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.
Financing Pandemic Risk
Could capital markets offer an alternative to transfer the risk of financial losses caused by pandemics? The fast spread of the Zika virus in the past few months has made this question a valuable one for companies around the world.
The answer might well be yes. There are already instances of insurance and reinsurance firms selling pandemic risks to capital markets. And investors appear to be keen on buying them.
“We like to buy this kind of risk. It can be a good diversifier to a global portfolio,” said Christophe Fritsch, co-head, securitized and structured assets, at AXA Investment Managers.
The challenge of a pandemic risk bond is to define triggers and conditions for the coverage.
Past market transactions involve insurance-linked securities that transfer pandemic risks, often along with other excess mortality events such as terrorism. They are used by insurers and reinsurers as an extra tool to manage their regulatory capital reserves.
But an initiative by the World Bank to issue pandemic bonds could lead the way for other kinds of issuers to employ similar capital markets instruments. The World Bank’s bond employs a parametric trigger that helps speed up payments when companies may need some urgent cash flow.
Bill Dubinsky, a managing director at Willis Capital Markets & Advisory, said a likely candidate could be an airport that sees dramatically reduced traffic if there is a pandemic in the country.
If the risk had been transferred to the capital markets, he said, the airport could have a considerable degree of cash flow through the duration of the outbreak.
The challenge is to define triggers and conditions for the coverage.
The trigger of the World Bank’s bond, which should be placed with investors in the Fall, is linked to the level of confirmed deaths caused during a pandemic event. It might not be the best option in the case of pandemics such as Zika, where the number of deaths is fairly low, and companies face other effects such as the interruption of business or loss of revenues indirectly associated to the disease.
But other indicators, such as number of people infected in a limited period of time, could be employed, as is already the case with some parametric insurance coverage purchased by the tourism and airline industry.
The World Bank bond will test the market to assess whether there is appetite from investors for pandemic risks issued by players outside the insurance and reinsurance industries.
Priya Basu, a manager at the development finance department at the World Bank, said she expects the bond will pay a coupon of about 8.5 percent a year, which would be lower than the opening price for other CAT bond initiatives previously launched by the organization, such as the Caribbean Catastrophe Risk Insurance Facility.
The World Bank’s pandemic bond is part of a broader project called Pandemic Emergency Financing Facility, or PEF, which includes both a bond and insurance element, and aims to make $500 million available for pandemic emergencies at 77 poor countries.
The bond is expected to raise $300 million, while $200 million will be placed in the reinsurance market. Munich Re and Swiss Re are the insurance partners of the project.
The costs related to the bonds and insurance premiums are subsidized by donor countries, but the idea is that the facility will become a purely market-based one in the future.
“We are working both on a bond issuance and with the reinsurance market because we want to target a range of different investors with different risk appetites,” Basu said. “We expect that, over time, countries will be able to pay their own premiums and coupons.”
“One of the goals of the World Bank is to promote the utilization of market-based catastrophe schemes by governments that would otherwise struggle to provide urgent assistance to its citizens.” — Priya Basu, manager, development finance department, World Bank
The coverage would be activated when the aggregate number of deaths caused by a pandemic, as confirmed by the World Health Organization, reaches a certain limit. The formula also includes data about the rate of growth of the disease and the acceleration in the number of fatal cases. The index is calculated globally, but the payout is only released to the 77 countries covered by the program.
The facility is complemented by a cash component, worth between $60 million to $100 million, which can be employed in case of a severe pandemic that does not cause enough deaths to trigger either the bond or the insurance coverage.
According to Basu, that is the money that could be used for Zika outbreaks, where the number of expected deaths is relatively low.
“There is a financing gap from the moment it is clear that there is an outbreak with pandemic potential, but it has not become pandemic yet. That is when the PEF comes in,” she said. “The parametric trigger enables us to respond in a much quicker and more timely manner.”
One of the goals of the World Bank is to promote the utilization of market-based catastrophe schemes by governments that would otherwise struggle to provide urgent assistance to its citizens, Busa said.
In her view, the use of facilities such as the PEF could result in significant savings of public resources and, especially, in reducing losses of life. If PEF was up and running back in 2014, she said, international money to fight off the the Ebola pandemic could have started to flow to the affected countries more quickly.
Instead, it took extra months to gain any steam, resulting in the cost of billions of dollars and thousands of lives.
The disease covered by the $500 million bond and insurance facility includes some kinds of influenza, SARS, MERS, Ebola, Marburg and other zoonotic diseases like the Lassa Fever.
Your Workers’ Safety May Be at Risk, But Can You See the Threat?
Deadly violence at work is covered extensively by the media. We all know the stories.
Last year, ex-reporter Bryce Williams shot and killed two former colleagues while they conducted a live interview at a mall in Virginia. In February of this year, Cedric Larry Ford opened fire, killing three and injuring 12 at a Kansas lawn mower manufacturing company where he worked. Also in 2015, 14 people died and 22 were wounded by Syed Farook, a San Bernardino, California county health worker, and his wife, who had terroristic motives.
