Corporations Get Creative With Cells
Cell captives have become extremely popular self-insurance tools for companies of various sizes across all sectors, with cell legislation enacted in more than half of U.S. states and cell formations now outstripping stand-alone captive formations in many onshore and offshore captive domiciles.
Protected cell companies (PCCs, also known as a segregated accounts companies or segregated portfolio companies) consist of a core company that writes and administers ring-fenced insurance policies in underlying cells, whose policies and accounts are segregated from other cells in the PCC.
The recent development of incorporated cell company (ICC) legislation in a handful of jurisdictions enhances PCC features by granting each cell distinct legal status.
As well as being quick to set up, cells require significantly less capitalization than stand-alone captives, while shared costs among the participants and core lead to economies of scale. It is little surprise that since the first PCC was formed in Guernsey in 1997, they have proliferated and broadened.
“Risks written through cells are becoming more sophisticated, expanding beyond traditional medical malpractice, workers’ compensation and property insurance,” said Paul Scrivener, a partner in the Cayman Islands’ law firm Solomon Harris.
Cells are being touted, for example, as a potential solution to cyber risk, one of the insurance industry’s great challenges.
Cells for Every Risk
“If you have a structure with different risk profiles within different cells, it may make sense to put cyber risk in a separate cell rather than co-mingle it with traditional lines of insurance as it is very different and unique,” said Scrivener.
“Some have suggested using a cyber cell because you are looking at low frequency, high severity situations,” added Tom Jones, partner with McDermott, Will and Emery. Questions remain, however, over how best to address coverage terms, exclusions and payout limits, he said.
Cells are also growing in popularity in the health care space, particularly for medical malpractice risks.
“Hospitals may set up cells for independent physicians or group faculty plans if they want to assist them with insurance but don’t want to co-mingle the loss reserves,” Jones said.
Scrivener recently converted a single parent health care captive to a cell structure so it could put its existing hospital program into one cell and create a second cell to insure the risks of the self-insured physicians within the hospital.
Ascension Insurance Services set up Cayman’s first portfolio insurance company, AARIS, in 2015 to offer workers’ compensation solutions to agribusinesses, but now intends to roll out flexible workers’ comp cells to other sectors including the trucking and automobile racing industries.
“We’re getting calls from all around the country,” said Paul Tamburri, Ascension’s West Coast risk management practice leader, adding that the next step could be to write employee benefits stop loss through AARIS.
Cells can offer a fast route into captive insurance for employee benefits programs, while many regulators have yet to find a comfort level with stand-alone employee benefits captives.
“Getting the whole cell structure approved up-front makes it relatively easy to add cells. Instead of taking six months to get approval, we can get a cell approved in a matter of weeks,” said Karl Huish, president of captive services for Artex Risk Solutions, which runs a PCC-like employee benefits series business unit named Sentinel Indemnity in Delaware.
“Getting the whole cell structure approved up-front makes it relatively easy to add cells. Instead of taking six months to get approval, we can get a cell approved in a matter of weeks.” – Karl Huish, president of captive services, Artex Risk Solutions
“The cells in Sentinel each have different employee benefit captive structures, including one that is for a group of credit unions who want to pool risk together for their health insurance,” he added.
According to Guernsey Finance, multinational corporations can use cells as fronting vehicles through which to gain access to the reinsurance market. A cell can be used to issue an insurance policy to the insured that is mirrored by a policy between the cell and a reinsurer, and while the cell retains no risk, the corporation benefits from access to cheaper wholesale reinsurance cover.
The ability for numerous small companies to group their insurance risks in a cell means the self-insurance business is no longer reserved for big corporations. Huish believes a group of insureds must have projected annual losses in the region of $5 million or above to justify forming a cell, while that figure would be closer to $3.5 million for individual cell owners.
Insured Turns Insurer
More than simply participating in their own risks and enjoying greater control and premium savings from self-insurance, an increasing number of companies see PCCs as an opportunity to generate cash flows while strengthening bonds with business counterparts. Indeed, any company comfortable with the self-insurance concept can set up its own PCC to offer insurance solutions to third-party clients, suppliers or partners.
