The Insurance licence vs the cell captive

Many corporates who chose the captive route are finding that operating their own insurance licence simply exposes them to different business risks, and consumes too much time, energy and money.

Back in the seventies one of the hottest things around in the corporate insurance market was the wholly-owned captive. Many companies – seduced by the prospect of sharing in underwriting profits and the "prestige" of owning an insurance licence – pulled out of traditional insurance markets, opting instead to take the self insurance route. But that was before International Financial Reporting Standards and the many other onerous compliance issues that insurers face today.

Best of both

But – being used to sharing the underwriting profits and with an appreciation of the very real benefits that prudent risk management can provide in a self-insurance environment – many of these companies are loathe to return to the traditional market. Enter the cell captive, which provides all the benefits of owning your own insurance company, without the arduous compliance and administrative responsibilities.

Comparison

There are several key differences between cell captives and wholly-owned captives starting with the capital requirements. In the case of the latter, the minimum capitalisation requirement ranges from R3 million to R5 million. For a cell captive, it is based on net premium written through the cell and estimated "burn" of premium in the cell, and is significantly lower.

Captives are required to maintain a minimum solvency of 25% at all times, while a cell's solvency is required to be at the prescribed level at the company's year-end (and, for a fee, the promoter can provide solvency support to the cell owner).

Establishing a captive is an onerous affair: proposals and a three-year business plan must be submitted to the regulator and he must be satisfied as to the quality of management and the ability of the infrastructure to support an insurance company.

An existing cell captive insurer, on the other hand, already complies with regulatory requirements and a prospective cell owner simply joins by taking up a block of shares and is able to starting writing business through the facility in a matter of days.

Entry-level requirements

Another key difference – and the reason that many companies were precluded from the captive market prior to the advent of the cell captive – is the entry-level requirements. For a wholly-owned captive, critical mass is essential and large premium volumes are necessary to reach bulk purchasing power. This is not true for cell captives, which are able to accommodate small and medium sized companies, as well as large corporates.

A captive attracts onerous fiduciary responsibilities for the company's directors, and requires directors to spend significant time on its operations. In contrast, there are no fiduciary responsibilities for cell owners within the cell captive environment and the cell captive insurer liaises with the regulator on behalf of all its cells.

Licensing

And then there's the issue of the licence: captives are generally restricted only to certain classes of insurance business (and rarely receive a licence to write third party business). Cell owners have access to the cell captive insurer's unrestricted licence, and can write all classes of short-term insurance.

With brokers increasingly being called on to provide more than broking services, they may well find that captives are not flexible and dynamic enough to keep pace with the ever changing business models of their clients. Cell captives are simply more efficient than captives and that's what clients and shareholders are looking for in today's business environment.