Malta, a Reputable Jurisdiction for Captive Insurance Companies

Mr. Nicholas Warren co-authored with Giuseppe Signorelli | 02 Mar 2018

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After joining the European Union (EU) in 2004, Malta has witnessed a steady influx of captive insurance companies developing a stable reputation as a trustworthy European destination for these particular type of financial institutions.

A) What is Captive Insurance?

Under Maltese legislation, captive insurance companies are referred to as “Affiliated Insurance Companies” (AICs). ‘‘Affiliated Insurance’’ is defined as the business of an insurance company which is registered in Malta and whose business of insurance is restricted to risks originating with shareholders or connected undertakings or entities.

Businesses have been using Affiliated Insurance Companies for decades as a risk management tool. There are a large number of captives, including group and cell captives, established in various domiciles throughout the world for the benefit of all types of industries. In this regard,  Affiliated Insurance Companies may insure risks originating from a vast array of counterparties such as:

  • Parent companies;
  • Associated or group companies;
  • Individuals or other entities having a majority ownership or controlling interest in the AIC; and
  • Member of trade, industry or profession associations insuring risks related to that particular trade.

An AIC can be authorised to carry out general business of insurance (including accident, sickness, general liability, etc.), or long-term business of insurance (life and annuity, linked long term, permanent health, etc.) or reinsurance or both.

B) Benefits of a Captive Insurance Company

Captive insurance refers to a subsidiary corporation established to provide insurance to the parent company and its affiliates. A captive insurance company represents an option for many corporations and groups that want to take financial control and manage risks by underwriting their own insurance rather than paying premiums to third-party insurers.

Among the reasons to form a captive insurance vehicle, we may find the following:

1. Reduced Reliance on Commercial Insurance and Improved Capacity

It provides more opportunities to access the reinsurance market and enter the pooling arrangement. Because commercial insurers work on higher expense ratios than a captive, reinsurance can be obtained at a lower cost without paying commissions and fees. Through direct access to the reinsurance market, over time, successful underwriting creates surplus in the captive, enabling the parent to increase retentions lowering its dependency on reinsurance.

2. Insurance Cost Reduction

Although captives will incur certain operating expenses, overall insurance costs are drastically reduced. Reductions result from the elimination of the profit element built into premium charged by commercial insurers and reduction of expenses through the avoidance of high sales, marketing and administration costs of commercial insurers.

3. Stabilisation of Pricing

In conventional insurance market prices will be often set in relation to broad industry classifications. The result would be a price volatility based on general market conditions. On the other hand, in the captive market insurance premiums can be defined according to the loss experience of the insurance, therefore receiving a more tailored quotation.

4. Investment Income 

The captive earns investment income on premiums and capital during the period over which losses are paid out. All the investment income accrues to the benefit of the captive and its owners and creates investment income in a tax-preferred manner while reducing costs.

5. Opportunities for Improved Claims Handling and Control

Captive insurance, essentially being self-insured, provides incentives for owners to reduce or eliminate the potential for claims through proactive risk control and claims management techniques.

C) Conditions for Carrying on the Business of Affiliated Insurance in Malta

Companies carrying on business of affiliated insurance in or from Malta must receive the regulatory licence by the Malta Financial Services Authority (MFSA) under the Insurance Business Act (Cap. 403). An application for the authorisation is usually processed within the statutory period of three months.

1. Licensing Conditions

Authorisation to carry on the business of affiliated insurance is subject to the following licensing conditions:

  • Submission of a detailed business plan or scheme of operations of the proposed business;
  • Own funds in sufficient quantity and quality in accordance with applicable legislation;
  • All qualifying shareholders, controllers and persons directing the business must be fit and proper;
  • Any close links that the company may have with any other person must be disclosed; and
  • Exclusion of other commercial business from the company’s objects other than the business of affiliated insurance.

