Marsh
Derek Patience and Donna Weber of Marsh put forward a case to CIT for choosing a protected cell company over a single parent captive
Why would a company use a cell in a PCC rather than implement its own single parent captive?
Donna Weber: In our view, there are several reasons why a company would want to use a cell in a protected cell company (PCC) instead of creating its own single parent captive. For starters, there is a faster and lower cost of setup and closure if necessary. Cells additionally benefit from lower ongoing administrative costs, given that they jointly share a portion of the service provider costs. Cells also require less of a time commitment on behalf of the parent company forming the cell.
Derek Patience: Another point is where there is a disconnect between the client regarding the various wishes, ie, the risk manager wants some form of a captive solution and maybe the other members of the board might say that they are not in the business of owning an insurance company.
So a cell might be a way of appeasing both parties, ie, the risk manager gets his captive solution, albeit through a cell, and other members of the board get their wish in that they don’t have a fully owned subsidiary within their group.
Where are Marsh’s PCCs domiciled and why?
Patience: At the moment we have companies in the Isle of Man and Washington DC. The Isle of Man primarily meets the UK and European market, and Washington DC is for the US.
Weber: We chose these two domiciles to begin with for their strong regulations relating to complete segregation of assets between the cells—we felt they were extremely important.
Washington DC is a great US domicile because it has a parity provision that generally permits cells and captives domiciled in DC to write any business that is permitted in other US or foreign domiciles, so cells have the flexibility to write most insurance lines.
Another reason for choosing Washington DC was that the domicile allows for the formation of cells as incorporated entities through incorporated cell company (ICC) regulation. This allows companies to form cells under various organisational structures to facilitate liability protection and tax planning. Incorporated cell formation also makes it easier for cells to make certain US tax elections, such as 831(b).
Are there any other destinations that Marsh has thought about expanding into?
Patience: We already have vehicles that are non-Marsh owned in a number of domiciles, including Guernsey, Malta and Bermuda. But there are other domiciles that Marsh is considering.
Is there a typical client profile for Marsh’s PCCs?
Patience: A PCC is similar to a fully established captive in that really all lines are feasible, though it does depend on the risk profile of the client itself as to what the most appropriate insurance lines are for them.
Still the most popular, whether its captives or PCCs, are the likes of property, general liability and workers’ compensation.
In terms of a typical client profile, again it is similar to captives in that it will suit all industry types. So I don’t think that there is a typical client profile, so to speak, but I do think that in terms of cost and pricing it may be more suitable for 831(b)s in the US.
Additionally in the UK, amendments to the controlled foreign companies (CFC) rules have lowered the threshold for profits, so we are seeing more interest from small- and medium-sized enterprises looking for a captive solution in itself, and probably what would be more appropriate for them is the cell option.
The threshold on diminutive profits rose from £50,000 to £500,000 and there were also changes to foreign subsidiaries risk not being taxed in the UK. So again, we are seeing greater interest as a result of both of those factors.
Where do you see the most potential for growth in the PCC sector?
Weber: As far as the US is concerned, we expect significant growth from cells that are set-up under IRS section 831(b). Companies that establish a captive or cell under this election can write up to $1.2 million of premiums annually, building underwriting profits free from federal tax.
In order to make the 831(b) election, the cell needs to meet IRS tests for risk transfer and risk distribution—the latter of which is often harder for companies to achieve.
Marsh is soon going to be launching a strategy to use health wellness incentives to help companies achieve risk distribution within a cell or a captive structure. So Marsh is quite excited that through this strategy companies will be able to both address rising healthcare costs, and create some economic savings through an 831(b) structure.
Patience: With both UK CFC and 831(b), it’s given a certain impetus there. What I would say is that captives, whether they are fully blown or cell solutions, are still effectively at the mercy of the traditional insurance market. The insurance market has been somewhat soft over the last few years, so we are less inclined to get many deals that go direct to the insurance market—should market conditions change, captive and cells will be in higher demand.
Are there any noticeable downsides to the PCC structure?
Patience: A potential downside of the PCC structure in the Isle of Man is that we have separate PCC and ICC legislation. This means that you can’t morph into both—a PCC can only have protected cells and an ICC can only have incorporated cells.
If there was a need for a client to move from a protected cell to a single parent captive, it would need to be done by portfolio transfer of liabilities from the cell to the captive. It can’t simply spin off in a way that a cell in an ICC could.
Weber: I haven’t heard of any, and there have been no complaints yet!