Not only does the sponsor of the PCC get closer to the risk of companies that affect its own risk profile, but it can also add value to its service propositions by offering valued third parties a quick, cheap route into self-insurance.
“Setting up your own PCC is a way of locking in clients, strengthening relationships and generating revenues, while also offering profit sharing opportunities between the PCC owner and its clients,” said Clive James, consultant at Artex Risk Solutions.
While this may be a natural fit for financial services firms, the concept can be applied to any sector, and may be particularly useful for those that operate on a project-by-project basis.
Construction firms, for example, are setting up PCCs through which the underlying cells write segregated insurance coverage for distinct projects, partners or groups of subcontractors. Freight storage unit owners are already using cells to self-insure the fire, theft and flood insurance they provide to licensees of the units, and there are myriad opportunities for health care organizations to offer insurance across their networks via cells.
Companies that lack the insurance expertise to run a PCC themselves would outsource this responsibility to an insurance manager in the same way stand-alone captive administration is outsourced — at a similar cost.
As PCC sponsors must ultimately compete with guaranteed cost options in the commercial marketplace, Tamburri noted it is essential to educate potential clients that participation is both a long term commitment and also an opportunity to recoup underwriting profits they would otherwise lose if they stayed with commercial insurers.
“One hurdle is getting data from prospective clients,” said Tamburri. “It’s a lot of work for them to get together historical loss and exposure information. Smaller companies may wish to join the group but fear that they will do a lot of work only for the cell not to get off the ground.”
Such is the decision all companies must make when considering self-insurance, whether taking an individual cell or going a step further by forming a full PCC for third parties to join. What is clear is that cells give risk managers more options than ever before. And when insured becomes insurer, it is surely a sign of insurance industry evolution and innovation.
From personal items such as e-cigarettes, cellphones and laptops to power tools, hoverboards, electric vehicles and alternative energy storage, rechargeable lithium-ion batteries (LIBs) come in all shapes and sizes, and are integral to modern living.
But despite their increasing application, the fire risks associated with LIBs have gained publicity of late, piquing the interest of insurers across a range of disciplines, from property and casualty to supply chain to product and environmental liability.
If overheated, LIBs can enter “thermal runaway,” emitting flammable material — sometimes in the form of small explosions; the bigger or more powerful the battery, the more impactful the event.
LIBs include a number of safety features to minimize the risk of thermal runaway. However, overcharging, damage to the battery, using an improper charging device or even excessive discharge can all trigger the problem.
After a UPS plane carrying a bulk LIB cargo caught fire and crashed in 2010, at least 18 airlines, including Cathay Pacific, Emirates and Qatar Airways, banned the bulk haulage of such cargo, causing supply chain headaches for companies transporting LIB products.
There have also been incidents when personal items have ignited in the carry hold on passenger flights.
A study by the Federal Aviation Administration (FAA) showed that gas venting from the batteries had the potential to “rocket” the battery away from the heat source. In a bulk storage facility, this could send batteries off into other parts of the warehouse, spreading the fire.
“If you are selling lithium batteries, it is even more important to have detailed instructions and warnings because there are so many things that can go wrong.” — Paul Owens, products liability manager, Sadler Products Liability Insurance
Indeed, bulk storage situations pose the biggest threat due to the risk of contagious overheating when multiple batteries are in close proximity.
“When you have a lot of these batteries together, fires can grow very quickly and be very damaging,” says Lou Gritzo, vice president of research at FM Global.
However, Gritzo’s firm said it made a major research breakthrough in April that could help mitigate LIB fire risk.
In partnership with the National Fire Protection Agency and the Fire Protection Research Foundation’s Property Insurance Research Group, FM Global conducted a first-of-its-kind warehouse fire test on the type of LIBs used in electric cars and energy storage. The test, he said, identified a sprinkler configuration that provides an “adequate fire protection point.”
Gritzo hopes the test results, which he expects to be published in a few months following data quality assurance checks, can be taken on board as an industry standard.
