Ivy Jermyn-Buckley and Marian Fenton of AIG – which has a PCC established in Guernsey since 2007 – share their knowledge of PCC and cell formation in Guernsey.
Today, as the industry continues to develop and evolve, the Protected Cell Company (PCC) structure is receiving a new focus. Industry statistics reported an increase of 60 protected cells and four incorporated cells in Guernsey alone in 2012. PCC's can trace their origin to historical contractual cell structures. The need to ring fence assets and liabilities by statue rather than by contract gave rise to the development of the PCC concept, which originated in Guernsey and was introduced into Guernsey law in 1997. The PCC itself is a single legal entity made up of a 'core' and any number of cells. The cell is not a separate legal entity, and therefore it cannot transact with another cell within the same PCC or the PCC Core, but is legally separated from other cells in the PCC and can be owned by the PCC owner or by a third party. The assets of one cell are not available to shareholders or creditors of another cell or to shareholders or creditors of the core.
Who would establish a PCC?
A PCC is often set up by insurance or reinsurance companies or brokers wishing to offer a facility to their existing clients or to others who otherwise would not have access to such a facility. Alternatively, individual companies may wish to have their own PCC to manage their own risks and use the PCC Cell structure to segregate these risks by territory, affiliate or even profit centre.
Who would establish a cell?
Cells are usually set up by companies who are trying out the captive concept for the first time and do not, as yet, want to commit or are in a position to commit, to creating their own standalone vehicle with the associated costs and management time that goes with doing so. The advantages of using a cell are numerous:
- Allows smaller companies to have access to the captive market as the capital required is lower than that required for a standalone captive.
- Start-up and operating costs are lower due to the sharing of services provided through the PCC concept. As the cell is not required to have its own board of directors, instead being managed by the board of the PCC, this reduces the sponsors' time and management involvement needed.
- Protection by statute against third party claims through the PCC legislation.
- Set up of a cell (see table) is easier as the framework is already in place through the PCC. It is also easier to exit the cell than a stand-alone captive.
- Provides flexibility – can segregate run-off business from active business or segregate and better manage the risks of a subsidiary which a group may wish to divest of at some future point.
What capital is needed to form a cell within a PCC?
The PCC owner has already contributed the required minimum capital for the legal entity. The cell, similar to a traditional captive, will still have to meet the required margin of solvency. For general insurance in Guernsey this is based on the greater of 18% of written premium (up to £5m, and 16% thereafter) or 5% of loss reserves as provided for in the Insurance Business (Bailiwick of Guernsey) Law, 2002. Any risk gap (the difference between exposure, capital and net premium) is generally required to be covered. However, if the premium and capital fully fund the cell's exposure, i.e. no risk gap or a very low risk gap, a solvency waiver may be obtained. This will be dependent on the attitude of the regulator in the PCC jurisdiction.
Some PCC owners may allow the risk gap to be covered by the core assets of the PCC. Usually a further premium will be charged for this, some form of security will be required and a "recourse"1 agreement will be put in place.
In Guernsey, there is no automatic recourse to the core assets and these are protected from creditors of the PCC who are not creditors in respect of the core. Some domiciles do allow automatic re- course to the core under certain conditions, such as Malta captives writing non-compulsory business.
1 A recourse agreement is a written agreement between a PCC and a Creditor which provides that protected assets may be subject to a liability owed to a creditor.
Setting up a PCC in Guernsey
A company can be incorporated as a PCC or an existing company can be converted into a PCC, either way with the prior consent of the regulator. The procedure for incorporation of a PCC is almost the same as for a standalone insurance or reinsurance company.
- An application including a business plan and financial projections is submitted to the regulator for approval;
- On receipt of regulatory approval, the company is formally incorporated and registered with the relevant authorities;
- A meeting of the directors is held to issue shares, agree policies, governance structure and the insurance programme, and to appoint:
- Company secretary
- A licence will be issued by the regulator to allow the company to commence trading per its business plan once the regulator receives a copy of the applicant's certificate of incorporation and Memorandum and Articles of Association (which must state that it is a PCC), confirmation that the share capital has been received and/or that letters of credit and subordinated loans are in place.
- The name of the PCC must include the expression either "Protected Cell Company" or "PCC".
- Core shares are issued to the PCC investors granting voting and distribution rights over the core capital only.
Steps in the creation of a cell within a PCC
- Initial meetings will be held between the prospective cell owner and the manager and or owner of the PCC to discuss the feasibility of owning a cell and insuring certain risks. Typically the owner of the PCC will also be the manager. The structure of the (re)insurance programme is discussed and an outline business plan drawn up for submission to the PCC underwriting committee.
- Assuming the programme is agreed in principal with the PCC underwriting committee, the PCC owners will work with the sponsors of the cell to complete all documentation needed to submit an application for a (re) insurance licence to the regulator.
- It is important to have an early meeting with the regulator to introduce the cell sponsors and discuss the business plan for the cell. This meeting is an opportunity to discuss any possible areas or issues that may cause delay or prevent the cell being formed. Those holidng 'prescribed positions' as defined by the Guernsey regulator for the cell will be required to complete a personal questionnaire which will provide evidence of their suitability for the proposed role.
- The questionnaire along with the final business plan (both narrative and financial projections) and cell application form will then be formally submitted to the regulator for approval.
- The application process normally takes up to eight weeks.
- Once approval has been obtained, the PCC owner will then simply resolve to create a new cell. Cellular shares in the form of redeemable preference shares are issued to the cell owner. These shares have limited status with no voting rights and allow dividends to be paid.
- The cell is registered with the relevant authorities before becoming active.
- The prospective cell owner is required to enter into a cell management agreement with the PCC board and will be bound by the Memorandum and Articles of Association of the PCC.
Use of PCCs
The continued growth of protected cells in Guernsey is a strong endorsement of both the domicile and the cell concept. We expect this trend to continue in 2013 as an alternative to a standalone captive, providing significant cost and capital savings.
IVY JERMYN-BUCKLEY - underwriting manager for AIG Insurance Management Services – European operations with responsibility for all underwriting aspects of managed captives and new business prospects. She is a chartered insurer with more than 20 years' experience of several insurance and reinsurance markets.
MARIAN FENTON - is the regional director at AIG Insurance Management Services – European operations with responsibility for financial and operational oversight. Marian is a chartered accountant with almost 20 years' experience in the Irish domestic and International insurance industry.
Originally published by Captive Review, February 2013
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.