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The Growing Interest of Cell Captives

Chris Murray
Posted on: June 23, 2016 by Chris Murray

Over the last two decades, there has been growing interest from smaller and mid-size companies in forming a captive as a risk transfer vehicle. For many, however, the resources and capital required to form a single or pure captive is not a viable option. That’s where the use of cell captives come in, with dozens of domiciles allowing for this type of captive structure. When compared to a pure captive, cell captives are more easily launched, generally require less capital and can separate risk by lines of business. They also can be easily expanded or quickly shut down.

There are several types of cell captives: Protected Cell Captive (PCC), Incorporated Cell Captives (ICC) and Series LLC Captives.

A PCC is a legal corporate entity in which the assets and liabilities are segregated and protected within one or many  cells within the company, also called “the core”. Each cell is legally independent of the other cells and often from the main core itself. Each protected cell’s finances, therefore, must be separately accounted for on the books of the core company. With this structure, the assets of one cell cannot be affected by the liabilities of another.

An ICC is similar to the Protected Cell Captive but each individual cell is incorporated and considered its own separate legal entity. The core company and the incorporated cells must file separate premium tax returns and are each required to meet the minimum and maximum premium tax limits as legislated by their domicile. The cells segregated by this structure are considered to have “higher and thicker” walls separating them from one another.
A series LLC captive bears similarity to a protected cell captive: The LLC is a separate legal entity that can form one or more series business units (SBUs) that are not separate legal entities but which can have limited liability and operational independence, much like a PCC. The core company has a minimum capital requirement (that is often quite lower than for regular captives) and when those requirements are met, the SBUs can generally begin operation. Each SBU can obtain its own tax number and will file its own tax returns. One limitation is that an existing SBU will often only allow a limited range of permitted lines of coverage.

Segregation of the assets and liabilities of each individual cell of a company is what makes cell captives advantageous. Like pure captives, cell captives enjoy the benefits of lower premiums, more control over the risks covered, potential dividends for owners, as well as tax benefits and other tax-saving opportunities. There are other advantages, too, including the fact that, once the core company of the cell captive is established, it is relatively quick for new cells to be launched and begin operations. Cell captives can also separate from the main company and transition into a regular or pure captive. This is particularly so for ICCs that will already have separate finances and their own board of directors. Cell captives are also very flexible allowing for the captive to meet the needs of its owners.

In addition to a cell captive’s flexibility and lower capital requirement than a pure captive, the widespread interest and growth in this area is also because these structures are well suited for emerging risks that are categorized as “high severity, low frequency”, such as employment practices liability insurance, product recall, errors and omissions, catastrophic, cyber and reputational risk.

Caitlin Morgan specializes in providing captive solutions for all types of businesses including structuring cell captives. We can assist you in evaluating whether your insured will be a good candidate for a captive. For more information about our services, please contact us at 877.226.1027.

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Posted in: blog Captive Solutions Uncategorized