British Virgin Islands: The Benefits of Segregated Portfolio Insurance

Last Updated: 27 February 2004
Article by Conor Jennings

A segregated portfolio company (SPC) or protected cell company (PCC), as it is known in some jurisdictions, is a single legal entity, but the company is made up of individual "protected cells". It has a "core" capital (the ordinary share capital provided by the owners) but in addition each cell has its own capital (usually redeemable preference shares), provided by the client using that cell. Each cell is completely separate from each other but linked to the common core.

The assets of one cell are statutorily protected from the creditors of another. Therefore a variety of organisations can safely use different cells within one company.

The great advantage of this SPC concept is that it is an easy and cost-effective way for a small organisation to take advantage of the captive insurance market. Not only is the cost lower, but the amount of senior management time that needs to be spent in dealing with insurance matters can also be considerably reduced.

A captive insurance company is a wholly-owned insurance subsidiary of a non-insurance parent, which is used to self-insure the risks of the parent and associated companies. A segregated portfolio insurance company can be independently owned and capitalised, providing the insurance facility through legally separate financial cells for each insured client or activity.

Each cell owner will acquire a number of redeemable preference shares in order to capitalise the cell, and as a mechanism to receive future profits in the form of dividends. This is formalised in a shareholders' agreement.

British Virgin Islands insurance regulations require the cells to maintain a minimum solvency of 20% of net premiums, but this may need to be greater to meet the risks to be covered within the cells.

SPCs are similar to traditional rent-a-captives except for the very important fact that if a rent-a-captive program goes bankrupt, the assets of the entire program, including those of the insureds, are at risk, whereas with an SPC, the assets are secure. The assets of the insured are separate from those of the captive and vice versa. In addition, the assets of the insureds within the captive are protected from the effects of bad or adverse selection, underwriting or losses. This is, in effect, creating a regulatory and accounting wall around the captive cell (ring-fencing).

SPC Usage

SPCs offer an extremely cost-effect alternative to full blown captives and can be used for a number of different purposes.


The SPC owner offers traditional rent-a-captive services to clients with the added security of statute to support the segregation of assets and liabilities between cells. This has been popular with insurance companies who have wanted to ‘lock in’ their good policyholders, especially those with better than average loss experience who have been considering establishing their own captives. This concept has also been used by some insurers to attract good business away from competitors who have no such facility.

Insurance Companies

Another development has seen the use of SPCs by insurers as an alternative to a standalone captive for their own reinsurance retentions, using a separate cell for their own activities alongside the cells of client companies.


Association Captives have operated successfully for very many years, providing insurance cover to members of trade associations or companies trading in a particular industry. Too often, however, the idea of an association captive is too difficult to sell to the potential participants, because of a disinclination to share risk, or even to share information between individuals or companies who operate in direct competition with each other. The SPC concept is ideal, as it permits segregation of assets and liabilities as well as enabling confidentiality to be observed.

Offshore Life Insurers

Offshore Life Insurers have embraced the concept of SPCs to provide added protection to policyholders. Using separate cells for individual policies or products does not greatly increase running costs but ensures segregation of risk (and supporting asset classes). Should the life insurer decide to write also general business and become a composite, the SPC structure is one of the few accepted corporate structures to accommodate this without having to establish a separate general insurer (with associated cost of capital and marginal costs).

Global Program Solutions

Segregated Portfolio Companies are also used to restructure global insurance programs through a captive-type operation. By using an SPC, the global company can separate its risks geographically or by subsidiary. Each cell can then be capitalised to meet its particular requirements, and most importantly it can be rated in accordance with the success of its own risk management programs.

In the event of Merger and Acquisition (M&A) activity, an SPC-structured captive is far better suited to the identification, inclusion or removal of individual trading companies or subsidiaries. Insurance cover for joint ventures and strategic alliances can be provided through the captive on a fully segregated basis.

Special Purpose Vehicles / Transformers and Securitization

The SPC structure can also be used as a platform for any type of special purpose vehicle (SPV), including those established as transformer vehicles to support securitizations. Structuring an SPV as an SPC also has the advantage of enabling the segregation of different classes or categories of investor. Using SPCs for umbrella investment funds also offers many advantages, and is becoming increasingly popular as a result.

The proof of true legal segregation of cellular assets is even more important in the area of SPVs and funds than for the more traditional Rent-a-Captive vehicles.

SPCs in a Hard Insurance Market

The captive insurance market has been thriving over the past few years as a result of the increase in global insurance premium rates, the reduction in capacity and the reduction in cover available. In most countries, traditional captives have only been available to organisations with a large premium who could justify the high set-up and operational costs of a captive. However, the ready availability of SPCs means that the cost of entry to the captive arena has fallen dramatically, thus encouraging more companies to reduce their ‘exposure’ to the traditional insurance market, and to enjoy the substantial benefits of increased self-retention.

Furthermore, the SPC concept will be of particular interest in the US where Congress has given the most advantageous tax treatment to US and offshore small property and casualty insurance companies under Section 501(c)(15) of the Internal Revenue Code.   Essentially, an insurance company primarily engaged in the business of insurance that receives less than $350,000 in annual insurance premiums is tax exempt, subject to certain restrictions. In the past, individuals would set up their own small privately held captives and have to cover all the associated costs themselves. However, they now have the opportunity to share these costs with similar individuals in the form of affinity group SPCs.

The Role of the British Virgin Islands

BVI is the fourth largest offshore captive domicile in the world. This is primarily because it is the chosen home of many small to medium sized captives. BVI has built up an excellent relationship with the ‘middle-American’ market and has earned the enviable reputation of being a professional, well-regulated and cost-effective jurisdiction. Therefore, with recently introduced SPC legislation, BVI is now in the perfect position to provide even more sophisticated products to an enormous market.

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.

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