INSURANCE SEGREGATED ASSET PLAN COMPANIES IN PUERTO RICO: AN OVERVIEW OF THE LEGAL FRAMEWORK

Vol. 47 - November 2025 | ©2025 by Vidal, Nieves & Bauzá, LLC. All rights reserved.

By: Pedro I. Vidal Cordero | Vidal, Nieves & Bauzá, LLC

Pedro is a licensed attorney in Puerto Rico and in the District of Columbia, with over 30 years of professional experience. His practice covers corporate, regulatory, contractual, and transactional matters related with the operation of insurance companies, captives, and reinsurers in Puerto Rico, as well as other business entities established in Puerto Rico.

Since the establishment of the Puerto Rico International Insurance Center in 2004 (“CIS”, by its acronym in Spanish) through the adoption of Puerto Rico’s captive insurance act, --Act No. 399 of 2004 (“Act 399”)--, insurers authorized under the CIS have had the choice of operating as either carriers writing business and/or providing reinsurance supported by the entity’s own contributed capital or, on the other hand, by choosing to both write business and reinsure risks backed-up by the entity’s own capital and, additionally, by obtaining an additional authorization allowing the insurer to organize separate accounts or portfolios of assets and liabilities which serve to support a particular insurance risk transfer transaction.

Insurers authorized under Act 399 to provide captive insurance solutions through the establishment of one or more “segregated asset plans” or “protected cells” are referred to in Puerto Rico as “segregated asset plan” or “protected cell” companies.

It is reasonable to state that the preferred organization structure for insurers seeking authorization under the CIS is the segregated asset plan company-protected cell company operating structure.

Puerto Rico’s segregated asset plan companies are modeled after those originating in other long-established insurance centers located in places such as Gurnsey, Bermuda, Cayman Islands, and the British Virgin Islands, among others. In these other offshore domiciles, entities capable of offering similar captive insurance and other risk transfer alternatives through structures centered on the legal separation of assets, liabilities and the corresponding insurance obligations are usually referred to as segregated account companies or segregated portfolio companies.

Not surprisingly, many states in the U.S. have similarly adopted legislation under their respective captive insurance laws which allow insurers and other sponsors to organize so-called “sponsored captive insurance companies” directed at insuring the risks of insurers or businesses through protected cells having assets and liabilities that are completely fenced off from the other protected cells established by the sponsored captive insurer, as well as from the general account of the licensed insurer itself.

For example, Vermont, the precursor captive domicile in the U.S. after having adopted its original captive law in 1981, added sponsored captive insurance companies to its statute in 1999; i.e., many years before other states in the U.S. and Puerto Rico did so under their respective special captive laws. Vermont’s success as a captive domicile is unquestionable. It has been reported that during 2024 it positioned  itself as the leading captive domicile in the world with 683 total captives that year; a number which exceeds that of traditional, favored offshore captive domiciles such as Bermuda and the Cayman Islands.

THE LEGAL AND REGULATORY FRAMEWORK APPLICABLE TO SEGREGATED ASSET PLAN COMPANIES AND THEIR SEGREGATED ASSET PLANS OR PROTECTED CELLS

Act 399 defines a “segregated asset plan” as a group of assets that are identified and managed separately in an integrated manner by and international insurer… for the purpose of paying a group of obligations that are identified and managed pursuant to an operational plan previously approved by the Commissioner [of Insurance]. Only class 2 (association captive insurers), class 3 (P&C captive insurers), class 4 (P&C and high limit casualty insurance and catastrophic reinsurance captive insurers), class 5 (life and disability-health captive insurers) and class 6 (insurance risk securitizations captive insurers) may be authorized as segregated asset plan companies.

Segregated asset plan companies, therefore, need to operate within the confines provided by the operational plan or plans previously approved and on file with the Insurance Commissioner,

including any amendments to such plan(s). In order to conduct business through a particular protected cell being organized, a segregated asset plan company needs to file its operational plan with the Commissioner at least 60 days before the protected cell will be organized. The operational plan will be considered “deemed” approved within 30 days from its filing, if not sooner rejected within such 30-day period or if the Commissioner does not notify the extension of the review period for not more than an additional 30 days.

