CAPTIVE SOLUTIONS FOR MGAs For some MGAs, providing risk-bearing capital for their most profitable portfolios of business can be a truly transformative business decision. But making the leap from pure MGA to capital provider can be daunting. Robus has the experience and expertise to guide you through the process. A SIMPLE WAY TO PARTICIPATE The most common way for MGAs to participate in their portfolios is by providing reinsurance capacity to their insurer panel. This means establishing a reinsurance vehicle which typically agrees a quota-share reinsurance treaty with the existing the insurer or insurer panel. In this case, the insurer(s) agree to cede a fixed proportion of the premium to the MGA-owned reinsurer, which in turn agrees to fund the same proportion in claims. INSURED
INSURANCE
MGA
CAPITAL
MGA REINSURER
CAPACITY QUOTA SHARE REINSURANCE
INSURER OR INSURER PANEL
Over the past 15 years, the Robus team have facilitated many such arrangements. We have witnessed MGAs starting with small risk-bearing participations, then growing over time to writing significant parts of their portfolios, often by providing direct capacity themselves.
Managing your existing capacity providers Negotiation with existing capacity providers can be a key part of the process. Robus has the expertise and experience to assist in negotiations and early-stage development of your participation plans. Participation in risk by an MGA can sometimes appear to be a threat to the market, but in most cases it can enhance the relationship by ensuring a true alignment of interests. Here at Robus, we will ensure the most common concerns are handled appropriately. For example, existing capacity providers often cite ‘credit risk’ as a reason not to accept MGA-owned unrated reinsurance. Robus has developed a number of techniques to counter these arguments and satisfy insurer credit committees. www.robus-risk.com
Captive Reinsurance Facilities at a Glance
CELLS
COMPANY
There are a number of alternative corporate structures for transacting reinsurance. They can be broadly classified as either Companies or Cells, with various options within each group:
Standalone Reinsurance Company
An MGA-owned reinsurance company in a domicile such as Guernsey can be set up within several weeks with a relatively modest capital outlay (minimum £100,000). There are however certain overheads to consider such as regulatory, directors’ and audit fees, which come from owning a standalone reinsurance company. The main advantage over other structures is that a private limited company is a straightforward and familiar concept. This can be important to certain contracting parties such as insurers.
Protected Cell Company (PCC)
For MGAs wishing to segregate portfolios of business or provide a reinsurance facility to third parties, a Protected Cell Company (PCC) may be considered. A PCC is one legal entity divided into the ‘Core’ and multiple ‘Cells’. The assets and liabilities of each cell are legally segregated from those of the Core and all other cells. The costs involved are very similar to that of a standalone reinsurance company.
Incorporated Cell Company (ICC)
An Incorporated Cell Company (ICC) is similar to a PCC but comprises multiple incorporated and licensed cells that are separate legal entities. The main advantage of an ICC over a PCC is that individual cells can contract with each other. The costs can be slightly higher than other structures as each Incorporated Cell is a truly distinct corporate entity. For example, each Incorporated Cell must be audited independently (whereas in the case of PCCs, only one audit is required for the whole PCC).
An alternative to a standalone company is an MGA-owned ‘cell’ within a third party sponsored Protected Cell Company. MGAs can set up a Protected Cell (PC) within an existing PCC in order to provide reinsurance capacity to their insurer panel in a low cost, capital-efficient way. The Core of the PCC will already have an insurance license and will already meet Cell in an existing third- the minimum regulatory capital requirement. They will also have in place arrangements for the overall management party Protected of the entity, leaving the cells to transact insurance or Cell Company reinsurance business according to the wishes of their owners (PCC) (in accordance with the approved cellular business plan). In this way, a PC within an existing PCC can be a very efficient substitute for a standalone reinsurance company. Hexagon Insurance PCC Limited, a Robus sponsored PCC, is available to new and existing clients. For more information visit www.hexagon-pcc.com
Cell in an existing third-party Incorporated Cell Company (ICC)
An Incorporated Cell (IC) within an existing third-party sponsored ICC is an alternative cell option providing a very similar solution to a standalone company. Consequently, the costs involved can be slightly higher than for a PC as, for example, each IC has to be individually audited. In Guernsey, an IC also has to maintain the minimum capital requirement of £100,000, which is the same as a standalone company. The advantage of having a separately incorporated cell vehicle can be dependent upon the needs of your contracting counter-party. Robus’ Hexagon ICC is available to new and existing clients.
European Fronting If existing capacity providers are unwilling to facilitate MGA participation in risk, Robus can assist with sourcing new capacity or EEA fronting. We have excellent relationships with capital providers and onshore EEA insurers with an appetite for new business opportunities. In the last 12 months, Robus has facilitated over £20m of fronting capacity, in addition to £60m of coinsurance and £30m of third party quota-share.
Establishing a standalone insurer For MGAs wishing to participate in their portfolios in a more direct way, it is possible to set up a standalone MGA-owned insurance company. As with reinsurance vehicles, there is a wide choice of corporate structures and domiciles. Guernsey continues to be a popular domicile for standalone insurers. Some UK risk can be underwritten on a direct basis by a Guernsey insurer, subject to a clear demonstration of Guernsey as the domicile of underwriting and control. However, for extensive UK or European portfolios, either a fronting arrangement or an alternative domicile should be considered. Gibraltar is an onshore EEA jurisdiction and is an excellent choice for the direct writing of UK and European risks. Gibraltar companies can be used to write insurance and reinsurance across all classes, including compulsory classes, such as third party motor and employers’ liability.
How can Robus help? Robus can manage the entire process, from cell or company set-up and licensing through to on-going management. Our teams in Gibraltar and Guernsey have market leading experience in the formation and management of insurance companies, including pure captive insurers, open market insurers and reinsurers. For MGAs that are considering bearing insurance risk for the first time, we can conduct a Feasibility Study to ascertain whether this would be strategically and financially beneficial. For some MGAs with certain portfolios, establishing an insurance or reinsurance vehicle is simply not viable – we will be honest in our assessments, outlining your options and the various costs and benefits in an unbiased way,
If you are interested in discussing this further, please contact : Tom Stephenson Justin Wallen Chris Le Conte +44 (0)1481 742551 +350 200 77065 +44 (0)1481 742554 thomas.stephenson@robus-risk.com justin.wallen@robus-risk.com chris.leconte@robus-risk.com
www.robus-risk.com
About Robus Robus is an independent insurance management, fiduciary and financial advisory group. We provide services to captive insurers, open market insurers and reinsurers, insurance intermediaries, ILS fund managers and other corporate entities around the world. We have offices in Guernsey and Gibraltar, providing our clients with representation in two of Europe’s leading insurance domiciles, one inside and one outside the European Union. For further information, please visit our website at www.robus-risk.com Robus Guernsey Town Mills North Rue du Pre St Peter Port GY1 6HS Guernsey
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