Rent-A-Captives and Protected Cell Companies: Alternative Risk Financing Solutions
“Rent-A-Captive” was a term originating in Bermuda in the 1970s when captives owned by large international companies needed to write third-party risk to attain certain tax guidelines issued by the IRS. In essence, an existing captive could be “rented’ by an unrelated owner to facilitate their own self-insurance solution. The benefit to the new unrelated owner was primarily the ease of entry into using a captive (which at the time was expensive) and access to capital. Indeed, since the captive was already capitalized, the new unrelated owner basically “rented” the existing captive’s capital and paid a fraction of the cost of services needed to manage the captive. The primary disadvantage, of course, was that all the loss funds were essentially separated only by written agreement. If a loss was incurred that accounted for more than the captive owner’s funds, it was possible that funds other than that of the owners were accessible.
By the mid-1990s, however, a modern form of the Rent-A-Captive was introduced offshore and has since gained tremendous acceptance worldwide, most notably in the U.S. Often referred to as a Protected Cell Company (PCC) or a Sponsored Cell Company in the U.S., similar structures are known as a “segregated cell company” or a “segregated account company”. Though somewhat like a Rental Captive in organization and management, a significant benefit of a PCC allows for independent governance, statutory separation of funds and assets and the possibility to incorporate each account, which are referred to as “cells”. Unless otherwise agreed to, there is no pooling of risk between cells. Each cell and its assets are legally separated from other cell participants.
PCCs represent the fastest-growing area of captive use among middle-market organizations, allowing entities and businesses to obtain the benefits of a captive insurance company without incurring the upfront costs, capital and human investment as well as significant maintenance costs associated with forming and managing a wholly owned captive.