The rise of cell captives

We explore how cell captives can reduce the time, cost, and complexity of standing up a new captive, and could unlock the value of international employee benefit arrangements for more organizations.

The use of captive insurance for employee benefits has gained popularity in recent years, as employers look for more proactive ways to manage and finance their people-related risks, including life, disability, and medical insurance benefits.

This trend has mostly been led by large multinationals that have previously established a captive to participate in their property and casualty insurance programs. Having already invested in creating and running a captive, these organizations often have sufficient surplus capital available to support the addition of employee benefits, and the scale of their employee benefit premiums ensures that the business case makes financial sense.

But what about multinationals that do not have a captive? Or the considerable number of smaller multinationals, particularly those headquartered in the US, that are growing rapidly overseas but do not yet have the level of insurance premiums that would typically be required before using a single parent captive? The cost and effort of establishing a captive solely for employee benefits can be hard to justify for these employers. This is where we think cell captives can create interesting opportunities.

Why reinsure employee benefits to a captive?

Our 2024 People Risks report identified the key people risks that HR and Risk Management leaders are most concerned about, many of which point to the reasons for an increasing use of captives in this area. In particular:

International employee benefits are very localized in nature and for a large multinational operating in multiple countries, the landscape can look complex. The opportunity to consolidate providers under the framework of a captive program can help simplify vendor management, improve governance, and minimize cost.

Organizations are investing more in the health of their workforce, and in medical benefits, further increasing the scale of spend to be managed and creating a need for better data to track progress and identify opportunities.

Ensuring equity across the workforce is top of mind for many companies, for example providing access to the right healthcare and protection regardless of geography or seniority. Uplifting benefit programs to plug gaps requires investment and employers are seeking tools to contain these additional costs while keeping cash within the business.

In the midst of economic uncertainty, attracting and retaining the right talent remains a challenge. Differentiating their employment proposition through competitive and unique benefits is key but employers are finding that some insurers are less keen to break from the norm, preferring to maintain coverage in line with traditional local practices (e.g. limiting coverage for mental health or fertility treatment) or applying very conservative pricing. Use of a captive puts more control in the hands of employers to provide the benefits they need to support and engage a more diverse workforce.

What is a cell captive?

A Protected Cell Company (also known as a Sponsored Cell Company or Segregated Account Company) is an insurance company that offers the benefits of a single parent captive without the need — and associated time and expense — to create a separate legal insurance entity. Cell facilities are structured to create a legal separation of assets and liabilities between the individual cells and can be a popular alternative to a single parent captive due to their ease of implementation and lower operating costs.

A cell captive facility provides a licensed insurance vehicle or “cell” with the necessary infrastructure for clients to participate in their own risks, like a single parent captive. The insured operating company effectively rents the use of the cell. In exchange for the benefits, clients utilizing cells don’t get to choose some of their captive service providers (e.g. captive manager) as services are included in an overall package. Additionally, not all captive domiciles have Protected Cells legislation, so clients may have less choice regarding domicile selection.

Marsh McLennan is the largest captive manager globally and we operate cell facilities under the Mangrove brand in domiciles across the world including Bermuda, Barbados, Cayman Islands, Malta, Isle of Man, Guernsey, Delaware and Washington, D.C. There has been an uptick in the number of clients making use of cells; within the last three years alone, the number of cells in Marsh sponsored facilities more than doubled. In 2023, cells accounted for approximately 25% of new captive implementations by Marsh.

How can a cell be used for employee benefits?

Our clients have already used cell captives to capture significant savings on employee voluntary benefits and medical stop-loss programs in the US. We think cell captives have untapped potential as a powerful risk retention tool to help more organizations better manage their international employee benefit programs. A typical structure could look like this:

The use of a cell in this way could lower some of the typical barriers to organizations establishing and managing a new captive, including:

Streamlined process for implementation, allowing a captive to be created within days rather than months.
Simplified management processes, removing the need for complex or time-consuming tasks such as regulatory approvals and board meetings.
Significantly reduced fees implementation and ongoing management costs compared to a single parent captive.
Access to pre-selected service providers including legal, tax, actuarial, underwriting, and reporting.
Ease of use by HR stakeholders, to move quickly by purchasing an off the-shelf solution that they control rather than needing to convince multiple stakeholders with an interest in an existing captive.