PUERTO RICO’S SEGREGATED ASSET PLAN COMPANIES ARE MODELED AFTER THOSE ORIGINATING IN OTHER LONG-ESTABLISHED INSURANCE CENTERS LOCATED IN PLACES SUCH AS GURNSEY, BERMUDA, CAYMAN ISLANDS, AND THE BRITISH VIRGIN ISLANDS, AMONG OTHERS.

Operational plans for a segregated asset plan must, at minimum, address (i) a protected cell´s business objectives, (ii) the proposed directors, responsible officers or managers for the protect ed cell, (iii) the protected cell´s assets and liabilities and the manner in which they will be identified, and (iv) the investment policy to be followed with respect to the protected cell. Moreover, any amendments to an approved operational plan on file with the Commissioner need to be filed within 30 days of their intended implementation date.

While segregated asset plan companies in Puerto Rico are formally incorporated under the provisions of Act 399 and, subject to the regulatory oversight powers of the Commissioner of Insurance as regulated entities, the segregated asset plans they organize are not considered separate legal entities under Puerto Rico law. As provided by Act 399, No segregated assets plan shall be considered as an entity with a juridical personality separate from that of the international insurer for legal purposes. The approval of the Commissioner of a segregated assets plan or its subsequent amendments shall not be construed in that sense.

It is, therefore, the responsibility of the segregated asset plan company establishing a protected cell to not only clearly identify the assets and insurance obligations attributed to each protected cell in the protected cell´s operational plan, but, more importantly, to actually segregate the protected cell´s assets from those of the general account of the segregated asset plan company, and those of other protected cells organized by the company. This is achieved, in part, through the opening of one or more bank or custody accounts by the segregated asset plan company on behalf of a particular protected cell. A segregated asset plan company must, at minimum, attribute sufficient assets to a protected cell in a value equal to the reserves and other insurance obligations contractually assumed by each protected cell.

Each segregated asset plan or protected cell is required to be uniquely identified through a chosen name that includes the term “segregated asset plan,” “protected cell” or, by usage and custom, their respective acronyms “SAP” or “PC.” Additionally, the segregated asset plan company must make sure that it adopts reasonable administrative and accounting policies such that the assets of each of the protected cells are separately identified.

This is particularly important as separate accounting audits for each of the protected cells are conducted by the appointed external auditors and filed with the Commissioner annually, as an integral part of the segregated asset plan company´s annual report filed before the insurance regulator.

With respect to the Puerto Rico tax obligations to which segregated asset plan companies are subject to, companies are annually required to file a special tax return with the Puerto Rico Department of the Treasury. The taxable net income attributable to each of the segregated asset plan company´s protected cells must be separately reported in a schedule to the special tax return. Additionally, and pursuant to the applicable provisions in the Puerto Rico Incentives Code recognizing the special tax treatment of segregated asset plan companies, as well as the parallel provisions found in the Puerto Rico Internal Revenue Code, any tax income tax liability resulting from the insurance operations conducted by each protected cell must be paid exclusively from the protected cell´s funds.

Consequently, the segregated asset plan company is responsible before the Puerto Rico Treasury Department for both reporting and paying on behalf of each protected cell any tax liability that results from its operations each year.

Segregated asset plan companies, finally, are required to formally terminate any of the protected cell they have established, including bank or custody accounts opened in respect to the same, once the commercial operations conducted by the corresponding protected cell have concluded.

CONCLUSION

Puerto Rico offers insurers and businesses wishing to establish insurance captives and other risk transfer structures, a proven and flexible regulatory framework from which to operate, coupled with the attractive tax benefits that Puerto Rico is capable of offering to businesses and individuals establishing operations in Puerto Rico. As an “onshore” U.S. domicile with deep historical connections to the Spanish-speaking world, Puerto Rico continues to be uniquely positioned to favorably compete with other leading U.S. onshore captive domiciles such as Vermont, Utah, Arizona, among others.

For more information about this article contact Pedro I. Vidal-Cordero, Esq. at pvidal@vnblegal.com or vnblegal.com

Vidal, Nieves & Bauzá, LLC is a corporate law firm with special emphasis in energy and environmental matters, including permitting, real estate transactions, corporate, tax, transactional, and insurance practice.

Vidal, Nieves & Bauzá is located at Suite 1108, T-Mobile Center | Guaynabo, PR

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