In February this year, Barbados passed legislation that enables the creation of incorporated cell companies (ICCs). This is an exciting development for international business in Barbados, as it builds on the capability established by the segregated cell company legislation, allowing small and medium-sized companies access to reasonably priced risk management solutions.
What is a cell company?
A cell company is a single corporate entity with separate and distinct cells, carrying on separate businesses with separate governance, but with a common core. The concept first came into use in Guernsey, Channel Islands in 1997 with the introduction of protected cell companies (PCCs). Since then, more than 28 countries have followed suit and implemented similar legislation, with the cell entities having names like segregated cell companies (SCCs), segregated account companies (SACs), segregated portfolio companies (SPCs), special purpose vehicles (SPVs), and now most recently, incorporated cell companies (ICCs).
Segregated Cell vs Incorporated Cell
Barbados enacted segregated cell company legislation in 2001, and as of December 2015, there were 19 licensed SCC entities in Barbados. One of the limitations of all SCC and similar entities is that the individual cells are defined only through a contract with the core company, and as such they are not separate and distinct legal entities. They have no contractual capacity of their own, and in the case of dispute, individual cell assets could be called upon to cover the liabilities of an unrelated cell.
These practical limitations are addressed by the introduction of incorporated cell company legislation, where individual cells are separate legal entities, sharing a common core. They are incorporated and registered as separate legal entities in their own right. They can be capitalized separately, and hold their assets and liabilities separately from all other cells. Individual cells are taxed separately, and can contract with each other, as well as with third parties. This significantly enhances their use and attractiveness, particularly for insurance and other risk management vehicles.
Again, the Channel Islands were at the forefront of this move, implementing ICC legislation ten years ago in 2006. There are now 77 licensed cell entities in Guernsey and Jersey. Since 2006 other jurisdictions have followed suit with similar legislation, with Barbados being the most recent one to get on board this year.
Use of ICCs/SCCs
Cell companies are attractive as they enable a corporate group structure where expertise and costs can be shared, creating a scalable business model for owners and insurance managers. The operating and administrative costs of the group will be lower than a traditional stand-alone group of companies. The separation of assets and liabilities into individual cells for business and accounting purposes enhances and widens the use of the structure. With ICCs, the additional layer of protection offered by the walls created by individual incorporation of each cell significantly increases the attractiveness of the vehicle in today’s litigious world.
For insurance purposes, ICCs can and have been used by companies that want to have a direct insurance or reinsurance captive facility, without owning a completely stand-alone company. They are particularly attractive for small to medium-sized companies that want a risk management vehicle but cannot justify the full cost of a stand-alone captive. Larger companies that may already own a captive might use a cell structure to reduce their administration costs and create a flexible and easily expanded captive. Cells may also present a short-term solution for captives in run-off.
Management and administration of Cell Captives
A Barbados cell company must be managed by a competent party that is licensed by the regulator, the Financial Services Commission. Fortunately, Barbados has a number of excellent local captive insurance company managers, who are able to manage ICCs and very importantly, contribute to new business for Barbados by developing new and innovative uses for them. The insurance managers can introduce a range of qualified service providers to the owners of ICCs, including actuaries, lawyers and investment managers, as well as provide day-to-day management and accounting services to the structure.
One of the challenges for ICCs is the effective investment management of assets. After the cell captive has been able to establish itself, determine its premium levels and claims experience, the generation of investment returns on surplus income will become more important. The key issue of cell structures for insurance managers is that assets available for investment may be divided across the cells in small amounts. This directly affects the ability to manage assets in a cost-effective way, especially given that segregated accounts are usually more appropriate for insurance companies than pooled funds. Consistent investment reporting across the individual cells will be very desirable, and often difficult to achieve.
It’s still early days since the ICC legislation was passed, and so far there have been no ICC incorporations in Barbados. The reasons for this are two-fold. Firstly, there are implementation issues being experienced in the various Government departments who deal with the incorporation of the new entities. These may take some time to resolve, but are not insurmountable. Secondly, the global insurance market is quite soft, with high-capacity in traditional markets, and relatively low premiums. Historically, this leads to fewer captive formations.
However, as companies seek to gain control of their risk management programs and costs, we will continue to see a net positive rate of captive formation. The introduction of ICC legislation allows Barbados to market itself to smaller and mid-sized companies looking to take charge of their risk exposure and earn investment returns on surplus income. This can only be a good development, both for those companies, and for our jurisdiction.