Active shooter scenarios, however, are just the tip of the iceberg when it comes to violence at work.
“Workplace violence is much broader and more pervasive than that. There are smaller acts of violence happening every day that directly impact organizations and their employees,” said Bertrand Spunberg, Executive Risks Practice Leader, Hiscox USA. “We just don’t hear about them.”
According to statistics compiled by the FBI, the chance that any business will experience an active shooter scenario is about 1 in 457,000, and the chance of death or injury by an active shooter at work is about 1 in 1.6 million.
The fact that deadly attacks — which are relatively rare — get the most media attention may lead employers to underestimate the risk and dismiss the issue of workplace violence as media hype. But any act that threatens the physical or psychological safety of an employee or that causes damage to business property or operations is serious and should not be taken lightly.
“One of the core responsibilities that any organization must fulfill is keeping employees safe, and honoring that duty is becoming more challenging than ever,” Spunberg said.
“Workplace violence is much broader and more pervasive than that. There are smaller acts of violence happening every day that directly impact organizations and their employees. We just don’t hear about them.”
— Bertrand Spunberg, Executive Risks Practice Leader, Hiscox USA
Desk Rage and Bullying: The Many Forms of Workplace Violence
Bullying, intimidation, and verbal abuse all have the potential to escalate into confrontations and a physical assault or damage to personal property. These violent acts don’t necessarily have to be perpetrated by a fellow employee; they could come from a friend, family member or even a complete stranger who wants to target a business or any of its workers.
Take for example the man who killed three workers at a Colorado Spring Planned Parenthood in April. He had no affiliation with the organization or any of its employees, but targeted the clinic out of his own sense of religious duty.
Companies are not required to report incidents of violence and many employees shy away from reporting warning signs or suspicious behavior because they don’t want to worsen a situation by inviting retaliation. It’s easy, after all, to attribute the occasional surly attitude to typical work-related stress, or an office argument to simple personality differences that are bound to emerge occasionally.
Sometimes, however, these are symptoms of “desk rage.”
According to a study by the Yale School of Management, nearly one quarter of the population feels at least somewhat angry at work most of the time; a condition they termed “chronic anger syndrome.” That anger can result from clashes with fellow coworkers, from the stress of heavy workloads, or it can overflow from family or financial problems at home.
Failure to recognize this anger as a harbinger of violence is one key reason organizations fail to prevent its escalation into full-blown attacks. Bryce Williams, for example, had a well-documented track record of volatile and aggressive behavior and had already been terminated for making coworkers uncomfortable. As he was escorted from the news station from which he was terminated, he reportedly threatened the station with retaliation.
Solving Inertia, Spurring Action
Many organizations lack the comprehensive training to teach employees and supervisors to recognize these warning signs and act on them.
“The most critical gap in any kind of workplace violence preparedness program is supervisory inertia, when people in positions of authority fail to act because they are scared of being wrong, don’t want to invade someone’s privacy, or fear for their own safety,” Spunberg said.
Failing to act can have serious consequences. Loss of life, injury, psychological harm, property damage, loss of productivity and business interruption can all result from acts of violence. The financial consequences can be significant. In the case of the San Bernardino shootings, for example, at least two claims were made against the county that employed the shooter seeking $58 million and $200 million.
Although all business owners have a workplace violence exposure, 70 percent of organizations have no plans in place to avoid or mitigate workplace violence incidents and no insurance coverage, according to the National Institute for Occupational Safety & Health.
“Most companies are vastly underprepared,” Spunberg said. “They don’t know what to do about it.”
Small- to medium-sized organizations in particular lack the resources to develop risk mitigation plans.
“They typically lack a risk management department or a security department,” Spunberg said. “They don’t have the internal structure that dictates who supervisors should report a problem to.”
With its workplace violence insurance solution, Hiscox aims to educate companies about the risk and provide a solution to help bridge the gap.
“The goal of this insurance product is not so much to make the organization whole again after an incident — which is the usual function of insurance — but to prevent the incident in the first place,” Spunberg said.
Hiscox’s partnership with Control Risks – a global leader in security risk management – provides clients with a 24/7 resource. The consultants can provide advice, come on-site to do their own assessment, and assist in defusing a situation before it escalates. Spunberg said that any carrier providing a workplace violence policy should be able to help mitigate the risk, not just provide coverage in response to the resultant damage.
“We urge our clients to call them at any time to report anything that seems out of ordinary, no matter how small. If they don’t know how to handle a situation, expertise is only a phone call away,” Spunberg said.
The Hiscox Workplace Violence coverage pays for the services of Control Risks and includes some indemnity for bodily injury as well as some supplemental coverage for business interruption, medical assistance and counseling. Subvention funds are also available to assist organizations in the proactive management of their workplace violence prevention program.
“Coverage matters, but more importantly we need employees and supervisors to act,” Spunberg said. “The consequences of doing nothing are too severe.”
To learn more about Hiscox’s coverage for small-to-medium sized businesses, visit http://www.hiscoxbroker.com/.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Hiscox USA. The editorial staff of Risk & Insurance had no role in its preparation.