Segregated Account Facilities

For companies seeking the benefits of a captive programme without the long-term level of management commitment, time and cost needed to form their own captive, Chubb offers versatile risk financing alternatives through two wholly owned subsidiary segregated account companies domiciled in Bermuda and the United States.

Chubb has three wholly owned companies designed to provide risk financing strategies to ACE clients seeking profits and reduced costs from their risk management practices.

Two of those afford clients the benefits of a captive programme without the long-term level of management commitment, time and cost needed to form their own captive:

• Paget Reinsurance Ltd. (Paget Re), domiciled in Bermuda, is a licensed Class 3 insurer formed under the law of Bermuda’s Segregated Account Cell legislation. As a full-service segregated account company, Paget Re rents its capital, license and administrative infrastructure to clients for an annual fee.
• Pembroke Reinsurance Inc. (Pembroke Re) is domiciled in Delaware under the State’s Protected Cell Company legislation. Pembroke Re affords clients the choice of retaining their captive risk and premiums within the jurisdiction of the United States.

Known by different names in different jurisdictions, a segregated account company and a protected cell company are synonymous. Namely, each company enjoys statutory laws enabling complete separation between each participating programme’s assets and liabilities.

Since 1999, Chubb has provided businesses with the option of testing the advantages of captive insurance company risk financing without committing to the capitalization requirements and administrative costs associated with establishing and operating their own captive insurance company.

• A client, or cell owner, will typically be required to execute two agreements prior to the opening of a cell.
• The first agreement is a Shareholder Agreement, which is executed between the client and the captive sponsor, which lays out the formal terms and conditions of cell ownership. The Agreement addresses the rights of both parties, including but not limited to the definition of underwriting profit – from which dividends may be paid – along with the client’s responsibility to post collateral, to satisfy any ‘underwriting gap’.
• In contrast to owned captives, that assume risk in a similar way that commercial insurers or reinsurers assume risk, the captive sponsor does not assume any risk from underwriting activities. Therefore, the assumed risk that is borne by each cell (usually the difference between the aggregate policy limit and assumed premium – or ‘underwriting gap’) must be collateralized by the client or cell owner. Collateral can either be provided in the form of cash, LOC or S114 Trust.
• The second agreement, in the case where the cell acts as a reinsurer, is a Reinsurance Agreement. This Agreement primarily addresses the business covered, to be assumed by the cell, along with the policy limits and other terms and conditions most commonly found in such reinsurance arrangements.
   

• Vehicle that allows owner(s) to assume risk
• Risk financing mechanism that retains underwriting profit (or loss) and investment income (or loss) on reserves
• Commonly retains the frequency/working layer
• Utilizes reinsurance for capacity/spread of risk
• Operates as a direct insurer or reinsurer
   

• Prior to the formation of a cell, on behalf of an owner or insured, a captive sponsor will undertake their own due diligence to ensure that the captive proposition makes economic sense. This process is really no different from the steps an underwriter would take when reviewing a submission.
• The exchange of any data is normally preceded by the execution of a Non-Disclosure Agreement (NDA), which protects the rights of each party and restricts access to privileged information.
• In circumstances where the captive will act as a reinsurer, the insurer or fronting company will undertake their own underwriting analysis. They may wish to assume part of the risk for their own book, as part of the insurance structure particularly where a quota share of the risk is retained by the fronting carrier. The insurer needs assurance that the submission makes economic sense.
• The quality of the data – loss triangles, exposures, financials etc. - provided by the insured, or their broker, is key to the entire due diligence process. Data presented that is incomplete or that is difficult to understand, may delay the review process and possibly lead to a declination of the submission and business opportunity.
• If the analytics of the submission make sense, whereby the fronting carrier and captive sponsor are satisfied that the opportunity is viable, the logistics of how the ‘program’ will operate are then addressed. The logistics cover several areas including, but not limited to, how the data will be received by the fronting carrier from the insured; how it is processed; in what format will the data be distributed to the captive sponsor – net or gross bordereau; will a TPA be required etc.
• During the ‘logistics’ stage, the parties can also consider the terms and conditions of the formal documentation – the Shareholder Agreement (executed between the client and the captive owner) and the Reinsurance Agreement (executed between the fronting carrier and the captive sponsor, on behalf of the cell) – both of which will require execution before the cell becomes active.
• The Shareholder Agreement makes specific reference to the cell number, as allocated by the captive sponsor, to the owner of the cell. This unique cell reference number remains with the individual owner and is included on any documents that pertain to the operation of the cell.