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Cell Captives: A Powerful Tool to Manage Risk

Nov 15, 2022 Puzzle and puzzle piece representing a cell captive

This article originally was published on and is reprinted here with permission.

When insurance professionals discuss cells as a structural option for captive insurance companies, they’re not discussing prisons or other correctional facilities. Cell captives are simply one of the many choices available to companies interested in exploring captive insurance solutions.

What Is a Captive?

A captive is a licensed insurance company owned and operated by those it insures, whether a corporation, a nonprofit or even an industry association. Organizations can develop and fund a captive insurance company to enhance protection by customizing coverage to directly address their unique risks and the nature of their operations. In addition, operating a captive allows the organization to benefit from underwriting profits and positive loss trends that typically go to a third-party insurance carrier.

How Do Cell Captives Work?

Cell captives offer companies and organizations a way to realize all the benefits of a captive solution with significantly lower start-up and operating costs. They also take less time to implement than traditional single-parent captives.

Think of a captive insurance company as a single-family home under construction for one family, with all the construction workers, architects, materials and location decided by the ultimate owner. In contrast, a cell captive is more like a multi-tenant apartment building. The company operating the cell captive (known as the core) covers the costs of creating the apartment building and then rents out individual apartments (cells) in the building to organizations wishing to use a captive. The tenants retain their maintenance teams through the apartment complex (core) at a traditionally lower fixed fee.

Each cell in the captive keeps its assets and liabilities separate from those of other cells. The cell owners have no contact or involvement with the other cells. Each company is required to capitalize its cell based on the risk retained.

The core is a single entity that contributes the capital needed to establish the cell captive facility, holds the licenses, handles administrative tasks, keeps the cells in compliance with regulatory approval, and manages relationships with regulators and other key service providers to ensure cells meet all requirements of the domicile. The core is typically sponsored by an insurer, insurance broker, captive manager or agency.

The core negotiates contracts with the captive manager and other service providers who handle aspects of the day-to-day functioning of the captive for established fees, providing each cell access to professional management for a fraction of the cost they’d have to pay outside of a cell structure. Plus, because the cell captive facility already exists, new cells don’t have to go through the time-consuming processes and other barriers to entry associated with starting captives of their own.

What Are the Benefits of a Cell Captive?

Cells benefit from several unique advantages afforded by the structure. One of the most important is that segregating the assets and liabilities of each member allows that cell to focus solely on meeting the needs of its insureds. Cell captives are not one-size-fits-all solutions that force members to take on unnecessary risk. Cell captives typically experience lower operating costs, lower capitalization costs, greater control over specific risks, the potential for dividends, premiums derived from the firm’s loss history and direct access to the reinsurance market.

Sometimes a company in a particular industry sector may choose to help its industry counterparts by establishing a new cell captive structure. They plan to capitalize on the core and oversee operations while offering cells to other companies in their industry. This approach provides the opportunity to use their leadership to improve the entire industry. It is particularly valuable when companies in that industry find it difficult or cost prohibitive to obtain coverage independently.

How Are Cell Captives Created and Managed?

Legal structures for cell captives vary slightly in each domicile’s jurisdiction. They include incorporated, segregated, sponsored, series and protected. In the past, some captive structures required choosing an offshore domicile, but a growing number of states in the U.S. are enacting laws to encourage the formation of cell captives. The subtle complexities of each type warrant a deeper discussion than space allows here, reinforcing the importance of working with a knowledgeable, experienced captive partner when establishing a cell captive.

The decision to create a cell captive—whether as a core owner or rent as a cell owner—begins with a comprehensive review of losses, premiums and specific objectives. Some captive consultants can conduct a pre-feasibility analysis based on a firm’s existing data, a qualitative interview with the firm and a review of key performance indicators to determine the best structure. If an organization is uncomfortable with the idea of retaining its own risk, it’s probably not a good candidate for any type of captive.

Cell captive implementation and management require specialized expertise from a team of captive insurance experts and actuarial, tax and legal professionals. Professional planning, forecasting and continuous guidance through partnership are needed to achieve long-term success. For example, the captive evaluation process follows education, exploration (i.e., feasibility) and an eventual election to move forward with implementing the captive, leading to continued operation. The process engages members of the organization’s executive management team, gathering their unique insight to better secure the financial future.

Hylant Global Captive Solutions

Award-winning Hylant Global Captive Solutions helps organizations that feel their good risk record isn’t being rewarded or have difficulty obtaining specific coverage, explore alternative risk-financing solutions. If a captive is appropriate, Hylant structures, implements, operates and services the captive-related insurance program throughout its life cycle. Executives and their stakeholders benefit by strengthening the organization’s financial performance while protecting its assets. Learn how we can help you.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.