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Cell vs Pure: Horses for Courses

This month features an exclusive Q&A with Labuan IBFC Inc. CEO Farah Jaafar discussing the key features, advantages, and differences between cell and pure captives.

There has been a surge of activity in the captive space over the last couple of years. This has mainly been driven by the hardening third party insurance markets for both large and small organisations and exacerbated by COVID. What have been the factors in Labuan specifically?

Farah: Labuan IBFC offers Asia’s widest range of insurance, reinsurance and self-insurance structures, and in fact, we have the most comprehensive “toolbox” of self-insurance structures and solutions in the region, both in the conventional and shariah-compliant versions. To date, it is still the only jurisdiction in Asia that offers the protected cell company (PCC) as part of a risk management solution.

A little less known fact is that we also have the largest and deepest insurance and risk management ecosystem in Asia with more than 220 licence holders, supported by professional corporate service providers and international banks.

So, holistically, Labuan IBFC does offer an ideal location for captive set up, but our leadership in captives has been entrenched due to our approach in developing the jurisdiction’s self-insurance sector being hinged on generating awareness with the regional risk management community and working closely with industry groupings.

Having great intermediaries has been beneficial and fostering a close working relationship with the Labuan International Insurance Association has been key. And as you say the hardening of the market, greater awareness, Covid and the characteristics of the jurisdiction has really created the perfect “storm” for our growth.

Additionally, one cannot overlook that Labuan IBFC provides a cost-efficient operating base as creating economic substance such as administration and operational expenses can be made in Malaysian Ringgit.

It certainly seems that cells have come of age. Is it fair to say that the majority of new cells are being established for a specific risk? It sounds as though there are some last minute decisions being taken, would you see this as agile, opportunistic or perhaps desperate?

Farah: Well, yes and no. While cell captives are typically set up by corporations with exposures to specific risks especially those difficult to get traditional commercial cover, there are also corporations that are aiming to consolidate risk exposures for a holistic view of risks and transparency of risk costs and returns via a pure captive. We envisage cells as “training wheels” for pure captives, as it gives corporations a taste of the benefit of self-insurance, like an appetiser almost with a pure captive being the entre.

Having said that, like everything else in wholesale financial and risk intermediation, there is no one size fits all. Cells though do provide quick cover options, especially as we no longer require approval for the setting up of cells, merely a notification to the Regulator within 14 days.

Let’s drill down further into some of the key differences between a cell and a traditional captive. Clearly in the traditional formation of a captive, it's usually a 100% owned subsidiary. With the cell, it is owned by someone else. What are some of the key factors to think about in order to set up a cell with confidence?

Farah: Whatever the circumstances or situation may be, the choice of the service provider is key and that said provider is competent and familiar with the management of cells as well as the landscape of the insurance industry. This requirement applies to either the core provider for the protected cell company or the master rent-a-captive depending on the option chosen. Other factors worth considering include paid-up capital, professionalism and servicing elements. The relationship with the core is key, as the core will have to agree with the level and scope of risk being placed in the cell, there is to a certain degree an almost “underwriting” element in the operations of the core vis a vis the cells.

Do you have any data or information as to who is setting up these new cells? Are these the traditional captive players such as large multinationals, or are medium-sized enterprises also getting a taste for captives through this new route?

Farah: Yes, we are seeing a trend in medium-sized corporations starting to explore and consider captive as part of their risk management solution, more so now seeing how it is more cost-efficient in setting up via a cell. With the current hardening market and the covid pandemic, this has undoubtedly accelerated the setting up of cell captives for specialised risks, which would have otherwise been traditionally uninsurable. So we have seen a lot of cyber risk, directors liability, travel cover, etc, being placed in cells. It is also interesting to note how more and more of these cells are not set up by risk owners in Asia, as we have seen growing interest from Australia and Europe as well.

If it is easy and quick to set up a cell, presumably then it is also easy and quick to close it down again. Perhaps this is the intention of certain new market entrants? Come in when needed and then close the cell when third-party markets turn back to the buyers advantage. Is this feasible or sensible? And what about solvency?

Farah: In Labuan IBFC, it generally takes two weeks to set up a cell- operationally. Depending on the risks within the cell (whether long tail or short term) and if the risks have expired their term, then closing down a cell can be done almost immediately. Whilst cells as a corporate structure is easy to set up, the reinsurance contract inputted into the cell still requires a run-off like all other insurance contracts.

However, it is worth noting that there is no limit on the cover that can be taken at the cell, which is relatively similar to a pure captive. This ultimately depends on the appetite of the core in totality and the solvency of each cell individually. Hence, the solvency ratio is managed at the core vis-à-vis the reporting to the regulator. In Labuan IBFC, the solvency statement of the core is required to be reported to the regulator Labuan Financial Services Authority twice a year.

One of the ideas is that a cell captive can be considered as a 'trainer' facility before moving to a full captive solution. Is that still a reasonable base assumption? How feasible is it to convert a cell to a full-blown captive? Or should the customer assume from the outset that they will have to start again if they want the full self-owned version?

Farah: Yes, it is possible for a cell to convert into a pure captive the moment it achieves economies of scale to set one up. It could also be due to the changes of the corporate’s risk profiles with time which would then require a more holistic review of its risk management strategy. And for a more holistic approach to strategic risk management, there is no real alternative to a pure single owner captive. Alternatively, we have seen instances where only a couple of new lines or risk areas necessitating cover, some users prefer to set up only a new cell or two. At the end of the day, it all largely depends on the strategic risk management practices within the organisation.

In Labuan, a conversion from a cell to a pure captive is considered a new application. This is because a pure captive is a new legal set-up (whereas a cell is not), proper due diligence is required. That said, the process may be relatively simple as the cell already has a track record in the jurisdiction. In such cases, the approval process will normally take a month.

Labuan IBFC is pleased to announce that the fourth edition of The Asian Captive Conference (ACC 2021) will be held on 2 December 2021.

Jointly organised with the Labuan International Insurance Association, the conference is dedicated to the development of self-insurance in the Asian region.

Register your interest here to receive future updates and complimentary access to the virtual conference.
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