In the alternative risk transfer (ART) market, cell captives are gaining momentum as a preferred choice for businesses looking for greater control over their risk management strategies.
The alternative risk transfer (ART) market provides companies with a way to manage and transfer risk without relying on traditional commercial insurance. This market encompasses various risk management solutions, including risk retention groups (RRGs), insurance pools, captive insurers, and other alternative insurance products, offering businesses more flexibility in structuring their coverage.
Understanding cell captives
Among the different ART mechanisms, cell captives have gained momentum as a preferred choice for businesses seeking greater control over their risk management strategies. A cell captive is a specialised type of captive insurance that allows multiple individual users (cells) to share a single insurance company’s infrastructure. These structures offer businesses the benefits of captive insurance without the high costs and regulatory burdens associated with establishing an insurance company.
Historic background
The South African non-life insurance industry has a long history with captive insurance, dating back to the 1960s and before. However, the first cell-captive insurance licences were issued in 1993, marking the introduction of a relatively new self-insurance model incorporating elements of captive insurance. South Africa has since emerged as a global leader in cell captives, pioneering innovative structures such as first- and third-party cell captives, along with various ART solutions.
Growing popularity of cell captives
Several factors have contributed to the rising adoption of cell captives within the ART market:
- Cost efficiency: Unlike individual insurance companies, cell captives require lower capital investment and administrative costs, making them accessible to a broader range of businesses.
- Regulatory flexibility: Several jurisdictions around the world have developed regulatory frameworks that support the establishment and operation of cell captives, making it easier for companies to establish and operate them within compliant structures. Some key jurisdictions in sub-Saharan Africa that have developed some form of cell captive regulations include Namibia, Seychelles and Mauritius.
- Customisation and risk control: Businesses can tailor their cell captive to their specific risk profile, allowing them to take greater control over underwriting, claims management, and overall risk financing.
- Access to reinsurance markets: Cell captives provide companies with direct access to reinsurance markets, enabling better pricing and broader coverage options compared to traditional insurance.
- Managing the compliance burden: Cell captive insurers assume full responsibility for regulatory compliance, retaining an oversight role and ensuring that the participants adhere to governance and risk management requirements.
- Enhancing market credibility: Partnering with an established and reputable cell captive insurer like Old Mutual Alternative Risk Transfer Insure Limited provides immediate access to a strong brand reputation and financial stability. By leveraging the credibility of a well-recognised cell captive insurer, new cell owners can mitigate the challenges of brand recognition, actuarial support and financial assurance, allowing them to focus on growth and service excellence.
- Economic benefits of alternative risk transfer (ART) structures: ART structures provide financial advantages to policyholders or cell owners by allowing them to participate in underwriting profits. These benefits are typically distributed through dividends, performance-based bonuses, and investment returns on funds invested. This model not only enhances financial sustainability but also aligns the interests of the insurer and the insured, creating opportunities for long-term value generation.
- Scalability: Companies can expand their risk management programmes by adding new cells, risks or products as their needs evolve, ensuring long-term flexibility and growth.
Industries benefiting from cell captives
A wide range of industries have turned to cell captives to manage their unique risks. Sectors such as mining, healthcare, manufacturing, transportation and financial services have leveraged cell captive structures to optimise their insurance programmes.
Additionally, multinational businesses with diverse risk exposures find cell captives particularly useful in consolidating and managing risks across various jurisdictions.
The future of cell captives in ART
As companies continue to seek innovative ways to manage risk efficiently, cell captives are expected to play an increasingly prominent role in the ART market. Regulatory advancements, technological innovations and the need for more tailored insurance solutions will likely drive further adoption of this risk management tool. Businesses looking to reduce insurance costs, gain greater control over their risk and access reinsurance markets will find cell captives a compelling alternative to traditional insurance structures.
When selecting a cell captive arrangement, it is essential to evaluate key factors thoroughly. One consideration is the ability to retain risk, particularly when potential losses may exceed the organisation’s financial capacity. Additionally, securing sufficient and cost-effective reinsurance presents a challenge, requiring strategic planning to balance coverage needs with financial sustainability, risk management objectives and long-term financial goals.
In essence, the ART market has revolutionised risk management by offering businesses alternatives to conventional insurance, and cell captives have emerged as a key component of this transformation.
