EU Insurance Protected Cells - Captives on a Budget


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The use of EU onshore Protected Cells as a capital efficient, cost-effective, flexible and secure alternative to owning a standalone insurer or captive. Presentation by Ian-Edward Stafrace to the UK IRM Global Risk Management Professional Development Forum 2011

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EU Insurance Protected Cells - Captives on a Budget

  1. 1. EU Protected Cells Captives on a budget Ian-Edward Stafrace MIRM FCII PIOR Chartered Insurer Risk Analyst & International Business Development Atlas Insurance PCC Ltd, Malta 22 March 2011 IRM Global Risk Management Professional Development Forum
  2. 2. Agenda
  3. 3. Why form your own Insurance Vehicle? As a captive risk financing vehicle &/or To sell insurance to third parties
  4. 4. Why Captive? Traditional Insurance 100%* of Premium Insurer Profits Retained by Insurer vs Captive Catastrophe Risk Premium Your Business Risks beyond risk appetite reinsured Self Insured Premium All Profits Back to You *On average only approx 65% of Premium is used to pay claims Re/Insurer Your Cell/ Captive
  5. 5. Why Captive? 1. Reduce Cost of Insurance 2. Long Term Cover 3. Risk Management Strategy
  6. 6. Why not just self insure? In Self Insurance With Captives/Captive Cells • Reserves treated as profits & taxed • Premiums tax deductible as expense • Usually internal transfer with no reserve for large claims • Underwriting & Investment Profit help create reserves allowing higher retention • Temptation to strip funds • Reinsurance market access
  7. 7. Why Sell Insurance To Third Parties? 1. Underwriting Profits + Investment Income 2. Bolt-on To Non Insurance Sale 3. Knowledge Of Product, Market & Profitability 4. Avoid Market Uncertainty
  8. 8. Only for Large Organisations? Problem 1: Capital Requirements Problem 2: Fronting Costs Problem 3: Costs to run a separate company
  9. 9. SOLUTION: Cell in a Protected Cell Company (PCC) Purpose  Segregating cellular assets & liabilities  Allow different owners with varying interests to participate in one company  Insurance Cells set up with less capital as minimum requirements apply to PCC as a whole PCC Cell Cell Core Cell Cell
  10. 10. Where? PCC Domiciles Malta Only EU State To Have PCC Legislation Approachable Regulator EU Single Passport English, Time Zone, Flight Connections EU Compliant Regulations Tax Efficient Over 40 other domiciles have PCC or similar legislation: Gibraltar, Guernsey, Isle of Man, Bermuda, Cayman Islands, various US states...
  11. 11. Protected Cells: “Low-cost” Alternative To Owning A Stand Alone Insurance Company Or Captive No Minimum Guarantee Fund (MGF) Required • Complying with EU directives through PCC core capital • Example: General insurer with €1 million annual premium Minimum capital needed: EU Standalone Insurer EU Protected Cell
  12. 12. Protected Cells: “Low-cost” Alternative To Owning A Stand Alone Insurance Company Or Captive No Fronting Required for EU/EEA Risks Reinsurance access for smaller investors Lower Running Costs vs. Stand-Alone companies
  13. 13. Insulation from other Cells/Core  Cell has its own income and expenses  Where cell liability arises: 1. Assets of that cell used 2. If insufficient PCC‟s core assets used 3. Use of assets of other cells prohibited  Cellular dividend & tax independence Cell Cell Core Cell Cell
  14. 14. Benefits of Protected Cells (in Malta ) Lower Capital Direct Writing Into Europe No Setup of Separate Company Easier Access To „Captive‟ Solution Cell Assets Segregated No Board Of Directors Reinsurance For Smaller Entities Favourable Tax Regime Shared Administration
  15. 15. Cell Management PCC Board of Directors Cell A Cell B Cell Underwriting & Investment committees Cell Underwriting & Investment committees 3rd Party Insurance Manager
  16. 16. Why own an EU based Protected Cell? Captive Cell Fronting Cell Third Party Writing Cell Commercial / affinity groups looking for a captive risk financing vehicle Captive owners wishing to reduce EEA fronting costs Any business planning to sell insurance to third parties …and any combination of the above
