Introduction
Commercial Union, J&H Marsh & McLennan and Dresdner Kleinwort Benson have launched a new insurance facility called Portway Insurance PCC Limited. The objective of the facility is to allow corporate insurance buyers to access all of the benefits of a formal self-insurance vehicle at the lowest cost and without the need for them to inject share capital.
Portway Insurance has been incorporated in Guernsey, as an authorised insurer, under the newly enacted Protected Cell Company (PCC) legislation. This legislation provides for the legal segregation and protection of the assets and liabilities of each individual participant.
Effectively, Portway Insurance is a risk-taking rent-a-captive.
Prospective Users
The target market for Portway Insurance is varied; however, within a UK context, the principal target markets are seen as:
- Small to medium sized companies wishing to finance their risks over time, under a formal structure, but which have insufficient premium volumes to justify the expense of capitalising, establishing and managing their own captive.
- Homogeneous groups such as Trade Associations wishing to offer a package of insurance products to their members which incorporates elements of self insurance. The PCC legislation will allow competing businesses to enjoy a pooled self insurance arrangement without any risk sharing amongst the group membership.
- Existing captive owners who may wish to create a secondary self insurance mechanism for non-traditional risk financing, with the benefit of not participating in ownership or control of the insurance company.
Outside the UK, it is believed Portway Insurance will be attractive to:
- International companies where ownership of a captive is inefficient or where there is an interest in funding / tax planning.
As with the ownership of captives, the benefits of net cost risk financing to an Insured using Portway Insurance, will be achieved over a period of time. Participating Insureds should be committed to the "ownership" of their underwriting experience within their cells and, to this end, will sign a 3 year agreement with Portway Insurance.
Share Capital / Investors
The fundamental difference between Portway Insurance and a traditional rent-a-captive is that Portway Insurance's risk-bearing share capital is available to Insureds to support the underwriting programmes within their cells. The obvious benefits of that are, firstly, Insureds are not required to inject capital and, secondly, tax deductibility of premiums should be achieved in the Insureds' tax computation, which is not often the case with traditional rent-a-captives.
The core capital of Portway Insurance will support the underwriting activities of each cell and provide the cash flow in the event that any cell falls into deficit. In this manner, each Insured can fund for defined risk exposures over a period of time with the knowledge that if claims occur in the funding period, Portway Insurance will continue to support the programme and hence provide net cost risk financing for the duration of the contract.
Two investors, namely Kleinwort Benson Channel Islands Limited, a wholly owned subsidiary of the Dresdner Bank Group, and Commercial Union have equally subscribed to Portway Insurance's initial share capital of £5 million.
Service Providers / Existing Relationships
J&H Marsh & McLennan will manage the facility in Guernsey, Commercial Union will provide any required fronting and claims handling services and Kleinwort Benson in Guernsey will provide banking services, together with the management of a purpose designed investment vehicle.
However, it is important to note that Portway Insurance is accessible by any service provider. Portway Insurance permits the continuation of any good working relationship which an insured may enjoy with any other broker / insurer / reinsurer.
Underwriting Parameters / Pricing
There are no restrictions on the type and location of risk which Portway Insurance is prepared to consider.
Portway Insurance will follow the pricing strategy of the conventional risk transfer market. For instance, let us assume an Insured has placed a risk transfer contract with a conventional insurance company. Although the Insured has a strong risk management programme, they cannot avoid claims completely and, in the first year, they incur an unexpectedly large claim in addition to their normal attritional level of claims. At the renewal of this risk transfer insurance programme, the insurer will increase the base price of the contract because of the unexpected loss. This will return the insurer to an underwriting profit and once this has been achieved, they will gradually decrease the contract price again, assuming market pressures do not cause "abnormal" underwriting behaviour. Portway Insurance will behave in the same manner after the year of unexpected claims. The premiums will increase into Insured's cell in accordance with the "market" rate. However, if the Insured does not incur the unexpected claims in subsequent years, the additional premium surplus remains to the benefit of the Insured and therefore will be returned at the underwriting period closure. Ultimately this achieves net cost risk financing for the layer of risk retained within each cell.
Operational Aspects
Portway Insurance allows its individual Insured's to set up their own cell or cells from which to finance defined layers of risk.
Into each cell will be transferred:
- Premiums (after any brokerage)
- Investment Income on cash flow
and out of each cell will be paid:
- Claims
- Specific Reinsurance
- Management Costs
Claims reserved but unpaid at the ultimate closure of the underwriting year will be estimated and commuted back to the Insured. This method will provide a contractual termination of all further liabilities under the year of account. After deducting this commutation amount from the cell, any remaining accumulated surplus will be returned to the Insured by way of a premium rebate. From that surplus will be deducted a profit commission payable to Portway Insurance.
For short-tail business, it is envisaged that each underwriting year will be kept open for a period of 12 months after the end of the underwriting year, to allow claim reserves to be finalised. For long-tail risks, an appropriate period will be selected during which each underwriting year will remain open.
Thus, on closure, the Insured will receive a premium rebate (representing his net underwriting surplus, plus investment income, less management fees and profit commission), together with a commutation payment representing the value of any outstanding claim reserves.
If the cell should show a "cash" surplus but an "accounting" deficit - the difference representing reserves for outstanding claims - then the amount of the claim commutation payment to the Insured will be restricted to the "cash" surplus, so that the cell breaks even.
If the cell should show both a "cash" and an "accounting" deficit, on closure, then such deficit will be carried forward to be offset against surpluses from future underwriting years.
Costs of the Facility
As the target market in the UK is seen to be small to medium sized companies for whom the expenses of ownership of a pure captive might outweigh the benefits derived therefrom, Portway Insurance's total fees will be less than those incurred in running a pure captive.
There is a single charge levied on each Insured, calculated as a percentage of the premium income to be transferred to the cell, which will cover all costs, including :-
- rent of capital
- investment management
- construction of insurance / reinsurance programme
- claims management
- accounting and reporting (including Statutory)
- audit fees.
In addition to the above charge, a profit commission is payable to Portway Insurance on the ultimate closure of any underwriting year.
This information is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
