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Friday, February 1, 2008
Leveraged opportunities

Cell captives, among other benefits, provide the cell owner with the ability to act as an insurer legally without having to incur the expenses and burdens associated with founding and running his own insurance company.

Neil Ashcroft, executive head of marketing and client service at Centriq says that in comparison with other options, cell captives ring-fence insurance operations from the client’s other core business. “It also provides direct access to professional reinsurance markets without having to go through an insurer, thereby potentially reducing costs in the supply chain. It provides the opportunity to sell insurance products to the cell owner’s customer base and afford him the capacity to retain own risks.”
The cell captive industry has experienced extensive growth since its inception. It is regulated by the issue of a specific cell captive insurance license that takes into consideration the fundamental differences between cell captive insurance and conventional insurance. “The regulations governing cell captives have therefore become more onerous over time. This has, however, effectively enhanced compliance, which is very positive,” comments Mr Ashcroft.
The use of cell captives from a commercial perspective has dramatically increased since they were first introduced. “This,” he says, “is due to the growing number of retailers and other affinity groups that have become aware of the advantages in being able to sell insurance products to their client base.”
The significant increase in cell captives has therefore evolved less due to cell captive technology itself and more as a result of the commercial opportunities that the system offers.
Cell captives are formed for a number of reasons, of which the following are the most popular:
• Ability to on-sell insurance products;
• increased awareness of risk management;
• lower expenses compared to traditional risk transfer/insurance companies;
• credit for good claims experience;
• insuring the uninsurable; and
• direct access to the reinsurance market

As a market, South Africa is behind many other countries in the supply of affinity insurance solutions. For example, there are considerable leverage opportunities for affinity groups and the cell captive technology provides a cost effective method to access these.
Indeed, as Mr Ashcroft notes, while there is less use of cell captives to retain owner’s risks (the original intention), there is big increase in captives that enable cell owners to provide insurance products.
He points out some scenarios where companies have leveraged specific advantages from the use of cell captives:
Company A was able to offer its client base insurance on its core product, which was more attractive than the conventional insurance market because the client was able to manage the product risk more effectively, especially since it would understand its own product better. Therefore, this provided more value to its clients. In addition, Company A made profits in excess of R120 million over the last few years from this business, which has enabled it to provide even greater value to its clients in the form of incentives, lower costs, wider cover and so on.
Company B placed the employee benefits such as group, personal, accident, death and disability into a cell captive for its staff. As a result, the costs of cover have decreased as it does not need to cross subsidise poor risks or provide insurers with profits. Due to the lower costs, it has been able to provide its staff with cover much wider than the conventional market, making it a preferred employer to retain staff in an industry suffering from shortage of expertise.
I see the demand for the use of cell captives for on-selling insurance products continuing to rise – at least, in the absence of a more cost effective and convenient structure, he says.

Copyright © Insurance Times and Investments® Vol:21.1 1st February, 2008
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