The use of EU onshore Protected Cells as a capital efficient, cost-effective, flexible and secure alternative to owning a standalone insurer or captive. Presentation by Ian-Edward Stafrace to the UK IRM Global Risk Management Professional Development Forum 2011

1. EU Protected Cells
Captives on a budget
Ian-Edward Stafrace MIRM FCII PIOR Chartered Insurer
Risk Analyst & International Business Development
Atlas Insurance PCC Ltd, Malta
22 March 2011
IRM Global Risk Management Professional Development Forum

2. Agenda

3. Why form your own
Insurance Vehicle?
As a captive risk financing vehicle
&/or
To sell insurance to third parties

4. Why Captive?
Traditional Insurance
100%* of
Premium
Insurer
Profits
Retained
by
Insurer
vs
Captive
Catastrophe
Risk Premium
Your
Business
Risks
beyond
risk
appetite
reinsured
Self Insured
Premium
All Profits
Back to You
*On average only approx 65%
of Premium is used to pay claims
Re/Insurer
Your Cell/
Captive

5. Why Captive?
1. Reduce Cost of Insurance
2. Long Term Cover
3. Risk Management Strategy

6. Why not just self insure?
In Self Insurance
With Captives/Captive Cells
• Reserves treated as profits
& taxed
• Premiums tax deductible as
expense
• Usually internal transfer with
no reserve for large claims
• Underwriting & Investment
Profit help create reserves
allowing higher retention
• Temptation to strip funds
• Reinsurance market access

7. Why Sell Insurance To
Third Parties?
1. Underwriting Profits + Investment Income
2. Bolt-on To Non Insurance Sale
3. Knowledge Of Product, Market & Profitability
4. Avoid Market Uncertainty

8. Only for Large Organisations?
Problem 1: Capital Requirements
Problem 2: Fronting Costs
Problem 3: Costs to run a separate company

9. SOLUTION:
Cell in a Protected Cell Company (PCC)
Purpose
 Segregating cellular assets & liabilities
 Allow different owners with varying
interests to participate in one company
 Insurance Cells set up with less capital
as minimum requirements apply to
PCC as a whole
PCC
Cell
Cell
Core
Cell
Cell

10. Where? PCC Domiciles
Malta
Only EU State To
Have PCC Legislation
Approachable
Regulator
EU Single Passport
English, Time Zone,
Flight Connections
EU Compliant
Regulations
Tax Efficient
Over 40 other domiciles have PCC or similar legislation: Gibraltar,
Guernsey, Isle of Man, Bermuda, Cayman Islands, various US states...

11. Protected Cells: “Low-cost” Alternative
To Owning A Stand Alone Insurance Company Or Captive
No Minimum Guarantee Fund (MGF) Required
• Complying with EU directives through PCC core capital
• Example: General insurer with €1 million annual premium
Minimum capital needed:
EU Standalone Insurer
EU Protected Cell

12. Protected Cells: “Low-cost” Alternative
To Owning A Stand Alone Insurance Company Or Captive
No Fronting Required for EU/EEA Risks
Reinsurance access for smaller investors
Lower Running Costs vs. Stand-Alone companies

13. Insulation from other Cells/Core
 Cell has its own income and expenses
 Where cell liability arises:
1. Assets of that cell used
2. If insufficient PCC‟s core assets used
3. Use of assets of other cells prohibited
 Cellular dividend & tax independence
Cell
Cell
Core
Cell
Cell

14. Benefits of Protected Cells (in Malta )
Lower Capital
Direct Writing
Into Europe
No Setup of
Separate
Company
Easier Access
To „Captive‟
Solution
Cell Assets
Segregated
No Board Of
Directors
Reinsurance
For Smaller
Entities
Favourable
Tax Regime
Shared
Administration

15. Cell Management
PCC Board of
Directors
Cell A
Cell B
Cell Underwriting &
Investment committees
Cell Underwriting &
Investment committees
3rd Party Insurance
Manager

16. Why own an
EU based Protected Cell?
Captive
Cell
Fronting
Cell
Third Party
Writing Cell
Commercial /
affinity groups
looking for a
captive risk
financing
vehicle
Captive
owners
wishing to
reduce EEA
fronting
costs
Any business
planning to
sell
insurance to
third parties
…and any combination of the above

