JUN 8 – 10, 2015
Segregated Accounts and Other
Alternative Risk Transfer Structures
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Segregated Accounts and Other
Alternative Risk Transfer Structures
Today’s Speakers:
• Phil Stevens, Principal, Rowayton Risk Consulting
• Jim Bulkowski, Senior Manager, Advisory Services,
Ernst & Young LLP;
Moderator:
• Mike Douglas, Director, Business Development, Aon
Global Risk Consulting/Captive Insurance
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Our Topic Today
Discussion of the increasing
development and use of Segregated
Accounts as a means of alternative risk
transfer for a wide variety of covers.
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Agenda
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•
•
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Back to the Future – How did we get here?
Introduction to Cell Companies
What’s In a Name?
What IS a Cells Company?
Incorporated Cell Captives
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Back To the Future – How Did We Get Here?
What as the genesis of segregated accounts companies we use today?
• Rent-A-Captives;
• Started in Bermuda in the 1970’s;
• One insurance company that rented Its insurance License to
multiple participants;
• Segregation of assets and liabilities was by Contract
• Led to the potential for renter “A” to have to be bailed out by other
Renters and the Rent-A-Captive owner if insufficient funds in Renter
“A’s” rented space.
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Rent – A Captive
BAIL OUT!
CORE
CAPITAL
BAIL OUT
Preferred Shareholder s (Clients)
PF
1
PF
2
BAIL OUT!
PF
3
PF PF Bust
PF
4
5
66
PF PF
7
8
PF PF
9 10
PF
etc...
BAIL OUT!
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Segregated Account Companies
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Legislation first introduced in Guernsey in 1997;
•
Conceived a corporate entity in which separately identifiable cells are
created for the same or separate cell users under which the assets and
liabilities of each cell are legally separated from each other
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One legal entity – split into the core and multiple cells
•
Legal segregation of cells – each with a specific reference
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2 classes of shares – core and cellular
•
Unlimited number of cells
•
PCC’s now utilised in almost 40 different domiciles and very much an
established concept
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Segregated Cell Captive
Preferred Non-Voting Shares (Clients)
CORE
CAPITAL
Cell
Cell Cell Cell Cell Cell Cell
Bust Cell Cell Cell Cell
Cell Cell
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2
3
4
5
66
7
8
9 10
10 etc...
PROTECTED
PROTECTED
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What’s In a Name?
Depending on the domicile:
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•
•
•
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Segregated Account Company (Bda)
Segregated Portfolio Company (Cayman)
Protected Cell Company (US and Gib & Guernsey)
Series LLC’s (Some US Domiciles)
Sponsored Cell Captives (Vt)
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What IS a Segregated Cell Company?
Externally:
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One Company/incorporated entity
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(Statutory Accounts, Tax Treatment)
Internally:
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Complete autonomy of individual cells
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One cell is not liable for the obligations of another cell or the core. Cells are set up,
approved and closed individually.
The Core
• Capitalised with ordinary voting shares by the Sponsor
The Cells
• Capitalised by the owners of the respective cells issuing non-voting redeemable
preference shares connected to the cell with a specific cell reference
• Each cell has an individual cell reference e.g. cell A, cell B, cell C etc
• This is required by law and all bank accounts/contracts entered into by the cell must
refer to this specific cell reference.
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Traditional Segregated Cell Structure
Shareholder XYZ
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Typical Cell Uses
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Pre-loss risk funding for retained risk
•
Retain profitable premiums
•
Used for access to reinsurance
•
Used to provide fronting for certain risks.
•
Agency Captives (PORC’s)
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Used for Special Purpose Vehicles
– ILS
– Transformers
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Cell Uses – Practical Examples
Traditional
• Inland Transit (e.g. Stock Throughput)
• Punitive Damages (fronting)
• Difference in Conditions (fronting)
A Little Less usual
• Catastrophe/SPV
• Professional Indemnity
• Political Risks
• Environmental Risk
• Extended Warranty
• Bonus Protection (fronting)
• Wealth Transfer (SEE NEXT SLIDE)
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Segregated Cell Used for Wealth Transfer
Shareholders:
Children or Family
Trust
Owners:
Parent(s)
Dividends
Reinsurance
Premiums
Premiums
Organization
(Insured)
Commercial
Carrier
831 (b)
Segregated
Cell Captive
(Insurer)
(Reinsurer)
Insurance
Policies
Coverage and
Claim
Payments
Claim
Payments
Investments and
Potential Underwriting
Profit
Claimants
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Advantages of Cell Captives
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•
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Direct access to reinsurance markets;
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Greater structure and control over risk
management and financing;
Lower start up time to form a cell in
an existing facility
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Continuity and breadth of insurance
coverage;
Lower capital requirements than a
wholly owned captive
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Reduced volatility on insurance spend;
Almost all the advantages of a wholly
owned captive are mirrored in a renta-captive / protected cell captive;
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Lower administrative costs than a
wholly owned captive;
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Captures profits otherwise lost to the
insurer ;
•
Reduces the dependency on
commercial markets;
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Potential for tax benefits
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Disadvantages of Cell Captives
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Cells must be fully funded with premiums
and LOC. or reinsurance;
•
Where a cell is fully funded only with
premium and LOC – the cell may not be
classified as insurance for tax purposes;
•
Captive is not owned by the individual
renters and so any decision to pay dividends
etc. must be approved by the cell captive
owner;
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Rent-a-Captives have a credit element risk
where all renters may be required to bail out
a bankrupt cell. – Protected Cell structures
avoid this and there is no sharing of risk.
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Incorporated Cell Captives
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IC formed by resolution and application to the Companies Registry
IC is a legal entity in its own right – separately incorporated and licensed
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•
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IC can be converted into a standalone company
Separate audit required for each IC
Slower to form and can be more expensive to set up and administer
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ICC Recap - 2006
 The core can be used as a
holding company
 Cells can transact with
each other
 Single Board of Directors,
allowing delegation of
management
responsibilities
 The shareholder has
ultimate recourse and
control as cell can be
separated from the ICC
structure
Shareholder XYZ
Shareholder XYZ
 Greater accounting and tax
certainty – i.e. subsidiary
and CFC
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ICC – Potential Uses
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As an alternative to Segregated Cells or Wholly Owned Captive
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A more cost effective SPV than a full company subsidiary
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Complete certainty of ownership and liabilities
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Incubator cells for full blown captives
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Companies who want a separately incorporated vehicle but don’t want the
time/expense of the Board meetings
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Questions / Discussion
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