With the commencement of the new insurance environment and the implementation date of Solvency II around the corner, PKF Malta participated in the Captive Live 2015 conference in London, which was spread over two days. Senior audit partner George Mangion and audit partner Donna Greaves were among the impressive line-up of speakers.
What are the primary benefits of establishing a captive in an EU domicile?
The selection of a captive’s domicile is one of the most important decisions involved in a captive feasibility study. And the first critical question that needs to be resolved is onshore or offshore. One notes that tax differences are less significant and after recent new international regulations, most domiciles can no longer be considered offshore tax havens. Also, the cost of operating in Malta (onshore jurisdiction) is very competitive with offshore.
Having a captive in an EU domicile gave insurers the opportunity to write insurance business for which they have been authorised throughout the EU under the European passport rights. Without question the onshore domiciles have been gaining market share at the expense of the offshore locations.
In 2014, Malta continued in its efforts to attract more captives and build on its excellent regulatory reputation, efficient tax structure and competitive operating costs
How did Malta’s captive industry fare in 2014? Have there been any new developments?
In 2014, Malta continued in its efforts to attract more captives and build on its excellent regulatory reputation, efficient tax structure and competitive operating costs. Naturally 2014 was a sluggish year for insurance as global factors continued to influence growth in most European countries. However, in spite of the turbulence, Malta as a domicile continued targeting the ILS legislation, including catastrophe bonds and, to a lesser extent, the reinsurance sector.
What attracts captive owners’ to the island?
Till today, there are around 60 insurance companies and 26 cells which are based in Malta, and a raft of companies from across the world and in numerous sectors are being well looked after by the country’s insurance managers. The global names can also be found assisting owners of indigenous insurance management companies.
The advantages of relocating to Malta are numerous and include international banks, professional fund managers, insurance managers, call centres, stockbrokers and wealth managers. In addition, it is good to mention that there is a big cluster of overseas-owned concerns in pharmaceuticals, high technology manufacturing, commercial aircraft service and repair and marine electronics.
Preparation for Solvency II has been front and centre of all regulatory activity for 2014 (and will be for 2015). Implementation date is January 1, 2016. On December 22, 2014, the MFSA commenced a consultation process on proposed amendments to the Insurance Business Act and the Insurance Intermediaries Act.
As Guernsey is not part of the EU, it is not obliged to adopt the requirements of EU directives, and in fact opted not to adopt Solvency II or the equivalence of Solvency II. Nevertheless, Guernsey recently welcomed the publication of Guernsey’s new Solvency Rules. The Central Bank of Ireland (CBI) is the single regulatory authority for financial services in Ireland, which has undergone a major overhaul since the financial crisis. The CBI is broadly in alignment with EIOPA on matters of policy and meeting Solvency II requirements on schedule is a priority for CBI.
Malta is the only full EU member state with Protected Cell Company (PCC) legislation. What are the advantages of PCC in this onshore jurisdiction?
The core benefit of the PCC model is that an individual may carry out insurance business through a certain cell without having to go by the own funds requirements, through using the cell company’s core capital.
In addition, cellular assets that are contained in one cell are only available to meet the liabilities of that specific cell. This thus results in the concept of cellular creditors, meaning that cellular creditors contracting with the PCC in respect of a particular cell only have a right of recourse against the assets of that cell. Typically though, creditors of a cell may also have the right to secondary recourse to the core assets of the PCC, with the condition that the cellular assets of that particular cell to which the liability is associated with have been used up fully.
As explained, a cell of a PCC does not have separate legal personality, and as a result, under the quantitative capital requirements of Pillar II, a cell will typically need to put up its own funds equivalent to the calculation of the cell’s notional solvency capital requirement. In addition a PCC has the possibility to produce a single own risk solvency assessment (Orsa) for the entire PCC. The same applies to Pillar III reporting and disclosure requirements.
How far along is Malta towards accommodating insurance-linked securities (ILS)?