17. A) Captive Cell
 Lower access point to captive solution
 Special purpose applications
 Access to reinsurers & specialist risk-bearers
A protected cell in Malta allows cell owner to:
Insure Directly Own
Risks In EEA
Sell Insurance To
Third Parties In EEA
Insure on Non-admitted
Basis Risks Globally
Where Allowed
Reinsure Risks
Outside EEA

18. Example 1
French Manufacturer
Desire
 Reduce insurance cost & improve risk financing
Facts
 Multiple Factories, Stores & Offices in France
 Classes: Property & Non Compulsory Casualty
 Premium €1,000,000 (approx 30% Property)
 Loss ratio < 35% past 5 years
A) Captive Cell

19. Example 1
French Manufacturer
Possible Solution:
Property:
- Excess €50,000
- Reinsured above €200,000 any 1 loss/event
PCC
Cell owned by Manufacturer
Injects capital of €410,000
Third Party
Manager?
Yes
Casualty - Reinsured above €100,000 any 1 loss &
€300,000 in aggregate
Cell Agreement: PCC + Manager + Cell Owner
Management Agreement: PCC -> Manager
No
PCC Manages Cell
Cell Agreement
PCC + Cell Owner
Cell Committee/s Members
1 PCC + 1 Cell Owner
Cell Committee/s Members
1 PCC + 1 Cell Owner + 1 Manager
A) Captive Cell

20. Example 2
Association of Medical Professionals
Desire
 Wants more control over PI cost for members
Facts
 Premium €900,000
 Loss ratio < 35% past 4 years
 Single event/series exposure
A) Captive Cell

21. Example 2
Association of Medical Professionals
Possible
Solution
PCC Manages Cell
Cell owned by Association
of Medical Professionals
Injects capital of €370,000
Reinsured above
- €30,000 any 1 loss
- €350,000 in aggregate
Cell Committee/s Members
1 PCC + 1 Association Official
Agency Agreement
PCC + Association
Third Party Claims Handler
Agency Agreement
A) Captive Cell

22. B) Fronting Cell
 Cells in Malta can be used as fronting facilities
 Fronting cell reinsures most/all of the risk
 Reinsurer could be a non-EU captive
Fronting Cell Example
€1 Million Annual Premium
-- Required Cell Capital €90,000 --

23. C) Third Party Writing Cell
 EU cells offer direct access to European market
 Policyholder Protection Ensured
Possible Products
• Bolt-on products to non insurance sales
• Short tail risks - E.g. Extended warranty, property
damage, theft, marine cargo, travel cancellation…
• Long-tail risks also possible

24. Example
Portable Electronics Retailer
Desire
 Retain underwriting profit & have greater control
over pricing / commissions / availability
Facts
 AD & Theft cover sold to purchasers
 Placed with external insurer in return for commission
 Premium €750,000
 8 year claims history - Loss ratio < 40%
 No event or single large risk exposure
C) Third Party Writing Cell

25. Example
Portable Electronics Retailer
Possible
Solution
PCC Manages Cell
Cell owned by Retailer
Injects capital of €135,000
Broker
Intermediary?
Yes
Agency Agreement
PCC -> Broker
Yes
Claims Handling Agreement
PCC -> Retailer
No
Agency Agreement
PCC -> Retailer
Retailer Handling
Claims?
No
Claims Handling Agreement
PCC -> Third Party (E.g. Broker)
C) Third Party Writing Cell

26. Next Steps to consider Cell Route
Indicative Back of the Envelope Study – Some Key Considerations
Premium
Loss Ratio
(Claims/Premium)
Available Capital/Collateral
(To Capitalise Cell)
• Ideal: €1m+
•  Loss Ratio =  Profit Retained
&/or
 Insurance Spend
• Typical minimum 18% of Gross Annual Premium
• ↕ depending on risk, inclusion of liability, loss ratio, reinsurance, buffers
Risk Appetite
• Lower risk appetite may mean higher reinsurance
purchase but at lower cost than primary market
Other Factors
• Fluctuating primary insurance prices, terms & availability
• Risk financing flexibility
• Improved risk information flow, etc
Engage the industry to determine viability & options available
 Brokers, PCCs (Independent/Managed), etc
Domicile Choice

27. Website: www.atlaspcc.eu
Email: ian.stafrace@atlas.com.mt
Phone: (+356) 23435255
Atlas Insurance PCC Ltd
47-50 Ta' Xbiex Seafront
Ta' Xbiex
XBX 1021
Malta