Protecting Cell A When Cell D Cannot Meet Its Claims
MedPCC is a Gibraltar protected cell company with six cells writing medical malpractice cover. Cell D faces a £4.2m claim; its assets are £2.1m and its actuarial reserve was understated by £1.6m. Cell A has an £8m surplus. The board proposes using £2.5m of that surplus to meet Cell D's claim, to 'preserve the PCC's reputation'. One director, Paulo, is CEO of the parent of the underwriting agency that managed Cell D and did not disclose that link when the reserves were approved. Cell A's participants object. Cell D's policyholders include a hospital group threatening litigation. The PCC's articles permit board discretion but require cell accounts to be kept separate. The GFSC has asked for the board's assessment of the PCC's solvency and a remediation plan. The chair wants to know whether the transfer is permissible and how to handle Paulo.
1. Is the proposed £2.5m transfer from Cell A to Cell D permissible? Explain the legal and governance issues.
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The starting point is cellular segregation. In a protected cell company, the assets of each cell are generally ring-fenced for the liabilities of that cell, and creditors of one cell ordinarily have no recourse to the assets of another. Using Cell A's surplus to pay Cell D's claim is a cross-subsidy. It is likely to be inconsistent with the statutory cell separation and the articles unless there is a clear legal mechanism, proper disclosure, participant consent and regulatory engagement. Board discretion over investments or capital does not override that segregation.
The directors must also consider the interests of Cell A's participants and creditors, who could be prejudiced. The proposal may expose the board to claims for breach of duty. The GFSC should be told that the board is considering the issue, but the board should not proceed on the current papers. Realistic alternatives include a capital injection into Cell D, reinsurance or commutation, negotiated settlement, run-off or orderly closure of Cell D, and a restructuring with independent advice. Any transfer should be reviewed by external counsel and the GFSC before implementation.
2. How should the board handle Paulo's position and the reserve approval?
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Paulo has a clear conflict. He is a director of the PCC and CEO of the parent of the underwriting agency responsible for the cell whose reserves were understated. He should have disclosed the link before reserve discussions and should not have participated in approving those reserves. The board must now require full written disclosure, remove him from all related deliberations and votes, and minute that recusal. An independent actuarial review should test the £1.6m understatement and decide whether it resulted from error, poor process or misconduct.
The board should notify the GFSC of the conflict and the review, consider whether Paulo remains fit and proper to act as a director, and take legal advice on whether his appointment should be suspended. The audit or risk committee should be reconstituted so that it does not depend on him. The board should also check whether the underwriting agency's parent has any liability or insurance cover, and whether Cell D policyholders need to be informed. The key is to separate the conflict decision from the commercial rescue discussion.
3. What should the GFSC remediation plan contain for the PCC's solvency and policyholder protection?
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The plan should begin with an independent actuarial and solvency assessment cell by cell, not simply at PCC level. It should quantify Cell D's deficit, test the adequacy of reserves across all cells, and identify any cross-cell dependencies. It should then set out a policyholder protection plan: no new business in Cell D until the position is stabilised, a claims-handling strategy, communication with the hospital group and other policyholders, and a realistic timetable.
The board should present options: capital injection, reinsurance recovery, commutation, portfolio transfer, run-off or closure. It should explain why the selected option is credible and how Cell A's ring-fence will be protected. Governance actions should include an independent review of reserve sign-off, Paulo's recusal and fitness review, board minutes evidencing challenge, and a reporting timetable to the GFSC. The plan should identify who is accountable for each action and what triggers escalation if the deficit grows.