The island is fully prepared to cater for this new phenomenon of the captive world. In extension to the PCC, in 2013 Malta established a framework for the authorisation and regulation of Reinsurance Special Purpose Vehicle (RSPV), (LN 452 of 2013) which offers (re)insures the opportunity to obtain access to capital resources. In addition, last year, Malta earmarked another success, through the implementation of the Securitisation Cell Company (SCC), (SL 386.16), which allows securitisation vehicles to set up cell structures. Malta is now the only state in the EU with cell legislation for issuers of insurance linked securities (ILS). It is targeting the ILS, catastrophe bond and reinsurance convergence sector.
Emerging risks such as cyberattacks and terrorism are becoming salient for US captive owners. Are these gaining prominence in Malta as well?
Malta is geared to provide insurance to the risks of cyberattacks and terrorism for US captive owners.
It is important to define the modus operandi of cyberterrorism – it holds various advantages over traditional terrorism. Primarily, the physical presence of the terrorist is not required and a terrorist may perform the act in the comfort of his own territory.
Cyberterrorism is considered a wide-ranging risk as the internet provides an inexpensive tool for illegal acts to be committed from anywhere in the world. In essence, due to the proliferation of low-cost technology, crime can be perpetrated using just a good computer and sufficient hacking skills to penetrate the opponent’s firewalls.
Malta is geared to provide insurance to the risks of cyberattacks and terrorism for US captive owners
There are always vulnerabilities in any propriety software system that can be exploited by cyberterrorists. Cyberterrorism also offers greater anonymity, as security agencies can sometimes struggle to identify the terrorists’ real identity. Furthermore, the number of targets is unlimited, and may include governments and public utilities, such as transport systems, without the need to overcome physical security barriers and personnel.
What are the looming regulatory concerns for the island’s captive managers and owners – such as Solvency II?
Malta’s captive managers are remarkably positive about Solvency II, perhaps because the end is in sight, and they and their clients have, in effect, done all the hard work.
A recent survey shows that they are well prepared to embrace Solvency II with all its increased governance requirements in part because operators have been subjected to quality regulation for 10 years. They have done the necessary tests and are poised for the changeover.
Captive owners are confident that they have surpassed the learning curve and are now in the implementation period – so they will reap the benefits of their thorough preparation.
The common perception is that there is now well-developed expertise in the cost-effective application of Solvency II to suit particular clients’ needs. Furthermore, the concept of risk-based supervision is spreading beyond the EU, so one hopes that other offshore domiciles like Guernsey will be playing catch-up with onshore EU domiciles.
The risk management implications of the rising exposure to emerging markets is allegedly driving European companies to increase their use of multinationals. Is this trend being seen in Malta?
It is not apparent whether this trend is growing. However, using a comprehensive multinational programme is usually a better solution. Owners of captives in Malta are waking up to the realities of incremental management implications relating to exposure to risks.
For this and other reasons there is general consensus that companies strive to achieve consistent and compliant insurance cover. Certainly in this kind of environment it is becoming more difficult to use traditional approaches such as relying on a single global policy or a patchwork of uncoordinated local arrangements.
How does PKF work with Malta’s government to maintain the jurisdiction’s competitive edge?
Our partners meet with the MFSA on a fairly regular basis and our relationship is good. Linking our business relationship with a network of PKF offices in 125 countries enables us to provide international solutions and this structure helps us to give clients present and future a better service.
In the meantime we continue to seek the best training opportunities for managers and as a firm remain in touch with latest compliance and regulatory developments.
PKF Malta recently received the letter of intent from the Malta Financial Services Authority paving the way to obtaining a licence to provide statutory external audit services to the captive insurance sector. PKF Malta is drawing on the expertise of another member of PKF International – PKF Littlejohn – which has been in the insurance market for over 100 years in London. A half-day seminar on the topic is being organised for insurance managers in summer.