Chris Le Conte of Robus Risk discusses the continued success of protected cell companies (PCCs) in Guernsey.
Oh no, not another PCC article, I hear you cry! Well I am afraid so, and with good reason. The statistics for last year, i.e. calendar year 2013, tell us the continued strength of PCC business in Guernsey – PCCs and PCC cells were 77% of all new business in Guernsey last year. Here at Robus we followed this trend and in fact, by our reckoning had 28 cells licensed in 2013, making up almost half the 63 licensed in Guernsey in that period.
So PCCs are in our blood, and I speak both as a Guernseyman, and a Robusman. Why the on-going popularity?
PCCs rather than standalones – there's no reason not to
When setting up a new vehicle, our view is that you may as well go down the PCC route, just because – why do anything else? The costs of a PCC with no cells are exactly the same as a standalone vehicle because at its basic level a PCC is a standalone vehicle. This covers capital, regulatory fees, independent NED fees, audit fees and insurance management fees. A business can write business through the core exactly as if it was not a PCC entity. So given that a PCC could offer future flexibility, the first question I often ask my clients is 'why not'? Some PCCs are formed, therefore, without initially utilising cells or utilising just one cell. Some clients, of course, still prefer a standalone; they just cannot see when they would want or need to use a cell structure and/or they are concerned at confusing counterparties by having to explain what a PCC is and how they are utilising it.
These are perfectly valid reasons not to have a PCC structure. Of course, a standalone can be converted to a PCC at some point in the future too if the need arises. But in general our recommendation is to consider forming as a PCC initially 'just in case'.
PCC cells – still a great concept
Swift to form and swift to close
PCC cells are normally faster to set up than standalone vehicles, because the information required to the Guernsey FSC and consequently their review time is reduced. The corporate structure of the PCC, the board and the auditors, these things are already known and accepted, so a cell application can focus purely on the business plan and ownership of the cell itself.
There is speed of exit too. For a standalone the insurer needs to have liabilities removed and then must go into a liquidation process. For a cell there is no liquidation; once the cell has been emptied of assets and liabilities it can be simply closed through a board resolution.
Value for money
The costs associated with cells are reduced compared to standalone vehicles; regulatory fees are materially reduced and other costs are generally shared in a PCC and again should be lower. Insurance management fees for a single cell should be lower than for a standalone because the manager generally has less work to do as there is only one corporate structure for multiple clients.
Minimum barrier to entry
We rarely see it used but as the minimum capital of £100,000 required for a Guernsey insurer applies to the PCC as a whole, the capital of a cell can be less than that.
For a client, management time expended on their insurance/reinsurance vehicle can be brought down, specifically around board meetings, because the client will not have representation on the PCC board. Periodic strategy or planning meetings can of course be held but timing is entirely within the client's remit as opposed to the relative formality and rigour of a full board process.
PCC structures offer flexibility; an insurance licensed PCC can also, with regulatory approval, form cells not undertaking insurance business, for example offering guaranties or indemnities or participating in ISDA swaps or similar structures. These structures can also be facilitated in standalone vehicles but we are of the view that the regulatory oversight of PCCs is a good thing and gives comfort to third parties that business is occurring in a well-regulated environment.
PCCs rather than ICCs – almost always
Guernsey, of course, provides an incorporated cell company (ICC) framework as well as a PCC framework.
Incorporated cells (ICs) are actually very different to PCC cells, given that they are legal entities in their own right. One advantage this brings is that ICs can contract with each other while PCC cells within the same PCC cannot.
Historically ICs had the potential advantage of being 'floated off' from their umbrella ICC to become true standalones. However, under revised Guernsey legislation this is now available to PCC cells also.
Against this, costs of ICs are somewhat higher than PCC cells and administration is certainly more burdensome. So, all in all here at Robus we most often favour a PCC structure over an ICC, although there are specific occasions when an ICC format may be of value.
The rise of ILS
As has been well documented by Guernsey Finance and others, the insurance-linked securities (ILS) market has driven a lot of the growth of PCCs and ICCs in Guernsey, particularly in 2013. Certainly here at Robus our
Hexagon PCC Group, led by one of the world's leading PCC experts, Justin Wallen, has been very active in that sphere and we already see that continuing in 2014.
It's not all just ILS though
ILS may have led the way in terms of number of transactions, but that is not to say there isn't other business activity also; we have seen a variety of cells formed in 2013. PCCs and/or cells are ideal for MGAs and brokers looking to participate in capacity provision and we expect further activity in that sector in 2014.
Looking deeper into the Guernsey statistics as set out on the Guernsey FSC website, tells us that PCCs and ICCs are driving all insurance growth in Guernsey, certainly in terms of number of licensed entities. In the case of standalones, while 10 new licences were issued in 2013, 10 were also surrendered, so that market continues to appear quite flat. I have no doubt that Guernsey's love affair with PCCs and cells will continue in 2014, and our view at Robus is that that is quite right. While they are by no means new, having been around now for almost 17 years, PCCs remain a fantastic tool that will stand the test of time and continue to be valued by those interested in Guernsey insurance and reinsurance structures.
An original version of this article was published in Captive Review's Guernsey Report 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.