By using a cell instead of establishing a single parent captive, the value for the organization will not be diluted as they will still participate fully in the profits (or losses) of risks being retained through the captive and will maintain control over pricing and benefit design in the same way as a single parent captive.

When would a cell make sense?

A cell captive should be considered by those meeting some or all of the following criteria:

Organizations that do not have a captive.
Those that are experiencing challenges with increasing costs and/or a lack of flexibility inhibiting their ability to provide the benefits that they want to offer.
Organizations with non-US premiums in the region of $5-15m. A cell can potentially reduce the volume required for a viable business case, but some scale will still be required.
Organizations with an existing captive that cannot be used for employee benefits due to domicile regulations or other factors.
Organizations that have sufficient scale to consider a single parent captive but do not have the time or appetite for managing the associated processes and governance.

These requirements are not mandated but provide an indication of where a cell captive may be worth thinking about, together with an expert advisor.

What are the challenges?

Establishing a captive program for employee benefits using a cell captive will require investment and effort, therefore a thorough feasibility study should be undertaken to ensure that this is the optimal approach. Key considerations and solutions include:

As the cell captive is a regulated insurance company, sufficient capitalization will be needed; there is often a perception that capital requirements for establishing a new captive are significant.

Solution: Marsh McLennan has already contributed the core capital required to establish the Protected Cell Companies, but each cell owner is required to contribute sufficient capital to support the business being written in their cell. Unlike single parent captives, cells typically do not have a minimum capital requirement so the capital contribution may be lower with a cell. Additionally, there are several ways to structure capital in a flexible way through use of Letters of Credits and other approaches, so that upfront capital investment required from the cell owner can be relatively modest.

International employee benefit programs have some inherent diversification due to multiple territories being underwritten, along with different lines of coverage (life, disability, medical, US medical stop-loss etc). However, a cell captive only writing employee benefits would have less ability to spread losses across other uncorrelated lines of risk and premium, compared to a more mature and diverse captive.

Solution: This issue can be addressed firstly through expert underwriting, which can be considered the first line of defense for captive risk management, leveraging the expertise and experience of an advisor such as Marsh McLennan that understands the risks. Secondly, purchasing reinsurance to protect against unforeseen events. We have a readymade facility to provide captives with access to distinct types of reinsurance specifically designed for international employee benefits. The cost and structure of reinsurance, along with selecting appropriate risks to underwrite, will form an important part of the feasibility study. Additionally, clients can add other coverage lines to the cell over time, as with a single parent captive, to increase risk diversification.

Organizations that choose to use a cell captive may be doing so because they have lower overall premium volumes than organizations that have established their own captive. International employee benefits will always require a fronting insurer and there are a number of global networks or carriers that provide fronting solutions. While fronting networks have differing minimum premium requirements, the cost for service and other requirements become more commercial with larger volumes being included.

Solution: The availability and cost of fronting is typically linked to premium volumes so organizations with lower volumes may need to rely more on their broker’s scale and negotiating ability to ensure that competitive fronting solutions are made available. Marsh McLennan is the largest global broker for international benefits, placing more than $18bn in annual premiums outside of the US.

Forming a captive to finance international benefits is a big decision for employers, requiring careful consideration. But the availability of cell captive solutions, along with increasing appetite from fronting companies to work with smaller multinationals and a lack of compelling alternative options, is helping to lower some of the barriers and make it a more attractive option. We expect more small-sized multinationals will turn to captives in the next few years to help get to grips with their people risks. For those that have previously dismissed the use of a captive because they didn’t have the necessary scale, now might be the time to take another look.

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The rise of cell captives

We explore how cell captives can reduce the time, cost, and complexity of standing up a new captive, and could unlock the value of international employee benefit arrangements for more organizations.