A Guide to Protected Cell Companies: a new corporate structure for Insurance SPVs
When the Risk Transformation Regulations (the ‘Regulations’) become law, the first significant new legal structure since the creation of the Limited Liability Partnership in 2001 will be come into existence. Under the current proposals, a protected cell company (‘PCC’) will be able to be used only as a multi-arrangement insurance special purpose vehicle (‘mISVP’) however the government will keep the potential broader use of PCCs under review.
This note provides an overview of the proposals and the potential impact of the introduction of the PCC as a legal structure. After reading this note, please feel free to contact one of Elemental’s financial regulatory experts who can assist with any PCC queries you may have.
The Protected Cell Company
Although a PCC will be a private company limited by shares, it will have unique characteristics that have never before been written into English law. 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. The most impactful being that each cell will be insolvency remote from other cells and the core.
Unlike all other companies, 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). If you are thinking about applying to the FCA to register a PCC, Elemental would be happy to discuss this process with you.
Whilst for now it appears that PCCs will be confined to the ILS sector, it is arguably a structure that could be utilised to enable effective ring-fencing in many sectors from banking (between retail and investment units of a bank) to fund management (allowing a fund to invest different investor’s funds in different sectors without the risk of one bad bet bringing the whole house down).
Insurance Linked Securities
ILSs 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.
The two main structures adopted by the ILS market this far have been the catastrophe bond (or CAT bond) and collateralised reinsurance. The former are bonds used to raise capital to cover the loss associated with a catastrophe whilst the latter tend to be smaller in scale and often aimed at specialist ILS investors.
The introduction of the PCC takes advantage of provisions in the Solvency II Directive to use special purpose vehicles to group together ILS deals.
Saving time and administrative expense, the government hopes that the introduction of the PCC regime will bolster London’s claim to be the centre of the ILS sector. The key feature of a PCC is that it allows pools of assets and liabilities to be segregated within the company. If there is insufficient funding available for one deal (contained in one cell) then none of the other deals (contained in other cells of the same company) are affected. This is illustrated in the diagram below where the extent of the blue rectangle represents the single legal PCC entity.
Insurance Risk Transformation: a new regulated activity
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.
To ensure that the PCC regime is competitive in a global market, PCCs will be subject to a bespoke taxation regime. There will be no corporation tax for PCCs and a complete withholding tax exemption for debt and equity payments made from PCCs to investors. Our tax and accountancy team can provide further advice.
Following the publication of an updated version of the Regulations on 12 October 2017, the PRA and FCA have produced updated policy statements in order to finalise the rules and regulations required to facilitate the enforcement of the Regulations on 1 November 2017. Any businesses considering utilising the new PCC structure can open discussions with the PRA now and begin the process of applying for authorisation and should review the following PRA website.
Whether the concept of a PCC is ever extended beyond the ILS sector remains to be seen, however for those seeking further advice about the regime and considering commencing an application, Elemental can provide help. Please contact one of our experts if you would like any specific advice.
Elemental CoSec Limited
Useful resources and links:
PRA insurance special purpose vehicle website: http://www.bankofengland.co.uk/pra/Pages/authorisations/ispvs.aspx
Government web page on this matter including links to the Regulations: https://www.gov.uk/government/consultations/regulations-implementing-a-new-regulatory-and-tax-framework-for-insurance-linked-securities
Latest FCA consultation paper: https://www.fca.org.uk/publications/consultation-papers/cp17-3-proposed-handbook-changes-insurance-linked-securities
Latest joint FCA/PRA consultation paper: http://www.bankofengland.co.uk/pra/Documents/publications/cp/2016/cp4216.pdf
Latest PRA policy statement: http://www.bankofengland.co.uk/pra/Documents/publications/ps/2017/ps2617.pdf
Latest FCA policy statement: https://www.fca.org.uk/publication/policy/ps17-24.pdf
This overview has been provided for general information only. It does not purport to be complete and should not be relied upon and advice should always be taken if you are in any doubt as to the relevant rules.
 The latest draft of the Regulations was published and laid before Parliament in October 2017. The Regulations are expected to become law before the end of the year.
 The administration procedure under the Insolvency Act 1986 is amended by the Regulations to achieve this.
 The main piece of European legislation in the insurance and reinsurance sectors.
 This diagram has been adapted from a diagram produced by HM Treasury.