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Cell Captives Continue Growth Trends

August 7, 2023

This article was originally published by Captive International and is reprinted here with permission.

As professionals who advocate for our clients, we’ve long supported the use of the captive insurance strategy. And though the process of setting up or joining a captive requires important steps that cannot be skipped, the benefits are obvious and enduring.

It’s also why we’re excited to see the growth of cell captive facilities in the U.S. That means companies that recognize the benefits of a captive but may not be willing or able to invest the time and cost into setting up their own captive company can piggyback on another company’s captive.

Renting a cell in one of these facilities is a lot like renting an apartment. You don’t have to worry about constructing a building, fighting with local zoning departments or mowing the grass. The space becomes your private place to call home until you’re ready for something else. You can move in right away. And everything is upfront and legal.

A key advantage of cell captives is their remarkable flexibility and the comparably short time needed to implement them. The facility owner handles compliance, administrative tasks and relationships with the service providers for the entire facility. The organizations renting a cell only have to work directly with the facility owner.

Beyond the operational advantages, the simplicity of the structure may also be a powerful inducement to an organization that’s intrigued by the opportunities available through captives but also hesitant to dive in alone because of the inherent complexity. We’re seeing increased interest in middle-market companies that hold enough premium to establish a captive of their own, but their risk tolerance and resources make renting a cell a better approach for their short-term needs. As their comfort and understanding of the concept expand, they may even evolve into transitioning into their own single parent captive.

Many industries first encountered the captive strategy within the employee benefits arena, and it remains a key use, whether the goal is medical stop loss or a willingness to embrace some of the risk within a company’s coverage tower. Companies with international operations may find that a cell captive gives them a way to centralize and harmonize their risks while remaining flexible enough to address the specific compliance requirements in each location.

While attempts to limit cyber risk continue to be a strong incentive for using cell captives, we’ve seen some slowing in this area. The most likely reason for that is greater knowledge about specific risks and mitigation strategies, as well as carriers becoming better at creating policies with appropriate exclusions, so the rate of premium increases has cooled.

Speaking of cooling, climate issues are a growing driver in property-related cell captive programs. Whether a company seeks to protect itself from direct extreme weather events such as the flooding rains that soaked much of California or from the knock-on impacts of weather issues upon the supply chain, a captive strategy can focus on the most likely risks. And as with other forms of property insurance, pairing the captive approach with loss control efforts should provide the desired degree of coverage at a lower premium cost.

Concerns about litigation continue to be a trend in which captives play key roles. Rather than purchase standard D&O (directors and officers) or E&O (errors and omissions) policies, companies use captives to fine-tune coverage of their unique risks. Similarly, there’s also been increased activity in using captives to address differences in conditions and term exclusions.

A significant U.S. trend is the third-party strategy of using captives to fund some types of warranty coverages, such as warranty contracts sold by vehicle dealers or other manufacturers or retailers. Although these warranties are not sold as insurance, they function as insurance policies in some states. Typically, the bulk of the premium is captured by an insurance carrier as revenue, part is returned to the dealership as an incentive for selling it, and the rest goes into reserves. Carriers can place the bulk of a risk in a captive, using the captive’s profits to pay claims.

One surprising trend is organizations outside the insurance industry establishing cell facilities for the use of third parties. We’ve seen cases in which industry associations have established cells for the benefit of members who face similar risks that may be difficult or expensive to insure. Other companies have created cells for use by their vendors and even their competitors. When structured properly, the income from renting these cells can cover much or all of the cell facility owner’s own insurance costs—essentially, transforming a traditional expense into a revenue generator.

Companies that see establishing cell facilities as a potential business opportunity should begin by becoming educated about the requirements and benefits of captives. A sound place to start is conversations with the company’s insurance broker or consultant, as they will have a solid understanding of the company’s risk management needs and whether the company’s appetite for risk can accommodate the nature of a captive strategy.

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