Protected Cell Captive Insurance

Rather than pool its insureds’ risks, a rental captive may keep a separate underwriting account for each insured participant. In some domiciles, these accounts are legally separated or protected, and the terms cell captive or protected cell company (PCC) are used, indicating that each insured’s assets are kept in its own walled-off cell. The assets in one participant’s account may not be used to pay liabilities in another unless the respective participants have entered into an agreement to do so.

PCCs are essentially rental captives with a special provision that legally separates the assets and liabilities in each insured’s account or “cell” from those of every other participant’s “cell.” The structure is essentially the same as that for a rental captive with no risk sharing, but PCCs have the additional benefit of statutory protection. PCCs actually guarantee that each cell within the company will be shielded not only from sharing capital and surplus with other cell owners but also from any legal action brought against another participant. Even in the event of a cell liquidation, there is no legal recourse against any other cell in the company.

The key purpose of insurance regulation is to protect policyholders first and foremost, as well as investors and other stakeholders. A captive is different from a commercial insurance company, because it just serves its parent company. Therefore, captives are regulated differently than traditional insurance companies that serve the public. Like traditional insurance companies, captives are regulated by the state in which its headquarters are located. Captives can generally write most business insurances but are typically prohibited from offering personal lines coverage.  This important difference allows regulators to deal with more sophisticated insurance transactions.

Each domiciliary regulator requires an annual audit by an independent CPA firm (or its equivalent) with industry-specific experience in the insurance industry. In addition, many domiciliary regulators require a formal actuarial review of the captive’s policy on pricing and loss reserve methodology.