John Rowson, Executive Director at Aon Risk Solutions in Guernsey, considers the role of the traditional captive.

Recently at Captive Live UK, a fellow panellist advised that over 90% of new business in Guernsey was through cells and similar proportions of new business were being generated by cells in other jurisdictions with appropriate legislation. Furthermore, domiciles without cell legislation were stagnating and captive numbers reducing across the board.

After the discussion I was approached by a delegate who asked were "cells the death knell of traditional captives?".

I had also been extolling the virtues of cells being the head of White Rock Guernsey, the Aon owned and managed protected and incorporated cell companies. But was still slightly surprised by this comment, however, in hindsight it was very logical given the statistics. It is worthwhile interrogating the numbers a little closer and asking how we should look at the statistics given the old adage "lies, damn lies and statistics".

It is important to differentiate between:

1. cells in third party Protected Cell Companies ("PCC") or Incorporated Cell Companies ("ICC") where the shareholder abdicates control to the directors appointed by the core shareholders, i.e. pure cell business; and

2. subsidiary PCC and ICC companies where corporations chose a cell structure to accomplish their risk management objectives. In this instance they continue to have control as they are both the core and cell shareholders with the ability to appoint directors and participate in board meetings.

Subsidiary PCC or ICC structures are often preferred for the convenience they provide; allowing geographical or divisional risk management objectives to be undertaken by separate and legally distinct cells. This not only provides transparent risk management information but also allows for more efficient separation if a division is divested, especially if an ICC was the preferred structure (as shown in the diagram).

This use of cell companies constitutes an evolution of traditional captives as opposed to an end to the captive concept.

Only the use of a cell in a third party PCC or ICC would in the author's opinion signal the death knell of traditional captive business. Traditional captive business requires frequent captive board meetings, locally appointed independent directors and auditors contributing more to the island economy.

The Statistics

As highlighted by my fellow panellist the trend of jurisdictions with cell legislation to see greater numbers of cells and less captive formations is widespread and Bermuda, Guernsey and Malta were specifically highlighted. Here I will focus on Guernsey to try and uncover the underlying reasons, although I am sure similar issues could be identified elsewhere.

During the 12 months ending 31 January 2013 20 captives (referred to as companies) surrendered their licenses whilst only 2 additional captive licenses were issued. This net decrease of 18 companies was a worrying trend leaving a total 239 captives licensed in Guernsey. Following the financial crisis in 2008 these have not been typical times and Guernsey has seen an increased number of captive surrenders coming as a result of consolidation, companies ceasing trading and shareholders requiring the accrued underwriting profit and capital to support their core business or dwindling dividends.

The number of licensed captives locally has been incurring a slow but steady decline from the 291 captives licensed on 31 December 2008. However, taking data for the 4 year period until 31 December 2012 there have been an additional 27 companies licensed in Guernsey. This attests that there remains a place in the risk manager's arsenal for standalone captives. Indeed risk consultants continue to recommend them as the ideal solution for many clients.

Cell business licenses are showing healthy growth with 93 new protected cells being added in the 12 months to 31 January 2013; including a net gain of 3 incorporated cells there was overall growth of 65 cells.

The incorporated cell structure is gaining increasing recognition. Whilst the numbers remain small with 5 incorporated cell companies and 18 ICs, local managers are reporting that a majority of new business enquiries are for this structure.































Total Companies






Total Cells






If you look at the statistics going back to 2008 it shows the impact of the financial crisis on cell formations too. Surrenders exceeded additions during 2009 with growth in the industry only really starting to pick up in 2011 before the stellar growth in 2012 which appears to be continuing into 2013 with 4 more cells being added in January alone. Speaking to industry insiders interesting opportunities are arising more frequently, suggesting that the worst of the market impact has past.

It is also interesting to note that the number of licensed cell companies, despite the growth in individual cells, has remained fairly static throughout the period which suggests captive and first party PCCs and ICCs are suffering a longer lag following the crisis and supporting the earnest delegate's question.

Underlying Trends

Insurance Linked Securities and Collateralised Reinsurance

A source of significant cell growth, especially for incorporated cells, has been Insurance Linked Securities ("ILS"). These investment managers work with pension funds, corporate investment managers and wealthy individuals to provide non-correlated high return investments based on peak peril catastrophe risk.

Hurricane Andrew in 1992 put such considerable pressure on the capacity of the non-life reinsurance market, that it prompted an increased focus on the concept of securitising insurance risk through capital markets. This ultimately led to the convergence of the reinsurance and capital markets with the introduction of ILS.

ILS are financial instruments which allow risk to be transferred from the insurance market to capital markets. They essentially permit an insurer to purchase additional protection (or capacity) for low frequency high severity losses, such as natural disasters. Catastrophe Bonds ("Cat Bonds") were the traditional vehicles used for this transfer between the insurance and capital markets. More recently the ILS funds have been using collateralised reinsurance (pictured below) as a means to participate in the reinsurance markets and for this Guernsey cells have been an effective vehicle.

Guernsey as a jurisdiction started conducting this business in 2007 and has experienced steady growth. As ILS managers have looked to diversify their service provider concentration Guernsey has benefitted from its proximity to London, favourable time zone, proportionate regulation and experienced insurance management professionals. The most common structure is a separate cell for each reinsured which has created a demand for cells and has supported the growth in the number of licensed cells, as well as introducing its own innovations to the island.

During 2012 the Channel Island Stock Exchange ("CISX") listed its first Cat Bond. This private placement cat bond was part of a dual listing on both the CISX and Vienna exchange. The transforming vehicle was an Aon managed IC which issued a traditional reinsurance policy collateralised by a reinsurance trust account. The capital to support the collateralisation was raised through issued notes which were subsequently listed on the CISX.

NewBuy Housing Scheme and MI New Home Scheme

It has already been widely reported that the Governments of England, Wales and Scotland have supported the incorporation of two protected cell companies to support the growth of the UK new build housing sector. These companies have necessitated the formation of numerous protected cells owned by both the banks and home builders that have created numerous licensed cells.

The Answer

In summary the trend for cell formations in Guernsey has been exceptionally positive over the past 12 months and there are strong indicators to suggest this will continue through 2013. However, the captive (whether structured as a limited liability company or a cell company) remains a fundamental risk management tool for sophisticated insurance programmes and will weather the storm of 2008 and the vogue for cell structures in third party PCCs to remain an important industry in Guernsey and elsewhere for years to come.

Originally published by Captive Review, May 2013

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