Guernsey pioneered the cell company concept when in 1997 it
introduced the Protected Cell Company (PCC). It has since also
introduced the innovative Incorporated Cell Company (ICC).
In addition, the Island has made legislative advancements
that have created a regulatory environment which allows for
their flexible use.
Guernsey's experience, expertise, flexibility and
creativity mean that it is leading the way in providing cutting
edge solutions to meet clients' complex risk transfer
Transformer Cells These are cells which are
used to convert a capital market instrument, such as a credit
derivative written on ISDA (International Swaps and Derivatives
Association) terms into an insurance contract, such as a credit
indemnity policy in this case.
The benefit of these cells is that they help banks and
capital markets to access reinsurance markets where premium is
generally lower than in direct markets. The cell acts as a
go-between to transact, for example, a credit default swap with
the bank on ISDA terms, and with the corresponding reinsurer by
way of a traditional reinsurance policy, which mirrors the
risks inherent in the credit swap derivative. As the cell
retains no risk, there is no requirement for the cell to retain
any capital, so long as the (re)insurer has a sufficiently high
Cells Converting Intra-Group Reinsurance Into
Third-Party Reinsurance (Using A Third Party Reinsurance
Cell) These cells are owned by highly secure financial
institutions which charge an arrangement fee for the use of
their cell to enable international insurance groups to gain
credit for reinsurance ceded to subsidiary companies. By having
the cell assume the reinsurance from the parent insurer, and
cede the business to the subsidiary reinsurer, the parent is
usually able to secure credit for the reinsurance because the
cell is a third-party reinsurer. Consequently, whilst the cell
retains no risk, it is able to achieve a benefit to the
insurance group by way of regulatory arbitrage.
Fronting Cells These are cells which are
owned by third parties to enable large multi-national
corporations to access the reinsurance market. The cells retain
no risk, but are simply used to issue an insurance policy to
the insured which is mirrored by a reinsurance policy between
the cell and a reinsurer. The cell retains no risk but the
multinational corporation is able to access cover in the
cheaper wholesale reinsurance market.
Insurance Linked Securities (ILS) In recent
years there has been an increased use of ILS, such as
catastrophe bonds, to securitize insurance risks and transfer
them to the capital markets. Cell companies can be used as
special purpose vehicles (SPVs) as an essential part of the
structure to which is created for such transactions.
Fully Collateralised Reinsurance Cells
These cells act in a similar way to sidecar' vehicles,
whereby the cell is fully capitalised by a financing vehicle
(e.g. investment fund or private equity) to the extent of the
risk exposure. The cell then writes a high level reinsurance
layer within the catastrophe programme of the reinsured.
In the event that a claim impacts the layer, the cell is
fully collateralised and therefore can pay the full exposure
without any credit risk. From the cell investor's
perspective, he is attracted by an investment opportunity which
has uncorrelated risk compared with its other investments.
The investment is made in the expectation that it will earn
investment income on its investment together with the premium
paid to the cell to take on the risk. As the cell cover will
expire after one year, or in a shorter period depending on the
underlying catastrophe exposure, the investor, depending on the
claims experience, will see a return of capital and income
within twelve months or such longer period as agreed.
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