Exploring cell captive insurance in sub-Saharan Africa

Globally, cell captive insurance is a relatively new concept. It grew out of the captive insurance concept, where a corporate entity self-insures its own assets by setting up its own licensed insurance subsidiary. In a cell captive structure one central licensed insurer forms ring-fenced cells issued to other organisations for the insurance of the cell owner’s own assets or the insurable risks of its client or membership base.

Cell captives have been one of the most important steps in the evolution of the captive insurance space and have become an integral component of the self-insurance market in many of the established captive domiciles.

Depending on the statutory or contractual conditions in place, the cell owner can draw dividends on the proceeds of the cell, obtain underwriting from the cell captive insurer and benefit from other insurance-related support functions. The cell captive insurer is accountable for all regulatory compliance and holds the insurance licence that covers the business of all the cells.

The cell captive structure emerged as a way for a corporate entity to access the benefits of captive insurance without setting up its own captive insurance company. However, such first-party business is not the only application for the cell captive model. The cell captive structure can also be used to cover the risks of the clients or members of the cell owner. Such structures are referred to as third-party cell captives.

The cell captive mechanism has the potential to help address some of the structural constraints faced by many insurance markets in sub-Saharan Africa, including a fragmented local industry facing constraints in the provision of specialised risk cover to the corporate sector, and, in the retail market, a lack of market innovation.

In Mauritius, the cell captive structure is successfully leveraged for first-party insurance. In South Africa (the global pioneer of third-party cell captives) cell captives have demonstrated their ability to drive retail innovation and provide an entry path into the insurance market. Other countries, such as Namibia and the Seychelles, have also developed preliminary regulation, while others are exploring potential use cases for the cell captive structure in their jurisdictions.

This study aims to inform regulators who are considering the introduction of cell captives to their market. Based on desktop research and in-depth consultations with market and regulatory stakeholders, it outlines existing cell captive models, identifies the potential roles to be fulfilled by cell captives and highlights key regulatory considerations. It asks two main questions:

• Use cases: What key insurance market constraints are cell captive arrangements able to address and how?
• Regulatory design: What are the steps and considerations to design a cell captive regulatory framework to meet the desired use case(s) in a particular country context?

We find that cell captive structures do, indeed, have scope to support the development of insurance markets in emerging economies. They could serve at least four use cases:

• Specialised risk management
• Retail innovation
• Insurance market participation
• Offshore financial centre development

Key considerations for regulatory authorities that are considering introducing a cell captive framework include:

• Use case/policy objectives: What would be the use case(s) for cell captives given the particular market realities and policy objectives of the country in question? That is: for which market development outcomes is the cell captive considered an appropriate solution
• Permitted underwriting functions: What is the scope of the underwriting functions that cell captives will be permitted to perform – first and/or third party?
• Regulatory framework elements: What should the regulatory and supervisory framework cover to ensure the effective introduction, operation and oversight of cell captive structures? A key consideration is what legal structure is needed to ensure appropriate ring-fencing between cells. Further considerations relate to capital requirements, governance structures and elements of supervisory oversight.

While the cell captive structure is not a panacea, it holds much promise as a vehicle to realise increased inclusion and growth within insurance markets in sub-Saharan Africa.

This work forms part of the Risk, Remittances and Integrity programme, a partnership between FSD Africa and Cenfri.