Understanding Insurance Cell Captives
- Part 2 of 2
Cell captives are highly effective but also complex structures and have been employed in many industries for many purposes so let us take a look at some practical examples.
REAL LIFE EXAMPLES OF THE APPLICATION OF CELL CAPTIVES IN AN INTERNATIONAL CONTEXT
Here are examples of specific organizations that utlise cell captive structures:
1. Multinational Corporations
Many multinational companies like Coca-Cola and General Motors use captive insurance for their global operations. Coca-Cola has a captive insurance company named Red Re, Inc which helps the company manage its global risks and provide insurance for its subsidiaries. GM’s captive insurance entity is General International Ltd helps GM manage risks like workers' compensation, general liability and vehicle damage.
Benefits:
Multinational companies face varied risks like currency fluctuations, regulatory compliance and supply chain disruptions. Using a cell captive structure allows them to customise insurance products for different regions while centralising their risk management and helps them avoid relaying on multiple insurers in different jurisdictions. Depending on the jurisdiction, there may be tax advantages to using the cell captive.
2. Pension Funds
Several substantial USA and Canadian Pension Funds use captive insurance to self-insure risks related to long-term liabilities including disability benefits. Managing these liabilities through a captive allows the Pension Funds to have more control over the reserve investments and risk mitigation strategies, aligning with the fund’s investment goals. In addition certain
Benefits:
Pension funds may use a captive structure to insure life, disability or health benefits, allowing them to manage risk directly. Pension funds can tailor their disability benefits to meet specific needs including types of disabilities covered, benefit amounts and waiting periods. Pension Funds are subject to strict regulatory requirements and cell captives can ensure compliance while providing coverage They may save on premiums compared to traditional insurance markets, especially if they have a favourable claims history. Funds within the cell can be invested, generating investment income thar can offset claims. They may implement their own claims management processes. The specific terms of the disability benefits can be developed as the needs of the workplace/ industry changes. There may be tax advantages depending on the jurisdiction. Captives are structured to comply with local regulations. By managing claims, the Funds may create a more predictable cash flow and forecast liabilities. They can develop long-term strategies for managing disability risks such as employee wellness programs.
3. Large Retailers or Wholesalers
Walmart operates a captive insurer for property, casualty and employee benefit risks across its vast retail network. By managing its insurance needs internally through a cell captive, Walmart can lower the costs associated with external insurance premiums and retain the underwriting profits. Walmart uses Claims Management Inc., a captive insurance subsidiary that helps the retailer cover various risks like general liability, workers' compensation and property damage.
Benefits:
Large retail chains can self-insure risks like product liability, employee health benefits and property damage, smoothing insurance costs over time and keeping premiums lower. They can reduce administration costs. A retailor can tailor to customise coverage to suit its own unique risks. There is flexibility in the terms. The cell captive allows direct control over claims and data driven insight. Funds in the cell can generate income. They can be structured to provide tax benefits. They provide incentives for risk management. They can serve as a strategic tool for long-term risk management and financial planning.
4. Mining and Construction Companies
Anglo American, Rio Tinto and other multinational mining and construction companies use captives to cover environmental liability, workers' compensation and equipment damage risks. The cell captive allows for customisation based on unique operational risks across various mining sites.
Benefits:
Mining and construction companies face specific high-risk exposures such as equipment breakdown, environmental damage, or employee accidents, and a cell captive structure provides them with the flexibility to tailor insurance policies accordingly. Cell captives allow them to manage claims directly leading to faster resolutions and lower costs. They may lower insurance premiums and allow them to retain profitable risks. Captives can help companies manage budgets and financial planning. They can provide enhanced safety and risk mitigation. Data analysis helps the companies identify trends and implement strategies to reduce workplace risks. Depending on the jurisdiction, there may be tax benefits. They allow companies to adapt quicky to changing risks. They are excellent vehicles for employee benefits such as health and disability insurance and can fund safety and wellness programs.
5. Financial Institutions and Investment Companies
Goldman Sachs, JP Morgan and other financial institutions have historically employed captives to self-insure risks related to professional liability, errors, and omissions or operational risks. By doing so they retain control over claims management and the reserves needed to manage those risks.
Benefits:
Financial firms can create cell captives for credit insurance, directors and officers (D&O) insurance and operational risk protection, keeping premium flows within the organisation while controlling risk management more tightly. Cell captives allow for tailored insurance solutions and direct claims management. They can lower insurance premiums and retain profitable risks. Financial institutions are subject to strict regulatory requirements and cell captives can ensure compliance while providing coverage. Depending on the jurisdiction, there may be tax advantages. The cell captive can incentivise institutions to implement robust risk management practices as they directly benefit from reduced claims and lower costs. They can be a strategic business tool to provide a competitive advantage and long-term financial planning.
6. Agricultural Cooperatives
The Iowa Corn Growers Association has used a captive insurance model to provide crop insurance and yield protection to its members, helping them hedge against weather-related risks. In doing so, they have reduced the volatility of premiums caused by the agricultural sector's inherent unpredictability. Ocean Spray, a prominent agricultural cooperative, manages its risks through a captive insurance company named Ocean Spray Insurance Ltd.
Benefits:
Cooperatives can pool risk among members, offering customised policies that cover crop yield loss, livestock loss, equipment breakdown, weather events or even market volatility. As described above they may offer cost efficiency, cash flow management, enhanced risk mitigation, data analysis, tax advantages etc.
7. Professional Services Firms
Deloitte and PWC have established captive insurance for professional liability and employee benefits, ensuring that the firm can cover client-related risks such as errors and omissions while managing the claims process internally as well as employee benefits for its global workforce.
Benefits:
Professional services firms and consultancies can use captives to provide bespoke professional indemnity insurance, employee benefits and risk management tools to their workforce around the world, reducing reliance on third-party insurers. Many of the benefits described above would influence their choice to establish a cell captive.
8. Trade and Industry Associations
The American Bar Association (The ABA) operates a captive to offer professional liability insurance to its members under the company ABA Insurance PCC.
Benefits:
By pooling risk across association members, industry-specific risks such as professional liability can be mitigated with lower premiums and tailored coverage.
9. Technology Companies
Apple Inc and Google operate captive insurance companies, offering warranties on products and providing coverage for intellectual property disputes, warranties and product liability and cyber liability risks.
Benefits:
Tech companies can leverage insurance cell captives to handle cyber risks, intellectual property disputes, product liability, regulatory compliance challenges, employee benefits and other operational risks specific to tech which are increasingly important as the tech industry grows and evolves.
10. Healthcare Providers
The Mayo Clinic apparently uses a captive insurance company to cover medical malpractice risks and employee benefits. This allows the clinic to better manage its insurance costs while maintaining full control over claims and reserve levels.
Benefits:
Healthcare providers can self-insure malpractice claims, regulatory compliance risks, operational risks such as equipment damage and employee benefits using a captive to manage these high-exposure risks while retaining control over premium costs and risk management.
Conclusion
The above real-life examples illustrate the versatility of cell captive insurance structures for managing diverse risk portfolios and improving financial performance through customised insurance solutions.
by Alexandra Burger