Ian-Edward Stafrace of Atlas Insurance PCC shares how the active non-cellular core of their EU protected cell facility can help rapidly incubate risks, giving more time to assess and set up a cell.

Risk managers and insurtech innovators in Europe are increasingly looking to cells to tackle common challenges. In particular, Malta’s cell growth continues to outpace standalone captives. In 2021, insurance carrying cells grew 16 per cent, outnumbering captives and non-domestic insurance undertakings.

Besides cells, an EU PCC with an active core can provide many more solutions than traditionally understood, as it can also more rapidly underwrite risks through its core.

Shared substance and resources

Malta is the only EU member state with insurance protected cell legislation, providing cells with direct access to the European Economic Area single market.

Atlas also provides access to the UK market and is one of the first PCCs to submit a branch application to the UK Prudential Regulation Authority. While the application is being processed, Atlas writes new business in the UK under the Temporary Permissions Regime.

With their shared economies of scale, Maltese PCCs provide substance and resources. They give confidence in being onshore in the EU, without a standalone company’s complexities, costs and time, potentially also saving capital.

Insurers are increasingly expected to have adequate on-the-ground staff and key function holders. PCCs can significantly help address substance as cells form part of a broader single entity that provides shared board, governance and key functions in Malta.

The well-capitalised active core of Atlas PCC is focused on the traditional non-life domestic insurance business in Malta, where Atlas retains around 20 per cent market share. It has multiple branches and offices, naturally providing ample substance to the PCC.

Regulatory timelines

Owing to increased resources, the Malta Financial Services Authority (MFSA) has improved timelines for well-produced cell applications, with risks falling firmly within its appetite, especially if approached beforehand.

MFSA are very responsive and actively engage with promoters in each application. Insurance management companies and PCCs can help guide the application and regulatory exchanges.

Setting up a cell is faster than a standalone company due to the core capital, broader governance structures and resources already present in the PCC. However, you would not expect a cell or captive to be approved within days, as might happen offshore.

Rigorous compliance, due diligence process and solvency capital assessment aligned with EU regulations are required, especially in direct writing, when other stakeholders and consumer compliance may need to be factored in.

Active core incubation and fronting

Stafrace discusses a practical example of how an EU PCC with an active core can rapidly incubate risks, giving more time to assess and set up a cell:

A global captive manager had a client with a US captive that wished to set up a protected cell to cover its EU-based risks. As discussions progressed, it was clear in December that there would not be sufficient time to licence a cell for its 1 January renewal. As Atlas was already passported to all the countries where the risks were situated for the required classes of insurance, it underwrote the renewal through its core, reinsuring back to the US captive. Atlas provided a quick solution within a couple of weeks during the holiday season whilst allowing much more time for the setup of a cell to be considered within the same PCC.

Accelerated pilots attracting investors

Atlas hosts multiple insurtechs. On occasion, startups with promising models do not have sufficient data or capital to set up a cell. They may have reinsurance lined up or are willing to run a contained pilot to help them attract investors and better estimate projections.

Through its core, Atlas has assisted insurtech ventures in micro-testing parametric and other business models, for example, using blockchain smart contracts to automate underwriting and claims processes.

From Atlas’ experience helping prospective cells test their concepts, it is clear that market tests can attract investors, venture capital and other funding, further enabling scaling up of the business.

The non-cellular core can provide a sandbox facility that improves time-to-market and the gaining of actual market data. Business plans and projections can then be revised based on experience. If tests are unsuccessful, such also allows a low-cost exit without detriment to consumers.

Business underwritten by the core needs to fit within the PCC’s risk appetite. Typically, an assessment identifies risks that can adversely affect the projections, particularly volatility in results and exposure to potential events or claims tail.

The interests of customers or other third-party stakeholders need to be reviewed where applicable, together with local compliance requirements where risks are situated. Reinsurance counterparty risk and mitigations such as collateral are also assessed.

Brokers and global captive managers

The Atlas PCC team has built expertise in this sector, assessing and implementing various direct third-party, reinsurance and captive cells. It is also further developing the solutions it can offer through its non-cellular core.

Atlas is independent yet has excellent relationships with brokers and insurance management companies. In addition to the cells and schemes it hosts and manages directly, it also hosts business for clients of various leading global captive managers providing advisory and outsourcing support.

Brokers in the middle market are increasingly interested in such solutions. They are becoming more proactive when the hardened market rightly causes their most significant clients to question their risk financing. The collaboration with such brokers is mutually beneficial. Brokers are closer to their customers in their countries and provide compliant local services in their language.

Adequately resourced and experienced PCCs like Atlas continue to foster sustainable innovation, providing new solutions to emerging challenges.

Article first appearing in Captive Insurance Times July 2022 Issue 245