Cell captives should play much bigger role in life industry

The short-term insurance market has embraced the cell captive concept and cell captive insurers have enjoyed stellar growth for the past two decades. But this has not necessarily been the case in the life industry, which has been comparatively slow to follow suit.

The cell captive concept was introduced to the life industry some six years after it made its debut in the short-term sector. Life cell captives have been around for a decade now and, considering the very real benefits that the concept can deliver in the employee benefits arena, one would expect the take-up trend to mirror that of the short-term industry. 

By the end of 2008, short-term cell captive insurers’ net premium income amounted to R5,4 billion (R4,3 billion for the first nine months of 2009 ); while the life sector’s net premiums recurring income for 2008 was a more modest R1,6 billion (R1,3 billion for the first nine months of 2009). 

When cell captives were first introduced into the life sector, many of the larger traditional life insurers obtained their own cell captive licences. But, if truth be told, their hearts were never really in it and today few of these operations proactively write business. Rather the cell captive operations were formed defensively, while the main thrust of the business continues as it has always done. Thus, unlike the short-term industry where a buoyant cell captive sector exists in its own right (and provides traditional insurers with some healthy competition), the life cell captive industry is effectively represented by only a handful of players.

One reason that cell captives have received a lukewarm reception in the life industry may be the fact that the life sector has not traditionally been big on developing risk financing skills. While almost all short-term brokerages have dedicated risk financing divisions, few, if any, exist in life brokerages.

It also appears that life brokers have yet to be convinced that there is merit in forming long-term partnerships with cell captive insurers. Traditionally, employee benefit providers often change from year to year. The cell captive model, however, depends on a long-term arrangement. This is because of some initial costs – like catastrophe protection and stop-loss reinsurance cover, which are successfully recouped later on through underwriting profits – and additional contractual requirements involving executive input.

While the traditional market currently offers competitive rates when it comes to the annual rebroke, these will come under pressure when the market hardens, as it inevitably will, and those schemes that are enjoying the low rates today will have to pay the price – literally and figuratively – then.

But perhaps the most significant reason of all for the relatively slow uptake of cell captives in the life arena is the fact that employee benefits are inherently an emotional issue. This is an arena in which any perceived practice of risk taking is frowned upon. In the majority of cases the decision makers are retirement fund trustees and human resources executives who are mandated to be cautious and conservative in their approach.

While in the short-term sector the financial director and group risk manager make the calls about the company’s insurance portfolio, employee benefit programmes’ decision makers are mostly individuals whose business skills are not necessarily financial. And this means that they often overlook the financial stability of cell captives, effectively hampering the very programmes that they are trying to protect. There is no doubt that cell captives’ ability to offer customizable employee benefit programmes ultimately benefit both employers and employees.

Having said all of this, it is inevitable that life cell captives will come into their own. The sustainability, the flexibility and the security of the cell captive model will ultimately convince even the greatest cynics that cell captives have an important role to play in the employee benefits arena. And then traditional life insurers can look forward to the same robust competition that the short-term sector faces from its cell captive counterparts.


For further information please contact:
Herman Schoeman, MD of Guardrisk
Telephone: 011 669-1001

Issued by:
Melanie Davis, PR@Work
Telephone: 011 615-3309 / 083 225 7450