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Protected Cell Companies – An Efficient Solution for Changing Times

Protected cell companies (PCCs) have offered a cost-efficient alternative to captives since their inception in the late 1990s in off-shore jurisdictions. With Solvency II, PCC structures are now emerging in on-shore domiciles, offering benefits on all Solvency II pillars to owners.

20/05/2019 · 3 minute read

Solvency II came into force in 2016 and has both proved to be a regulatory burden on captive insurance companies (captives) and added to the cost of running one. Protected cell companies (PCCs), however, have offered a cost-efficient alternative to captives since their inception in the late 1990s in off-shore jurisdictions. With Solvency II, PCC structures are now emerging in on-shore domiciles, offering benefits on all Solvency II pillars to owners.

So what is a PCC, why are organisations using them, and how can risk analytics help inform organisations to determine the most financially efficient deployment of a PCC as part of their risk finance solution?

What is a Protected Cell Company?

A PCC is an insurance vehicle whereby multiple ‘cells’ are connected to a core; creating a single legal entity. A ‘cell’ is an insurance facility that can be rented by a single company to underwrite its specific risks – a form of risk retention vehicle. The PCC sponsor sets up the core, which manages the insurance activities of the cells. The assets and liabilities of each cell are segregated from the other cells. 

How Does a PCC Compare to a Captive?

PCCs may offer a cost, capital, and time efficient solution to companies. Also, the core manages the majority of the governance and regulatory requirements. For this reason, establishing a PCC cell also reduces the regulatory burden of Solvency II, in comparison to a standalone captive. Solvency II requires that all companies hold a minimum capital requirement (MCR) of EUR2.5 million. The MCR of a PCC is held centrally by the core and each cell is only responsible for holding its own solvency capital requirement (SCR); which could be less than the MCR. Additionally, since a PCC is a single legal entity, only one set of the Pillar 3 regulatory reports need be produced — which is done by the core on behalf of the cells — freeing up each cell from the time and expense required to prepare these reports.

Similar to captives, a PCC domiciled in the European Economic Area would have passporting rights to underwrite insurance risks across these territories.

How can an organisation ensure that they use a PCC optimally?

Aside from the ‘actuarial function’ responsibilities, risk analytics plays a vital role in an organisation’s overall risk finance strategy — including the setting of retention levels within or above a PCC (for example, including any business unit retentions and direct insurance purchasing). By using risk analytics to model an organisation’s expected insurance losses – and then overlaying a range of risk financing structures and their associated financial costs and benefits – an organisation can identify the optimal use of a PCC as a risk financing tool.

Recognising a greater uptake than ever seen before across the EU, Marsh & McLennan Companies has built on its existing PCCs in the Isle of Man and Washington DC by setting up a PCC in Malta; in a bid to support clients who require passporting rights to self-insure risks in the EEA. The PCC, named Mangrove Insurance Europe Limited, established its first cell in May 2018, for which Marsh Ltd. has taken on the role of ‘actuarial function’.

Meet the author

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Holly Deakin

Senior Vice President, Marsh Risk Analytics

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