Cell Captives

Cell captives, among other benefits, provide the cell owner with the ability to legally act as an insurer without having to incur the expenses and burdens associated with founding and running their own insurance company.

Neil Ashcroft, executive head of marketing and client service at Centriq, the first BEE insurer in risk finance, provides insight into the area of cell captives.

He says that in comparison with other insurance options, cell captives ring-fence insurance operations from the client’s other core business. “It provides direct access to professional reinsurance markets without having to go through an insurer, thereby potentially reducing costs in the supply chain. They also provide the opportunity to sell insurance products to the cell owner’s customer base and present the cell owner the capacity to formally retain their own risks.”

The cell captive industry has experienced extensive growth since its initial introduction. It is regulated by the issue of a specific cell captive insurance license which takes into consideration the fundamental differences between cell captive insurance and conventional insurance in its requirements. “The regulations governing cell captives have therefore become more onerous over time. This has however effectively enhanced compliance, which is very positive,” says Ashcroft.

The use of cell captives from a commercial perspective has dramatically increased since they were first introduced. “This,” says Ashcroft, “is due to the growing number of retailers and other affinity groups that have become aware of the advantages in being able to sell insurance products to their client base.”

The significant increase in cell captives has therefore evolved less due to cell captive technology itself and more as a result of the commercial opportunities that the cell captives present.

Cell captives are formed for a number of reasons, of which the following are the most frequent:

* Ability to on-sell insurance products

* increased awareness of risk management;

* lower expenses compared to traditional risk transfer/insurance companies;

* credit for good claims experience;

* insuring the uninsurable; and

* direct access to the reinsurance market

As a market, South Africa is behind many other countries in the supply of affinity insurance solutions. There are considerable opportunities for affinity groups to leverage on and the cell captive technology provides a cost effective method to access these.

But Ashcroft notes that the use of cell captives to formally retain the cell owner’s own risks seems to have lost its appeal as cheaper and less onerous structures exist. “The use of cell captives to enable cell owners to provide insurance products is however increasing in line with the enlarged demand by businesses to leverage these opportunities,” he says.

Ashcroft points out some scenarios where companies have leveraged specific advantages from the use of cell captives:

Company A was able to offer its client base insurance on their core product which was more attractive than the conventional insurance market because the client is able to manage the product risk more effectively and they understand the product better. Therefore, this provides more value to their clients. In addition, Company A has made profits in excess of R120-million over the last few years from this business, which has enabled the company to provide even greater value to their clients in the form of incentives, lower costs, wider cover etc.

Company B has placed the employee benefits such as group, personal, accident, death and disability into a cell captive for their staff. As a result, the costs of cover have decreased as they do not need to cross subsidise poor risks or provide insurers with profits. Due to the lower costs, they have been able to provide their staff with cover much wider than the conventional market, making them a preferred employer to retain staff in an industry suffering from shortage of expertise.

“I see the demand for cell captives continuing for use in on-selling insurance products, unless a more cost effective and convenient structure is designed,” concludes Ashcroft.