Marine ventures have traditionally relied on mutual protection and indemnity insurance against losses caused by maritime perils. However, in the last ten years, the UK government has introduced an entirely new framework for UK domiciled insurance via so-called corporate special purpose vehicles (ISPV’s). Under this regime, the idea of Protected Cell Captive companies (PCCs) has been conceived. These provide the opposite to the mutual Protection and Indemnity insurance (P&I insurance) which has hitherto been the go-to product in the marine insurance sector. Indeed, PCCs might threaten the dominance of P&I insurance where new marine energy technologies are concerned.
Shipowner’s insurance – a pocket history
In the early 18th Century shipowners met up in the City of London and devised a system whereby the risks their marine ventures incurred were pooled on a mutual, non-profit making basis. The shipowners formed ‘clubs’ or ‘Protection and Indemnity’ associations (P&I clubs), of which they were ‘members’ and which ran the insurance of maritime risks on their behalf. Providing cover for losses or damage to their marine ventures, each member agreed to bear a share of the total risk that was run by every ship entered into the clubs. To capitalise themselves, the P& I clubs levied ‘calls’ upon the members reminiscent of ordinary insurance premiums. Underwriters on behalf of the members underwrote the actual losses on the London insurance market and/or reinsured them in London or elsewhere. The clubs assumed the legal status of private limited companies. Then as now, they are run by directors who are themselves members of the clubs and are responsible in the first instance for the club’s safe governance, whilst day to day business is run by its managers.
How policy cover has developed over the years
Although, over the years the clubs’ portfolios of mutually insured risks have steadily developed to cover the exposure arising from the technical evolution of the shipping industry, as well as global political events, the clubs’ insurance cover has crystallised into a series of specific itemised risks beyond which underwriters only exceptionally assume liability. It is to be noted that underwriters have historically shown reluctance to underwrite uncommonly perilous ventures whilst a whole series of major casualties occurring in the past 60 years, such as the ‘Exxon Valdez’, the ‘Torrey Canyon’ and more recently ‘Erika’ and ‘Deepwater Horizon’, have only heightened risk-adversity.
For those wishing to insure innovative marine energy ventures, so called ‘difficult to address risks’, there may nevertheless be help at hand in the guise of PCCs. Insurance and reinsurance companies as well as financial institutions (sometimes referred to as the ‘sponsor’) increasingly adopt this legal entity for most types of insurance.
How are PCCs structured?
In common with P&I Clubs, PCCs are private limited companies but a PCC has a corporate structure which links a core, containing the capital for the entirety of the entity, to several individual ‘cells’, or as it can often be referred to, a ‘hub and spoke’ business structure.
The sponsor of the core, most commonly banks or insurance companies, contracts with third parties to rent and/or form the individual cells. It holds the regulatory capital for the whole entity and the insurance license for the PCC whilst the cells each have their own separate assets (and liabilities) and function independently from each other. Strictly segregated as they are, a claim against one cannot be impacted or covered by the assets of another. By contrast, in the case of P&I clubs, each member agrees mutually to share the risks incurred by other members and agrees to contribute extra funds towards the financing of the claims and losses arising from such risks where necessary.
The sponsor of the PCC is responsible for the cell’s compliance with local regulatory requirements. In the UK PCCs are regulated by the Financial Conduct Authority (FCA).
A PCC is governed by one single board of directors responsible for the management and the smooth running of the PCC as a whole. One single annual return is filed for the entire PCC. The directors may create new cells at their discretion.
Whilst the core of the PCC is capitalised by external sponsors, P&I clubs do not have third party sponsors who can, where necessary, contribute (additional) funds. They only have one core fund upon which they can draw. In common with the members of clubs, premiums are written to the participating cells.
How a PCC works if there are insufficient funds to support one cell’s liabilities
If there are insufficient funds available to support liabilities incurred by one cell within a PCC, then none of the positions of the other cells are affected. For such events, individual cells may keep collateralised underwriting risk within the cell.
When assets prove insufficient in a P&I Club the reinsurance market may provide distress capital as a backstop before the members will be called upon to contribute additional funds over and above their yearly contribution. There are no third parties who can sponsor the equity or even a state which can come to the rescue as in the case of PCCs. However, PCCs might also be supported by reinsurance before a state is called in to provide extra funds.
PCC vs P&I Clubs
A PCC may comprise a wide variety of different cells requiring divergent forms of insurance, whilst the membership of a P&I club consists only of shipowners – operators, demise charterers and sometimes freight forwarders.
Furthermore, at the very heart of the PCC is the ‘Project Risk Panel’ (PRP). P&I clubs tend not to have such a specialist body anchored within their corporate framework. Each cell of a PCC may in its turn have its own individual committee to facilitate the insurance process. Some P&I clubs do have specialist boards and committees which deal with specific territories or subject matters but these appear to be rather ad hoc instead of an inherent part of the club’s structure.
Insurance for new technologies in the marine energy sector
Returning now to the significance of PCCs for maritime insurance purposes, where marine interests seek alternative risk management or where new technologies in the marine energy environment require insurance cover (which might be turned down by conventional P&I clubs), the PCC might provide the solution. In the event that different stakeholders wish to participate in one and the same innovative, non-core maritime project but wish to keep their liabilities segregated then ‘special purpose’ PCCs can come to the rescue.
Marine ventures with a common purpose such as a wind farm project, starting with its original design via its onshore construction, its towage to sea down to its actual securing on the seabed or anchoring afloat, could benefit by a special purpose PCC. Each different contractor involved in the project could then be tied to one core, without being liable for any losses sustained by other stakeholders up or down the chain. The core would administer and manage the entire venture.
In the marine industry, voices have been raised dismissing the idea of PCCs on the basis that the industry is too fragmented and too traditionalist to accept PCCs as an alternative for conventional insurance. This remains to be seen.
Whilst the individuality of each cell of a PCC is very carefully fenced off, the members of a P&I club are inextricably tied to each other in their maritime ventures. The fast moving world of marine energy technology demands sophisticated, bespoke solutions for the insurance of each project undertaken. The dependency, and reliance, on fellow-insured as is the case with mutual insurance narrows down the number of risks in respect of which a club feels comfortable to extend cover. The flexibility of a PCC structure is entirely missing. I view PCCs, where the insured cell has the opportunity, provided it is well assessed by the PRP, to seek cover for an extraordinary marine venture, as a truly progressive way of insuring their risk.
Reina Maria van Pallandt
Reina Maria van Pallandt is a senior disputes resolution lawyer with dual British and Dutch nationality. After obtaining an LLB Honors degree in Dutch Law and Public International Law at the University of Amsterdam (UvA), Reina Maria studied International Law of the Sea at London School of Economics (LSE).
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