  17. 17. A) Captive Cell  Lower access point to captive solution  Special purpose applications  Access to reinsurers & specialist risk-bearers A protected cell in Malta allows cell owner to: Insure Directly Own Risks In EEA Sell Insurance To Third Parties In EEA Insure on Non-admitted Basis Risks Globally Where Allowed Reinsure Risks Outside EEA
  18. 18. Example 1 French Manufacturer Desire  Reduce insurance cost & improve risk financing Facts  Multiple Factories, Stores & Offices in France  Classes: Property & Non Compulsory Casualty  Premium €1,000,000 (approx 30% Property)  Loss ratio < 35% past 5 years A) Captive Cell
  19. 19. Example 1 French Manufacturer Possible Solution: Property: - Excess €50,000 - Reinsured above €200,000 any 1 loss/event PCC Cell owned by Manufacturer Injects capital of €410,000 Third Party Manager? Yes Casualty - Reinsured above €100,000 any 1 loss & €300,000 in aggregate Cell Agreement: PCC + Manager + Cell Owner Management Agreement: PCC -> Manager No PCC Manages Cell Cell Agreement PCC + Cell Owner Cell Committee/s Members 1 PCC + 1 Cell Owner Cell Committee/s Members 1 PCC + 1 Cell Owner + 1 Manager A) Captive Cell
  20. 20. Example 2 Association of Medical Professionals Desire  Wants more control over PI cost for members Facts  Premium €900,000  Loss ratio < 35% past 4 years  Single event/series exposure A) Captive Cell
  21. 21. Example 2 Association of Medical Professionals Possible Solution PCC Manages Cell Cell owned by Association of Medical Professionals Injects capital of €370,000 Reinsured above - €30,000 any 1 loss - €350,000 in aggregate Cell Committee/s Members 1 PCC + 1 Association Official Agency Agreement PCC + Association Third Party Claims Handler Agency Agreement A) Captive Cell
  22. 22. B) Fronting Cell  Cells in Malta can be used as fronting facilities  Fronting cell reinsures most/all of the risk  Reinsurer could be a non-EU captive Fronting Cell Example €1 Million Annual Premium -- Required Cell Capital €90,000 --
  23. 23. C) Third Party Writing Cell  EU cells offer direct access to European market  Policyholder Protection Ensured Possible Products • Bolt-on products to non insurance sales • Short tail risks - E.g. Extended warranty, property damage, theft, marine cargo, travel cancellation… • Long-tail risks also possible
  24. 24. Example Portable Electronics Retailer Desire  Retain underwriting profit & have greater control over pricing / commissions / availability Facts  AD & Theft cover sold to purchasers  Placed with external insurer in return for commission  Premium €750,000  8 year claims history - Loss ratio < 40%  No event or single large risk exposure C) Third Party Writing Cell
  25. 25. Example Portable Electronics Retailer Possible Solution PCC Manages Cell Cell owned by Retailer Injects capital of €135,000 Broker Intermediary? Yes Agency Agreement PCC -> Broker Yes Claims Handling Agreement PCC -> Retailer No Agency Agreement PCC -> Retailer Retailer Handling Claims? No Claims Handling Agreement PCC -> Third Party (E.g. Broker) C) Third Party Writing Cell
  26. 26. Next Steps to consider Cell Route Indicative Back of the Envelope Study – Some Key Considerations Premium Loss Ratio (Claims/Premium) Available Capital/Collateral (To Capitalise Cell) • Ideal: €1m+ •  Loss Ratio =  Profit Retained &/or  Insurance Spend • Typical minimum 18% of Gross Annual Premium • ↕ depending on risk, inclusion of liability, loss ratio, reinsurance, buffers Risk Appetite • Lower risk appetite may mean higher reinsurance purchase but at lower cost than primary market Other Factors • Fluctuating primary insurance prices, terms & availability • Risk financing flexibility • Improved risk information flow, etc Engage the industry to determine viability & options available  Brokers, PCCs (Independent/Managed), etc Domicile Choice
  27. 27. Website: Email: Phone: (+356) 23435255 Atlas Insurance PCC Ltd 47-50 Ta' Xbiex Seafront Ta' Xbiex XBX 1021 Malta