October 27, 2017 A Guide to Protected Cell Companies: a new corporate structure for Insurance SPVs
The Risk Transformation Regulations (the ‘Regulations’) will, once enacted into law, create the protected cell company (‘PCC’). This is an entity that will be used as a multi-arrangement insurance special purpose vehicle (‘mISVP’). A PCC will be a private company limited by shares but will have unique characteristics. Designed to provide for the efficient and robust management of multiple insurance linked security (‘ISL’) deals, a PCC will comprise a core administrative unit and any number of separate cells, each linked to a separate ILS deal. Any shares issued on behalf of a cell will carry no voting rights, i.e. investors have no means of influencing the management of a PCC.
The core and its cells do not have individual legal personality. It is the PCC as a whole that has legal personality. However, each PCC cell will have many characteristics of separate legal personality. Each cell will be remote from each other (and the core) from an insolvency perspective. The Insolvency Act 1986 is being amended to ensure that an administrator cannot use assets from one cell to settle claims in respect of another.
The company registrar for PCCs will be the Financial Conduct Authority (‘FCA’) and not Companies House. An application to incorporate a PCC must be made to the FCA as part of an application to become regulated to perform the new regulated activity of ‘risk transformation’ (discussed below).
PCCs will be used to issue insurance linked securities (‘ILS’) which are an alternative form of risk mitigation for insurance and reinsurance firms. When large insurance undertakings write thousands of policies protecting customers against catastrophic events such as a hurricane, a portion of this risk above a specific level of liability is often packaged and sold to other firms (reinsurers). In turn reinsurers will raise funds to meet their capital requirements through the issue of investments to the capital markets.
Incorporating a PCC must be part of an application to the Prudential Regulation Authority (‘PRA’) to become authorised to carry out mISVP business. This will be titled ‘insurance risk transformation’ and will constitute a new regulated activity. Elemental’s financial regulatory experts can help to create and manage the application process. Investments in PCCs will be limited to qualified investors only thus restricting investment to wholesale investors and persons who pass both a qualitative and quantitative test to ensure they are suitably qualified to invest in ILS. Along with a new regulated activity will come a new director duty. PCC directors will be required to exercise reasonable care, skill and diligence to ensure that a PCC complies with the Regulations.
For those seeking further advice about the regime, Elemental can provide help. Please contact one of our experts if you would like any specific advice.