How Cell Captives operate – structure, capital and profit mechanics: Article 2

Part 2 of 3

Having introduced the concept in my Part 1 article, it is essential to understand how a cell captive functions operationally and financially.

A cell captive is governed by a formal participation or shareholders’ agreement between the cell owner and the licensed insurer. This agreement defines capital requirements, governance rights, profit participation, fees, underwriting authority and exit mechanisms.

Capital and Risk

The cell owner subscribes for a specific class of shares in the insurer, representing its cell. This capital supports underwriting and ensures solvency within that cell’s ring-fenced balance sheet.

Premiums collected from policyholders flow into the cell’s account. From this premium pool, the following are deducted:

• Claims paid
• Claims reserves (including IBNR)
• Reinsurance costs
• Administration and management fees
• Regulatory and capital charges
• The remaining surplus represents underwriting profit.

Access to Reinsurance

A significant advantage of cell captives is access to reinsurance markets through the licensed insurer’s existing treaties and relationships. This enables cells to manage catastrophe exposure, cap large losses, and stabilise earnings volatility.

Profit Sharing

Profits generated within a cell typically accrue to the benefit of the cell owner, subject to solvency requirements and board approval. Investment income earned on reserves further enhances profitability.

However, profit participation is symmetrical with risk. If claims exceed pricing assumptions, the cell’s capital can be eroded. Additional capital injections may be required to maintain regulatory solvency thresholds.

Product Development and Control

While the licensed insurer holds ultimate accountability, cell owners often play a significant role in product conceptualisation, pricing input, distribution strategy and customer engagement.

This makes cell captives particularly attractive for:

• Retail groups embedding insurance
• Fintech platforms offering digital cover
• Industry associations serving members
• Corporates self-insuring predictable risks

The structure therefore combines entrepreneurial flexibility with institutional insurance infrastructure.

In Part 3, we examine regulatory compliance, governance responsibilities and the risk landscape facing both cell owners and insurers.

*Kwanele Sibanda, Founder and Editor-In-Chief, Insurance Biz Africa.