MAS proposes new corporate structure to grow alternative risk transfer market

The Monetary Authority of Singapore (MAS) has proposed a new corporate structure designed to make alternative risk transfer solutions more accessible and cost-effective for companies, as it seeks to strengthen Singapore’s role as a regional risk management hub.

The proposed protected cell company (PCC) framework comes at a time when Asia remains significantly underinsured, even as risks become more complex, more connected and harder to price, MAS said on Tuesday (Jul 7).

The PCC structure allows assets and liabilities to be segregated into individual “cells” within a single legal entity, such that multiple risk arrangements can be housed under a common platform while being legally ring-fenced from one another.

Meanwhile, a central “core” provides centralised governance and oversight, reducing costs and improving operational efficiency.

The PCC Act is targeted to be implemented in 2028.

The announcement comes after Deputy Prime Minister Gan Kim Yong said on Jun 25 that MAS would introduce a PCC framework as part of the Republic’s push to build “trusted market infrastructure for Asia’s next phase of growth and development”.

DPM Gan, who also chairs MAS, had said then that financial centres that can bring together underwriting expertise, reinsurance capacity, alternative capital and flexible risk-transfer structures would be best positioned for growth.

Under Singapore’s current corporate structures, risk owners typically need to set up individual legal entities – such as special purpose vehicles – to legally ring-fence the capital, assets and liabilities for each risk programme or coverage.

The effort and costs required for this can deter the broader adoption of these solutions that would support better risk management and protection, MAS said.

Targeting captive insurance, ILS and sovereign risk pools

The regulator intends for the PCC to be used specifically for captive insurance, insurance-linked securities (ILS) and sovereign risk pools.

Captive insurance is a type of self-insurance programme created by a company to manage its risks and premium rate volatility, arising from reliance on the commercial insurance market.

ILS are financial instruments that securitise insurance contracts, allowing insurers and reinsurers to transfer specific risks to the capital markets.

Sovereign risk pools are typically set up by multiple participating governments to share and manage risks in a diversified portfolio and secure insurance coverage against catastrophic events, such as natural disasters or climate shocks.

The proposed framework is conceptually similar to Singapore’s existing variable capital company (VCC) structure for investment funds. VCCs enable the creation of segregated funds so that managers can pull together assets for private investments or manage individual sub-funds on behalf of clients.

Some other jurisdictions that have a similar PCC structure include the UK, Bermuda, Malta and Qatar.

Sean Welsch, captive consulting leader for the Asia-Pacific at Marsh, noted that Singapore has explored PCC-style structures for a number of years.

Building on experience gained through the VCC framework, Singapore appears well-positioned – both from a policy and implementation standpoint – to take the next step and introduce a PCC regime for insurance, Welsch said.

Lower barriers to entry

Currently, only large corporates, such as multinational corporations, can justify the costs and resources required to establish their own captive insurer subsidiary, said Simon Goh, head of the insurance and reinsurance practice at Rajah & Tann Singapore.

Goh noted that Singapore has had a captive insurance legislation for more than 40 years, but the number of captive insurers domiciled in the Republic “has not grown much”. There are currently around 90 such captive insurers.

PCCs can lower barriers to entry for companies that are not yet ready to set up a standalone insurance subsidiary, said George Ong, regional director for captive and insurance, global risk consulting, at Aon.

Ong expects demand from smaller and mid-sized organisations that view PCCs as a practical, cost-effective entry point into captive insurance.

Larger organisations could also use PCCs as a stepping stone before committing to a fully licensed captive insurer, he noted.

Steve Tunstall, general secretary of the Singapore Captive Insurance Association, expects “lots of opportunities” for companies to make use of the PCC structure.

This comes as global corporations are seeing an increasing share of their business, and therefore their capital and related risk, pivoting to Asia, he said.

“More sophisticated structures make Singapore an even more attractive destination for regional and head office treasury functions looking for sophisticated risk solutions,” he said.

In the ILS space, the PCC would also allow for smaller transactions and open a new market of potential ILS investors and insurers who would otherwise not find it economical, for example, to issue a catastrophe bond, Rajah & Tann’s Goh said.

As for sovereign risk pools, governments looking at risk transfer arrangements have different needs than commercial insurers, said Benedikt Signer, chief executive of Seadrif Insurance Company.

With different risk appetites, funding sources and reasons for pooling risk, accommodating those differences currently require exploring bespoke legal entities, he noted.

“The PCC structure lets that variation sit inside one entity instead, giving us the flexibility to co-design fit-for-purpose solutions more efficiently,” he added.

How it works

MAS outlined how the proposed framework would be applied across different segments of the alternative risk transfer market.

For captive insurance, companies could establish dedicated captives in separate cells under a common umbrella, or “rent” a segregated cell within a shared captive facility to run their own risk programmes.

MAS said this reduces set-up and operating costs, increasing the accessibility of captive solutions that would otherwise be commercially unviable, particularly for smaller firms.

Meanwhile, insurers could issue ILS through separate cells within a PCC structure, without the need to establish a new special purpose vehicle for each transaction.

This enables faster execution, lowers issuance costs, and makes smaller or more bespoke transactions more viable, MAS said.

The framework can also support insurance facilities that pool risks across multiple countries or participants, such as disaster risk financing initiatives.

Interested parties may submit their feedback on a consultation paper for the framework by Aug 7.

Source: The Business Times © SPH Media Limited. Permission required for reproduction.

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