CAPTIVE STRUCTURES
benefits are obvious. The overheads of a PCC can be shared between the owners of the cells, making the captive less expensive to run from the point of view of the insured, while ensuring that the assets of each cell remain ring-fenced.
It is generally accepted that use of a cell captive constitutes risk transfer, but the question of risk sharing remains open. The IRS has set out the conditions in which cell captives may be considered insurance for tax purposes; the cells are generally considered to be self-contained single-parent captives for these purposes.
The assets of each cell are kept separate and are separately identifiable from both the company’s non-cellular assets and from assets attributable to other cells. In particular, cellular assets are available only to satisfy the creditors of the company, who are creditors in respect of that cell only.
Administratively, once a PCC is created, repeat transactions may be established more quickly. Hence, PCCs offer advantages for funds and securitisation structures where the initial documentation may be complex but might be replicated in future offerings.
The use of the PCC is one of the most significant developments in the world of corporate finance for many years. This flexible technology is already being used to provide a platform for a broad range of financial transactions, including the provision of a stable and cost-effective platform for securitisations and other transformer activities, as well as a diverse range of more conventional insurance and other financial applications.
Risk retention groups Risk retention groups (RRGs) are owner-controlled insurance companies authorised by the Federal Liability Risk Retention Act of 1986. An RRG allows members who engage in similar or related business or activities to write liability insurance for all or any portion of the exposures of group members, excluding first party coverages, such as property, workers’ compensation and personal lines.
Authorisation under the federal statute allows a group to be chartered in one state, but able to engage in the business of insurance in all states, subject to certain specific and limited restrictions. The Federal Act preempts state law in a number of significant ways.
Special purpose vehicles Special purpose vehicles are a form of captive that has been operated extensively for various financing arrangements, but recently has been used for catastrophe bonds and reinsurance sidecars. These are usually time-limited tranches of insurance or reinsurance spun off by a re/insurance company to mitigate its own risk and make specific insurance opportunities available to those in the capital markets. l
32 CICA | Forty years of captive leadership
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