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Expecting Continued Cell Captive Growth, Innovation

February 21, 2023

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

Cell captives provide a simple, affordable approach for organizations considering using alternative risk financing strategies to address risks that may otherwise be costly or difficult to insure. A cell captive (otherwise known as a rent-a-cell captive) gives owners a strategic risk management tool that can be implemented in a fraction of the time required for a traditional single parent captive.

Think of a captive insurance company as a building constructed specifically for the needs of just one tenant, namely the organization that established it. A cell captive facility is then similar to a multi-tenant office building. The cell captive facility’s owner and operator (the “core”) covers the costs of creating the “building,” organizing maintenance (“contracts with service providers”) and renting out individual spaces (the “cells”) in the building to organizations seeking the benefits of a captive program.

The many advantages of a cell captive make them a more attractive option for companies considering a captive solution. For one, all administrative tasks and compliance with regulatory requirements fall to the core’s captive manager, which serves as the captive manager for all cells within the facility. The company “renting” a captive cell does not need to secure relationships with external service providers such as audit or actuarial firms, as these services have been pre-negotiated by the core upon inception. This affords the owners of the cells more attractive terms and pricing for their captive servicing needs.

Many cell captive facilities go by different names in different domiciles, though they generally function similarly. Some of these differentiators between cell facility legislation in each domicile can center around capitalization requirements, legal incorporation, dividend distribution and more. In addition, some domiciles have legislation enabling cell captive owners to “port” out their captive from a cell facility to a single-parent captive, allowing captive owners to choose their service providers and captive manager and increase the autonomy of their captive insurance program.

We’ve seen increased interest among middle-market businesses exploring the roles cell captives could play in their risk management efforts. Interestingly, there has also been an uptick in companies utilizing a cell captive for a group captive. Those companies hold enough premium to make either group or cell captives feasible. However, their risk tolerance and willingness to share risk, lead many to find that the cell approach aligns better with near-term needs while providing greater strategic growth opportunities in the long term with a group approach.

Another trend garnering increased attention in sectors experiencing industry-wide pressure is the creation of cell facilities by companies wishing to address their own risks and earn revenues by helping third parties in similar industries do the same. For example, suppose construction contractors across the nation find it difficult or unacceptably costly to obtain specific liability coverage for new projects. One contractor creates a cell facility for their own coverage and rents the cells to other contracting firms. In return for creating a solution for similarly situated companies, the cell owner receives revenues from those renters in the form of cell rental fees.

One similar, innovative approach involves what we refer to as “companion” captives. This strategy allows insurance agencies, managing general agents or program managers to create a cell facility to benefit their insureds. Benefits for individual cell owners could include much-needed capacity, market access or reinsurance access and rate stabilization. As the core sponsor the establishing entity can participate in the risk with the cell owner(s) or simply act as a facilitator. When companies buy their insurance through the agency, the agency could offer a cell captive solution to their client for the benefits mentioned above or elect to retain some of the risk, providing an additional revenue stream to the agency.

Innovative uses of cell captives are rooted in the flexibility of captive insurance companies that allow for the above trending programs.

With our current economic environment, we expect interest in cell captives to continue to grow for the foreseeable future. It’s also a safe assumption that captive management and consulting firms like Hylant Global Captive Solutions will continue to create innovative structures allowing more organizations to benefit from the many advantages of alternative risk financing.

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

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