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.
The CPCU Society expects to see some 7,000 CPCU conferees in Honolulu at its September meeting, which acts as a graduation ceremony for new designees.
In addition to the CPCU (Chartered Property Casualty Underwriter) designation, the Malvern, Pa.-based The Institutes also provides training and materials for designations such as the ARM (Associate in Risk Management) and the AU (Associate in Commercial Underwriting).
According to Brian Savko, president of the CPCU Society — a community of CPCU-credentialed insurance professionals — that’s an enormous jump from the 750 or so designees who attended last year’s celebration in Indianapolis.
That’s no knock on Indianapolis, which has its own charms. But Hawaii is, after all, Hawaii.
An added incentive for those professionals who complete the eight courses comprising the designation — including a course on ethics — is that most of their companies not only pay for them to take the course, but will also fly them along with a spouse or friend to Honolulu.
As a result, the number of CPCU students that choose to complete their course study in time for the Hawaii event “just flood in,” said Savko.
The Institutes moves the event around from year to year. Future sites include San Diego and Orlando, both warm weather locations that can be fun to visit.
Hawaii Gets the Most Attendees
Hawaii, though, is the location every seven or eight years that gets the most attendees, hands down.
Savko, a State Farm executive, said if you are considering getting the designation, you might want to get it done in time to take full advantage the next time the event is in Hawaii.
When they are not considering how big the waves might get on the beach at Waikiki, underwriters, claims professionals and others pursuing the CPCU designation have a host of real-world issues to consider that will be impacting the insurance industry.
Chief among them, according to a recent survey by The Institutes, are the challenges presented in cyber security.
The other top challenges that Institutes members believe will have an impact are the sharing economy, in particular ride-sharing; predictive analytics; terror threats; and the rising use of drones.
As for threats facing their own companies, recruiting and retaining talent, with a response rate of 39.8 percent of those surveyed, was far and away the biggest in-company worry.
According to the CPCU Society’s Savko, that’s one more reason to celebrate the fact that more than 7,000 CPCUs will be honored in Hawaii.
“Certainly it’s well needed now due to all of the departures we are seeing in the industry,” he said. &
Handling Heavy Equipment Risk with Expertise
What happens to a construction project when a crane gets damaged?
Everything comes to a halt. Cranes are critical tools on the job site, and such heavy equipment is not quickly or easily replaceable. If one goes out of commission, it imperils the project’s timeline and potentially its budget.
Crane values can range from less than $1 million to more than $10 million. Insuring them is challenging not just because of their value, but because of the risks associated with transporting them to the job site.
“Cranes travel on a flatbed truck, and anything can happen on the road, so the exposure is very broad. This complicates coverage for cranes and other pieces of heavy equipment,” said Rich Clarke, Assistant Vice President, Marine Heavy Equipment, Lexington Insurance, a member of AIG.
On the jobsite, operator error is the most common cause of a loss. While employee training is the best way to minimize the risk, all the training in the world can’t prevent every accident.
“Simple mistakes like forgetting to put the outrigger down or setting the load capacity incorrectly can lead to a lot of damage,” Clarke said.
Crane losses can easily top $1 million in physical damage alone, not including the costs of lost business income.
“Many insurers are not comfortable covering a single piece of equipment valued over $1 million,” Clarke said.
A large and complex risk requires a sophisticated claims approach. Lexington Insurance, backed by the resources and capabilities of AIG, has the underwriting and claims expertise to handle such large claims.
“Cranes travel on a flatbed truck, and anything can happen on the road, so the exposure is very broad. This complicates coverage for cranes and other pieces of heavy equipment. Simple mistakes like forgetting to put the outrigger down or setting the load capacity incorrectly can lead to a lot of damage.”
— Rich Clarke, Assistant Vice President, Marine Heavy Equipment, Lexington Insurance
Flexibility in Underwriting and Claims
Treating insureds as partners in the policy-building and claims process helps to fine-tune coverage to fit the risk and gets all parties on the same page.
Internally, a close relationship between underwriting and claims teams facilitates that partnership and results in a smoother claims process for both insurer and insured.
“Our underwriters and claims examiners work together with the broker and insured to gain a better understanding of their risk and their coverage expectations before we even issue a policy,” said Michelle Sipple, Senior Vice President, Property, Lexington Insurance. “This helps us tailor our policies or claims handling to suit their needs.”
“The shared goals and commonality between underwriting and claims help us provide the most for our clients,” Clarke said.
Establishing familiarity and trust between client, claims, and underwriting helps to ensure that policy wording is clear and reflects the expectations of all parties — and that insureds know who to contact in the event of a loss.
Lexington’s claims and underwriting experts who specialize in heavy equipment will meet with a client before they buy coverage, during a claim, or any time in between. It is important for both claims and underwriting to have face time with insured so that everyone is working toward the same goals.
When there is a loss, designated adjusters stay in contact throughout the life of a claim.
Maintaining consistent communication not only meets a high standard of customer service, but also ensures speed and efficiency when a claim arises.
“We try to educate our clients from the get-go about what we will need from them after a loss, so we can initiate the claim and get the ball rolling right away,” Clarke said. “They are much more comfortable knowing who is helping them when they are trying to recover from a loss, and when it comes to heavy equipment, there’s no time to spare.”
“Our underwriters and claims examiners work together with the broker and insured to gain a better understanding of their risk and their coverage expectations before we even issue a policy. This helps us tailor our policies or claims handling to suit their needs.”
— Michelle Sipple, Senior Vice President, Property, Lexington Insurance
Leveraging Industry Expertise
When a claim occurs, independent adjusters and engineers arrive on the scene as quickly as possible to conduct physical inspections of damaged cranes, bringing years of experience and many industry relationships with them.
Lexington has three claims examiners specializing in cranes and heavy equipment. To accommodate time differences among clients’ sites, Lexington’s inland marine operations work out of two central locations on the East and West Coasts – Atlanta, Georgia and Portland, Oregon.
No matter the time zone, examiners can arrive on site quickly.
“Our clients know they need us out there immediately. They know our expertise,” Clarke said. “Our examiners are known as leaders in the industry.”
When a barge crane sustained damage while dismantling an old bridge in the San Francisco Bay that had been cracked by an earthquake, for example, “I got the call at 6 a.m. and we had experts on site by 12 p.m.,” Clarke said.
In addition to educating insureds about the claims process and maintaining open lines of communication, Lexington further facilitates the process through AIG’s IntelliRisk® services – a suite of online tools to help policyholders understand their losses and track their claim’s progress.
“Brokers and clients can log in and see status of their claim and find information on their losses and reserves,” Sipple said.
In some situations, Lexington can also come to the rescue for clients in the form of advance payments. If a crane gets damaged, an examiner can conduct a quick inspection and provide a rough estimate of what the total value of the claim might be.
Lexington can then issue 50 percent of that estimate to the insured immediately to help them get moving on repairs or find a replacement. This helps to mitigate business interruption losses, as it normally takes a few weeks to determine the full and final value of the claim and disburse payment.
Again, the skill of the examiners in projecting accurate loss costs makes this possible.
“This is done on a case-by-case basis,” Clarke said. “There’s no guarantee, but if the circumstances are right, we will always try to get that advance payment out to our insureds to ease their financial burden.”
For project managers stymied by an out-of-service crane, these services help to bring halted work back up to speed.
For more information about Lexington’s inland marine services, interested brokers should visit http://www.lexingtoninsurance.com/home.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.