Download Protected Cell Companies

Protected Cell Companies
This paper outlines the concept and purpose of a Protected Cell Company and advantages over a
conventional Captive insurance company. Please also refer to our Captive Solutions leaflet that
summarises the basic concepts of a Captive insurance company.
What is Protected Cell Company?
A Protected Cell Company (‘PCC’) is a standard limited company that has been separated into legally
distinct portions called Cells. The net income and loss, assets and liabilities, rights and obligations of
each Cell are kept separate from all other Cells. Each Cell issues its own separate Cellular shares,
allowing shareholders to maintain sole ownership of an entire Cell while owning only a small
proportion of the PCC as a whole. A PCC therefore operates as a “hub and spoke” arrangement with
a central core and individual Cells, while retaining the legal status of a single company.
The Cells operate like separate insurance companies, with their own bank accounts, cash flow and
profit and loss statements as well as their own reinsurance arrangements.
Segregation between Core and Cells is achieved through the issuance of two different classes of
shares:

Management (Core) shares: Control the use and application of the Core capital of the company
(holds the voting rights of the PCC);

Cellular shares: Control the individual Cells and have no voting rights in the PCC. Cellular shares
are usually structured as redeemable preference shares.
The Parent Company in the illustration below would be the owner of a Cell and not of the entire PCC
structure. As such they would hold Cellular shares.
Country A
Parent
Company
Labuan
Protected Cell Company
Cell
Core
As each Cell is not a legal entity in its own right, but is rather a part of the overall PCC company, a
Cell does not appoint an own Board of Directors, auditors and company secretary.
NMG Risk Solutions Pte Ltd
Cells are set-up, approved and closed individually. The Core of a PCC is a non-risk taking facility and
therefore protection (e.g. in the form of Letters of Credit, Parent Company Guarantees or similar) is
required for any risk gaps in order to minimise the risk for each Cell is needed.
PCCs are a further development from the Rent-a-Captive concept. The main advantage over Rented
Captive structures is that the Cells in a PCC will not be affected by the adverse performance of
another Cell and the assets of the Cells are not exposed to the counterparty risk of the PCC entity.
PCCs are only possible in domiciles providing specific legislation that protects the Cell even in the
case of insolvency.
What is the benefit of a PCC?
A PCC structure has several advantages over a Captive structure. These are mainly derived from the
fact that the Cell is not a legal entity in its own right, but the PCC structure as a whole is.
The key advantages are:
 No initial capital requirement
 Lower cost as no own auditor, separate Financial Statements or Board of Directors are
required for the Cell
 No Directorships
 The Cell is not a legal entity and hence is not subject to most Controlled Foreign Company
(CFC) legislations
 A Cell is quicker to set-up and close-down compared to a traditional Captive insurer
 The assumption of risks, investments and other decisions can be performed similar to a
traditional Captive insurer
 No audit is performed for the Cell itself, the PCC structure as a whole will be subject to audit.
However, the following also needs to be considered:
 Since the establishment of the PCC concept, there has not been a case of a Cell bankruptcy;
hence the legal framework has not been tested in practice.
 Since the Cell is part of the PCC structure and subject to Board approval of the entire PCC the
Owner/Company theoretically does not have full control over the Cell. In practice,
Shareholder Agreements will provide clarity, while the Board only needs to ensure Solvency
of the overall PCC structure.
 Fronting Insurers may require Cells to have letters of credit to limit their exposure.
Overall, the Cell provides very similar value to the owner as a Captive, but at lower cost and without
being a legal entity in its own right.
What are the Next Steps?
We would be delighted to discuss with you
how you can reduce your Total Cost of Risk.
We guarantee confidentiality of information
provided and offer a simple pre-feasibility free
of charge.
NMG Risk Solutions Pte Ltd
Contact us for more details.
NMG Risk Solutions Pte Ltd
Daniel Koepfer, CFA, CII
Partner
Tel.: +65 6325 9872
Email: [email protected]