A Primer on Protected Cell Captives

Since the first Protected Cell Captive (PCC) was incorporated in 1997, this type of vehicle has increasingly become an attractive alternative in insurance placements. One reason for this is due to the legal segregation of assets and certain contractual agreements that make the need for collateral not as important for PCCs as it is with single-entity captive—one the biggest challenges associated with owning a captive, according to a study in 2013 conducted by the Captive Insurance Companies’ Association.

In addition, PCCs offer flexibility that go beyond traditional captive purposes. For example, cells have been used successfully to facilitate and accelerate the run-off of all or part of some (captive) insurance companies. Life insurance PCCs are used by high net worth individuals who are looking for control, transparency and security over the management of their assets.

Following are some frequently asked questions about PCCs:

What is A Protected Cell Captive?

A PCC is a single legal entity comprised of a core with a number of parts or cells whose assets and liabilities are segregated from another one. The result being that a creditor’s recourse against the cell company is limited to whichever cell with which it transacts. If a cell becomes insolvent, the remaining cells of the structure are not affected and continue to operate as normal.

Who Are Good Candidates for a PCC?

A Protected Cell Captive solution may be suitable for an organization whose insurance premium spend is too small to form a single parent captive. It may also be right for companies not looking to join a group captive with others in the same industry. Other candidates for a PCC include those required to segregate insurance assets and liabilities, those wanting to access the reinsurance market and organizations with a legitimate need for confidentiality concerning their cell ownership.

How Are Traditional Captives and PCCs Similar?

Both a traditional captive and PCC are licensed insurance or reinsurance companies and subject to all applicable insurance laws, rules and regulations. Both have the potential of providing similar advantages to shareholders, including greater input and control over risk, reducing overall insurance costs by retaining insurer profit and lower overhead, access to the reinsurer market, coverages for hard-to-place-risks, program flexibility and the need for captive management services.

How Are PCCs Different from Traditional Captives?

In a traditional captive all business is co-mingled whereas with a PCC the risks within each cell are legally separated from one another. Moreover, as a PCC is already formed, the creation of a cell is a less formal and requires less time than setting up a new incorporated captive vehicle. This also results in lower costs. Additionally, exiting is made easier as the cell is not a separate legal entity in its own right, therefore, there are no formal liquidation procedures to go through. There is also less time commitment on the part of the shareholder as the PCC’s Board of the Directors and the captive manager generally undertake the bulk of the administrative and management activities, resulting in lower operating costs for the shareholder.

How Do You Incorporate and License a Cell in Protected Cell Captive?

Caitlin Morgan and M.R. Mead will work with you and prospective clients to assess the feasibility of owning a cell and insuring specific risks through the cell. Once it’s determined that this is a viable solution, an application along with a business plan and pro forma financials need to be filed with Constitution Insurance. Upon approval, we will submit on behalf of the cell owner/shareholder an insurance license application, fee and other materials to the Tennessee Department of Insurance. Statutorily the entity is formed under Tennessee’s alternate corporate laws and then licensed by the Department of Insurance. Once approved by the Regulator and the cell has been set up, you can begin writing insurance business.

What Are the Potential Uses of a PCC?

There are no restrictions regarding the type of business that can be undertaken by a cell and following are some examples of the potential uses:

  • An intermediate or alternative step for clients considering the possibility of establishing their own captive
  • Access to reinsurance markets
  • Niche products where coverage from traditional markets is unavailable or expensive
  • Joint venture undertakings
  • Special purpose vehicles
  • Commutation of captive programs

Talk to Us About Becoming Part of a PCC

A captive solution with Constitution Insurance may make sense for the successful business owner, association or high net worth individual looking to better manage their risks. We can help you choose the right structure to address your coverage and risk-financing challenges and turn a dead balance sheet item into a profit-making entity. Call us at 877.845.5069.

Learn More About Constitution Insurance & Setting Up A PCC