Liability crisis sees professional firms rushing to set up protected cells

The critical shortage of liability insurance is sending waves of professional firms to share offshore captives.

Finance chiefs in Guernsey, home of the first captive insurance company, report a surge in the number of protected cell companies (PCCs) - a means of sharing the cost of setting up a captive.

Steve Butterworth, director of insurance for Guernsey's Financial Services Commission, said: "We're seeing a lot of captives formed because of the employers' liability crisis in the UK and we're seeing a lot of cells in PCCs being set up."

In particular, lawyers, accountants and other professions are discovering new ways of protecting themselves against risk when faced with sky-high prices for traditional cover or simply no availability.

A spokesman for Risk 2003, Guernsey's annual captive industry gathering to be held in September, said 20 out of 34 new cells set up this year so far included an element of liability insurance.

"For ten of those the driving force was most definitely the hardening liability market," he said.

With regard to captives, nine of the ten captives set up this year so far included liability; of them, six were driven by the shortage of liability insurance.

"The number of new cells and captives doesn't change much but the number being driven by the hardening liability markets has gone from one or two to ten [captives] and six [PCCs].

"It's a boom in liability," the spokesman added.

The business was coming to Guernsey from as far afield as South Africa, New Zealand and the US.

And what was previously the reserve of FTSE 100 companies is now becoming popular among far smaller operations.

Of the ten cells and six captives set up this year in direct response to the lack of liability insurance, only one owner was a household name, the spokesman said.

Frank Maher, a partner in Legal Risk risk management solicitors, is also a consultant for Weightman Vizards and was involved in that firm's establishment of its own captive, that went live on 1 September last year.

He said: "The thinking is that you can save money if you can predict your losses, cover that yourself and use insurance for catastrophic loss cover.

"A lot of people have been approaching me for advice and it's not just lawyers. People like housing associations are getting interested."

Surveyors, too, had found that insurers were restricting terms to such an extent that cover failed to comply with regulatory requirements.

Maher said the number of professional firms opting out from the traditional insurance industry was still small, but was "the thin end of the wedge".

"People are recognising that if you don't pay for a claim this year you will pay for it next year when your premiums go up.

"The insurance industry isn't there to subsidise your business."

Guernsey growth
Guernsey's figures show that so far this year:

  • 20 out of 34 new cells include some liability insurance
  • Ten cells were in direct response to the liability shortage
  • Nine out of ten new captives include some liability insurance
  • Six captives were in direct response to the liability shortage