Gibraltar Protected Cell Companies to be permitted to write third party insurance business

Historically, ‘cell companies’ under the statutory regime for Protected Cell Companies have been used primarily for first party (captive-type) business. HM Government of Gibraltar has recently announced the expansion of insurance business permitted within Gibraltar PCCs (Press Release No: 486/2017, see link below), following lobbying on behalf of the insurance sector.

My view is that Gibraltar is correct in looking to extend the use of PCCs to cover third party business with the prior approval of the GFSC (local regulator). There are a number of safeguards one could put in place to permit this.

First, a cell writing open market business could have reinsurance supporting it with a minimum permitted rating or be fully collateralised. The reinsurer(s) would therefore have to be well rated with a minimum permitted rating or for an unrated reinsurer the reinsurance would be collateralised at a minimum level. The point here is obvious – if a cell’s reinsurance is collateralised by an unrated reinsurer it removes much of the counter-party exposure and arguably could provide even more effective security than a rating would because a rated reinsurer could fall below the minimum rating in the future.

Second, if there is no such reinsurance programme, the cell would have to be fully capitalised with a buffer above the Solvency 2 SCR level, agreed with the regulator. Here the prospective cell owners will have to decide whether it would just be more capital efficient to set up a stand-alone company instead of a cell within an existing PCC.

By way of example, I can envisage a situation where a PCC cell would want to write limited motor business for, say, one of the international car manufacturers (as promoter owner of the cell) and in my view we should view this differently to say a broker wanting to set up a cell to write motor insurance in the mass market.

By way of further example, I can see a situation where a promoter would want to use a cell as a fronting carrier to insure, say household business, but 100% (back to back) reinsured to say one of the leading international reinsurers – why should a PCC not do this, where the insurance paper is backed by such a strong balance sheet?

Of course, the regulators would still retain their power not to approve a new cell unless they were satisfied with the fitness and propriety, governance and risk management framework of the PCC and the promoters of the cell. This would provide additional appropriate safeguards and each cell application would obviously have to be dealt with on a case by case basis.