwide lacklustre underwriting results for many reinsurers. However, we often see a greater interest from reinsurers to support a book of business underpinned by a cell captive underwriting manager as parties often perceive the arrangement as having an ‘alignment of interests’.
Going forward, Le Roux expects the rationale for the underwriting manager cell captive to remain the same, namely a typically but not always niche, specialist player (concerning their product offering and/or distribution strategy and/or unique selling proposition) that is confident in their ability to produce a consistent underwriting profit throughout the insurance market cycles.
For the affinity scheme cell owner, Le Roux believes the underlying rationale for the cell facility to be the attachment of underwriting profits generated by the business.
The affinity cell captive allows the owner to offer much more to their client base concerning their core and non-insurance offering. It allows them to customise an insurance solution that directly speaks to and adds value to their customer base by meeting their needs and entrenching their core product and service offering.
Warranties provided by motor vehicle manufacturers, credit or lost card protection offered on in-house store cards offered by large retailers or handset insurance offered by mobile network providers, are prime examples.
By: Martin Le Roux, Managing Executive of specialist insurer, Centriq Insurance
Published in Cover magazine edition October “The relevance of Cell Captive in today’s insurance market”