Corporate

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1. Abstract
2. Differences between a “special purpose vehicle” and the new “protected cell company”
3. The structure of the protected cell company 
4. The registration of a protected cell company 
5. Characteristics 
6. Future development 

1. Abstract

The risk Transformation regulation 2017, introduce a regulatory framework for insurance-linked securities (I.L.S.) business in the UK. In particular, the new regulation introduces a new type of commercial entity to enable multiple insurance-linked securities deals to be managed in a single company: ‘the protected cell company’.

A protected cell Company (P.C.C.) can be thought of as being a standard limited company that has been separated into legally distinct portions i.e. cells. The income, assets, and liabilities of each cell are kept separate from all other cells. Each cell has its own separate portion of the P.C.C’s overall share capital, allowing shareholders to maintain sole portion of the P.C.C. as a whole. 

The protected cell company allows managing multiple insurance-linked securities deals in a single company. Each new deal is held in a cell, and the structure of a 'protect cell company' ensures the separation of each deal’s assets and liabilities from one to another. 

The regulations required that risk has to be segregated: the transferred risk of one insurance or reinsurance entity cannot be combined with the risk of any other entities. These transactions cannot lead to the leveraging or undercapitalisation of risk. So, Entity can assume the risk from and fully funding that exposure, issuing investments instrument.

2. Differences between a 'special purpose vehicle' and the new 'protected cell company.'

A 'special purpose vehicle' is used for assuming the risk under more than one separate contractual arrangement from one or more insurance or reinsurance undertakings. The only contract that can be managed by this entity are the ones referred to the assumption of risk. 

At the contrary, a protected cell company (newly introduced) is a transformer vehicle used as multi arrangement 'special purpose vehicle'. 

3. The structure of the protected cell company

Legally a P.C.C. is a single company, but each shareholder/investor retains a separate interest in the company. Similar structures to the PCC include the incorporated cell company (ICC) where each cell is treated separately as an incorporated entity to provide greater protection for the individual shareholder’s assets and income. 

The protected cell company it is composed of different parts, namely the Core and the cells created by the protected cell company after its registration and authorisation. 

• The core administers the protected cell company.
• The cells assuming risk from undertakings, issuing investments to investors to found the protected cell company’s exposure to that risk, holding the proceeds of the sale of those investments and, where permitted by the protected cell company’s instrument of incorporation, entering into arrangements between cells 
• The core and the cells do not have a legal personality distinct from the protected cell company but are segregated from each other accordingly with the provisions of this part. 

Such arrangements can be used to sidestep the Controlled Foreign Corporation (CFC) rules (including those on control) by allowing UK resident unconnected parties to run their insurance or investment activities alongside other, within the structure whilst only holding a minority of the total shares in the PCC/ICC and only being entitled to a small proportion of the total profits. 

The intention and the effect is entirely different from holding a small passive investment in a third party entity. 

4. the registration of a protected cell company 

The protected cell company is formed applying to the PRA for the registration of a protected cell company. 

These rule changes ensure the Prudential Regulation Authority (PRA) can use a fit-for-purpose regulatory approach to insurance Linked Securities vehicles. PRA will communicate to FCA after scrutiny on the company. 

The process of authorisation it is an exchange of information between the entity and the regulatory agency. It is subject to a motivated statement and can be challenged in front of a court. 

The application must state: 

• That the application wishes to form a protected cell company 
• The name of the proposed protected cell company’s registered office
• The names of the proposed director, the particulars set out in regulation 18 
• The names of the person who is, on registration, to hold voting shares in the core of the protected cell company
• An application made under the regulation 15
• The proposed instrument of incorporation
•  A statement signed by each person who is to become a director of the protected cell company that the person consents to be a director
• A statement signed by each person who will, on registration, hold voting shares in the core of the protected cell company that the person consents to hold those shares. 
• The process has the following effects from the date of incorporation: 
• The persons named in the application for registration as the persons who will, on registration, hold voting shares in the core of the protected cell company 
• Such other persons as may from time to time hold shares issued on behalf of the core of the protected cell company 
• The cell is capable of exercising all the functions of an incorporated company
• The registered office of the protected cell company is as stated in the application for registration
• The person named as proposed directors in the application for registration as the person who will, on registration, hold voting shares in the core of the protected cell company become the holders of those shares. 
• The shares referred are issues by the protected cell company on behalf of the core 
• The core is part of the protected cell company and does not have a legal personality distinct from the protected cell company. 
• The purpose of the core is to administer the protected cell company. The instrument of incorporation may allow the protected cell company to: 
• Hold property
• Lease properties
• Enter into contracts, including contracts of employment and contracts for the provision of services 
• Issue voting and non-voting shares
• Borrow money 
• Suffer liabilities 

But a protected cell company may not assume a risk from an undertaking on behalf of the core. 

The cells 

• Is part of the protected cell company 
• Does not have a legal personality distinct from the protected cell company 
• The purpose of the cells is to
• Assume the risk from undertakings 
• Issue investments to investors to fund the protected cell company’s exposure to the risks it has assumed
• Hold the proceeds of the sale of those investments 
• Where permitted by protected cell company’s instrument of incorporation, enter into arrangements between cells
• Carry out any other functions conferred on the cells by the protected cell company’s instrument of incorporation. 

A protected cell company may carry out the activity referred to in paragraph by using a trustee or a nominee. 

5. Characteristics 

The corporate instrument allowed the main entity to share the liability and obligation to obtain better risk management, in term of financial and regulatory risk. 

Liabilities or obligations incurred by a protected cell company must be incurred on behalf of a part of the protected cell company. 

All cells must keep their records and accounts distinguishing: 

• The assets held on behalf of each part of the protected cell company from the assets held on behalf of the other parts of the protected cell company
• The liabilities and obligations which are incurred on behalf of each part of the protected cell

All the cells can move and exchange asset themselves but any amendment to the protected cell company’s records and accounts made in accordance with regulation 52, 53 or 54 must be approved by a written resolution of the directors of the protected cell company. 

They also able to create arrangements between cells but their arrangements may only enable the protected cell company to discharge some or all the actual liability. 

6. Future development 

Still, open the question if this instrument could also be used for other forms of insurance spiral. 

September 2018

By Daniele Lupi