The results do not resolve the issue of air cargo safety, though some findings may be extrapolated out to develop in-flight fire extinguishing systems and improve safety for LIB cargo transportation.
Beyond the warehouse environment, LIB-powered devices present a product liability risk for manufacturers, importers, distributors and retailers. The biggest hazard lies in importing products that have been installed with defective or even counterfeited batteries that have been repackaged and rebranded to look superior.
In February, for example, U.S. Customs and Border Protection seized 3,500 hoverboards worth $1.8 million that reportedly contained substandard counterfeit batteries that posed a safety risk.
“If you are an electronics manufacturer, it is essential you know who and where you are buying your batteries from, that you are getting high quality batteries, and that they have high thermal runaway thresholds,” said Morgan Kyte, senior vice president and technology team leader at Marsh.
Detailed Warnings Required
The importer of defective goods is considered the manufacturer in the eyes of the law, and in the eyes of insurers in the event of a claim, said Paul Owens, products liability manager at Sadler Products Liability Insurance.
“Importers are top of the pyramid in the U.S. as no one is going overseas to recover,” he said. Most importers are buying from companies whose product liability policies won’t respond in the United States.
“Warning and instruction defect is a common entry into a product liability lawsuit,” Owens added.
“If you are selling lithium batteries, it is even more important to have detailed instructions and warnings because there are so many things that can go wrong.”
“When you have a lot of these batteries together, fires can grow very quickly and be very damaging.” — Lou Gritzo, vice president of research, FM Global
Retailers and wholesalers who purchase from U.S. manufacturers at least know they have a route of recourse in the event of a claim, though it is likely they would be dragged into litigation.
When e-cigarette user Jennifer Reis was set on fire in 2015 when the battery in her device exploded, the e-cigarette’s distributor, wholesaler and even the Tobacco Expo store where she bought it were all named in the lawsuit. Reis was awarded $1.9 million in damages.
“Retailers and distributors should ask their suppliers to name them as additional insureds on their policies,” said Owens.
“If you are named as an additional insured, the importer’s policy is primary and yours is secondary, which is an important step for retailers and wholesalers.”
However, Owen noted, not all insurance carriers are comfortable writing coverage for LIB-powered products.
“You have to be very careful with the policies you buy as some can be very narrowly written — some have full health-hazard exclusions, and for items like e-cigarettes this leaves very little coverage.”
It is not always easy to determine whether a thermal runaway event has been caused by a defective LIB, a defective electronic device or human error, Kyte said.
“Often there is not much material left after one of these, though there are certain tests that can be done and sometimes it is possible to extrapolate a sequence of events to determine the cause.”
The best way to avoid expensive product liability claims is to only buy and sell LIBs and chargers of the highest quality.
“This will cost you and your customer a little more, but it’s nothing compared to the increase in premiums after a product liability claim,” said Owens.
Lithium manganese (lMR) and hybrid (NiMH) batteries are considered chemically safer than most LIBs and do not require protection circuits, he said.
“Importers need to be good engineers. They should make sure they buy from reputable sources and it is advisable to batch test products that contain LIBs,” he added. &
Their emergence has been hailed as a “game changer” and “the biggest discussion topic in insurance.” Inspired by developments in the consumer marketplace, connected personal protection equipment, or “wearables,” can track a variety of employee risk factors and generate data so powerful that many believe it will revolutionize workplace safety procedures and risk modeling.
Health-related wearables such as the FitBit are taking the consumer market by storm, but far more powerful technology is being developed and implemented in commercial settings, from heavy industry to aviation, logistics and manufacturing.
Mining giant Rio Tinto is an early adopter of wearables, providing its workers with a “SmartCap” that measures brainwaves to detect fatigue. Honeywell and Intel recently released a prototype of their “Connected Worker” solution for industrial workers and first responders, which uses a hub of sensors to track workers’ location, vital signs, motion and exposure to hazardous gases.
Whether in the form of vests, caps, glasses or materials, it is now possible to generate valuable data that brings risk managers and insurers closer to workplace risk than ever before. It is hoped these insights should in turn help safety supervisors improve workplace design and procedure, foster safer worker behaviors and reduce workers’ compensation claims.
