What is a Cell Captive?
In 1993, the first cell captive insurer entered the South African insurance industry initially from the need of large corporates to self-insurer their risks. Subsequently, retailers also showed an interest in sharing insurance profits from products that were sold to their clients. Over time, the cell captive industry has expanded significantly, and cell captives have been established as a practical solution to insure risks.
A cell captive structure allows a non-insurer to access the benefits of offering insurance without setting up their own insurance company. In this structure, the company takes on insurance risk which results in them also taking on potential insurance profits. Cell captive structures are complex special purpose vehicles that are set up with registered cell captive insurance companies through the purchase of a preference share.
There are two types of cell structures in the South African Market:
- A first-party cell structure is used where a cell owner chooses to self-insure its own operational risks. The cell owner is both the policyholder and beneficiary under the insurance policy issued by the cell captive insurer.
- A third-party cell structure is used when a cell owner wants to issue policies to third parties, i.e. members of the public.
Third-party cells are more prevalent than one would expect and are very popular in the South African market. It is estimated that more than 200 third-party cell arrangements currently exist in South Africa. Retailers, credit providers, telecoms, football clubs – all examples of non-insurers using third-party cell structures. Given the strong economic link to South Africa, it has also become more and more common for cell-like structures to appear in other African countries.
The diagram below illustrates the operational and legal set up of a third-party cell captive.
The main parties involved in a cell structure are the cell captive insurer and the cell owner. Most cell structures also include a reinsurer and potentially external third-party service providers. A cell structure is created by an agreement between a cell owner and a cell captive insurer, known as a shareholder’s participation agreement.
Cell Captive Insurers provide limited services to the cell and take accountability for compliance with the associated insurance and financial services laws and regulations. The most important function is that the insurer takes responsibility for the actions of all the players in the arrangement from a regulatory compliance point of view. The services may include, but typically do not include, administration, product design and underwriting.
The Cell Owner takes control of the day to day operations. The cell owner provides the client value proposition – the product and distribution channel. The cell owner can also play the role of the binder holder. This can take the form of an Underwriting Manager or a Non-Mandated Intermediary. The cell owner typically contracts (or has in-house) and insurance expert that drives the business strategy.
Third Party Provider(s). The cell captive insurer will appoint other external third-party service providers to perform services if the cell owner does not act as binder holder and/or administrator of the policies.
The cell captive insurer can decide to underwrite the risks under the cell structure on its own or may enter into reinsurance arrangements to share the risk with another party. Insurers take out a policy with a Reinsurer to transfer some of the risks it has underwritten.
Third-party cells typically carry significant risk to the insurer. Many functions are outsourced, and it is ultimately the insurer, not the cell owner, that is legally responsible for the product. Should a cell owner default, the insurer must continue to service the policies as their own. Given these risks to the insurer, most cell captive providers require detailed business plans, conduct due diligences and monitor arrangements closely. Cell providers typically only contract with reputable counter parties with solid partners, ideas and distribution capabilities.