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Quick cover: segregated-cell captives offer almost instant insurance solutions combined with lower costs, but experts say their legal structure hasn''t truly been tested yet. (Alternative Market: Property/Casualty).

Article Excerpt
With insurance prices on the rise, coupled with terms and conditions tightening, many businesses seeking to take control of their own risk are looking to the newest tool in the alternative market: segregated-cell captives.

Known by different names in different jurisdictions--including sponsored captive, protected-cell company, and segregated-portfolio company--a segregated-cell captive is a single legal entity that operates in two parts: a core and an unlimited number of individual accounts, or cells. A single policyholder's assets and liabilities are placed into a separate cell, which is protected from other cells.

Unlike a pure captive, which is an insurance company owned and operated by a noninsurance-related business that uses the captive to write its own insurance, the segregated-cell captive can act as a "rent-a-captive" and rent its capital, surplus and license to the policyholder for a fee. The policyholder of a segregated-cell captive is insured by the captive without owning or controlling the captive. Originally, many rent-a-captives were structured so that different clients' assets and liabilities were lumped together in the same account. Some have argued that left a policyholder's assets at risk if another participant in the captive depleted its own capital. But the new segregated-cell legislation is designed to protect clients from each other's liabilities, experts said, by placing them in their own "cells" or accounts.

Segregated-cell captives also can be owned by a single parent that has elected to place different risks into different cells, or owned by a group captive that has separated its individual members' risks into different cells.

The beauty of a segregated-cell captive, said Alan G. "Scott" Barry III, president of Liberty Mutual's Captive Services, "is everyone is responsible for their own liabilities. They are responsible for paying their losses and company expenses. If they control the losses, they get an underwriting profit and the investment income that is held in the captive. We have set up a facility for them, but they will reap the benefits."

Each cell can have its own reinsurance policy, with a different reinsurer, noted Stephen Gray, vice president at Willis and head of its Cayman Islands operations.

"The basics are the legal separation of liabilities and assets and protection for the participants," Gray said. "That's the key."

While the entire alternative risk transfer market is seeing tremendous growth--A.M. Best Co. predicts 50% of the U.S. commercial market will have migrated to alternative-risk transfer by 2003, up from 40% in 2000 and 30% in 1996--those on the front lines in the alternative risk market say that cell captives are growing especially rapidly because it's easier and cheaper to add a cell to an existing cell captive than to launch an entirely new captive from scratch....