Having observed several pilot studies closely, David Bassi, former head of innovation and risk consulting, casualty for AIG, said safety wearables could reduce losses by up to 50 percent in some situations.
“The test cases are so compelling, it’s just a matter of scalability,” he said.
“The explosion will come pretty quickly. Virtually everyone I know in a safety role at a big company is interested in participating in a pilot or thinking about how to incorporate this kind of technology into their workplace.”
With demand strong, supply growing and costs coming down, the final piece of the puzzle is the insurance market, which insureds hope will begin to offer responsive pricing, customized products and client incentives once wearables’ benefits begin to be realized.
“In an age when data is becoming ever more critical for the insurance industry, this is huge,” said Michael Sillat, CEO of WKFC Underwriting Managers (part of Ryan Specialty Group). “A lot of the technology being developed is only being spoken about and is not available in the marketplace, but it has certainly grabbed my attention and that of many of my peers,” he said.
“Connected devices are going to have profound implications for the commercial property casualty insurance world, and wearables in particular are going to be very important in improving worker safety,” said Lex Baugh, president of casualty at AIG, which recently invested in wearable tech firm Human Condition Safety.
Nigel Walsh, vice president of CapGemini, expects more partnerships of this ilk, and heralds the ability to interact and advise on a daily, hourly or real-time basis as “game changing” for insurers.
“Insurers will no longer be claims paying companies — they will become better risk managers. When you provide value-added service and insight driven out of IoT, rather than just changing the price, you create real engagement and real value,” he said.
However, insurers don’t make knee-jerk adjustments to their terms or pricing, so for now organizations will need to take something of a leap of faith, and invest in wearables knowing it may take a number of years for improved loss experience to yield premium reductions.
The costs associated with implementing wearables into the workplace vary hugely, from a few dollars for the most rudimentary device up to millions for enterprise solutions including real-time feedback loops, network operation centers and the latest wearable technology. While the cost of equipment and data capacity continues to slowly decline, companies will need to think carefully before investing.
Rachel Michael, senior consultant in Aon Global Risk Consulting’s ergonomics practice group, said there are “no excuses” for not knowing the location and well-being of workers in hazardous jobs like firefighting or mining, for whom even expensive investments will be worthwhile, but she pointed out that companies should be sure they have done all they can to improve workplace ergonomics prior to investing.
“If an employer is palletizing 30-lb. boxes at ground level, do they really need a wearable spinal loading measurement system to determine whether this is bad?
You could save lots of time and money if you fix your line first,” she said.
Data management is also a concern — both in coping with the sheer volume of data (which Bassi said runs on some pilots into exabytes per week) and also avoiding what Michael terms “death by data” — having reams of information at your disposal but no clear plan of action.
Before a wearable technology is even considered, Michael said a planning discussion including the risk manager, HR, IT and possibly several other departments must take place. “You need to understand how much and what type of data is to be collected, how it is to be used, and what changes can be driven with the outcomes,” she said.
And companies should be prepared in case data raises uncomfortable truths, she added.
“If you hook all your workers up to smart caps and find that they are all suffering fatigue, are you willing to shut down your operations?” Michael asked, noting that this would be all but impossible in industries such as health care, firefighting or aviation.
Wearables are faced with various other challenges — from unions raising objections over potential worker discomfort or invasion of privacy, to workers becoming over-reliant on or overconfident because of the technology, or even the potential health risks associated with prolonged proximity to sensors and WiFi.
Then there are the questions around liability. If a worker with known heart issues has a heart attack on the job, could an employer tracking the vital signs be deemed negligent for not acting on warning signs? Would companies use wearables to offload responsibility for unsafe practices and workplace injury on their staff?
Ultimately, this highly promising technology should offer a win-win for insureds and insurers alike, but it can only be successful if the data is used effectively and risk managers enforce best practices through training, education and procedures.
“If all we do is sit back at the end of the week and look at the data, we’ve missed the opportunity,” said Michael.