2. Capital Requirements

Captive insurance companies are required to possess own funds amounting to not less than the applicable minimum guarantee fund, which varies depending on the business of the captive. The minimum guarantee fund for a reinsurance captive is €1.2 million, whilst for a general business captive it ranges between €2.5 million and €3.7 million, subject to the type and class of business. In the case of life insurance captives, the minimum guarantee fund is €3.7 million. These funds must be unencumbered at all times and are to consist of (i) paid-up share capital amounting to not less than 50% of the value of own funds requirement; and (ii) a mixture of issued and unpaid share capital, preferential share capital, subordinated loans, retained profits and reserves (not incorporating technical provisions or equalisation reserve).

3. Solvency Requirements and Technical Provisions

Captive companies are required to maintain at all times a minimum margin of solvency and maintain adequate technical provisions. The solvency margin for general business is currently determined on the basis of either the annual amount of premiums or on the average burden of claims for the previous three financial years, whichever is the higher. With regards to long term business, a different formula is adopted for the calculation of the minimum solvency margins for each class of long term business. Furthermore, captives engaged in direct writing of general or life business are required to cover the technical provisions by admissible assets, which assets must be diverse and spread.

D) Malta as a Captive Jurisdiction

Malta has become an appealing jurisdiction to establish a captive insurance company for a number of reasons.

1. Malta’s Accession in the EU

Since Malta’s accession in the EU and the subsequent right of Maltese insurance companies (including AICs) to passport their business throughout the EU and the EEA states. In this regard, Malta has been chosen as the domicile of choice for the captives of big name companies as Vodafone, Peugeot and Renault leading the island as an alternative cost-efficient domicile for captives. Moreover, top international insurance managers have all been established in Malta since its accession to the EU.

2. Advantageous Tax Treatment

Malta has agreed with the EU, under State Aid Rules and the Code of Conduct Group for Business Taxation, an imputation system of taxation. Hence, like all companies resident in Malta, captive insurance undertakings are subject to income tax on company profits at a rate of 35% and upon declaration of a dividend, shareholders are entitled to claim a refund of up to 6/7ths of the tax paid. This means that the net effect is to create a potential net tax rate in Malta of 5% to the Group.

3. Accessible Regulator

The MFSA has built a solid reputation as a meticulous, yet accessible, supervisory body, ensuring that the local industry is closely monitored and fully compliant. Furthermore, the MFSA has been at the forefront of the insurance market providing training to the different parties as well as hosting market discussion with the industry.

4. Innovative Company Structures

Malta has been one of the first jurisdictions to draw up and implement the legislation for the setting up of a Protected Cell Company (PCC) and Incorporate Cell Company (ICC). The PCC and ICC vehicles have attracted captives to Malta since the captive solution might opt either for a stand-alone insurance company or a PCC/ICC. The main benefit of a PCC is that a Cell can use the Core capital and therefore does not need to have its own Minimum Guarantee Fund. This is advantageous to those insurers who wish to have their own company but whose business might not justify the setting up of an individual insurance company from a capital point of view, primarily due to the relatively low level of business undertaken. A PCC is a limited liability company which, in its entirety, needs to satisfy the Minimum Capital Requirements under the Insurance Business Act. The Core does not need to take on any insurance risk itself, but must be solvent at all times based on the business written by the whole (i.e. including cells). The cells are all independent of each other and from a legislative point of view are protected from each other. In addition each cell shareholder receives its own dividend stream and from a tax perspective each cell is treated as a separate entity.

An ICC is very similar to a PCC, with the exception of each incorporated cell within an ICC having a separate legal entity. Incorporated cells are established within the ICC structure and assets and liabilities are attributed either to the cell company itself, or to a particular separate cell of the company. An incorporated cell in Malta allows a cell owner to insure directly own risks in EEA, sell insurance to third parties in EEA and reinsure risks outside the EEA. Cells can also insure on non-admitted basis risks globally where allowed.

In conclusion, although Europe as a whole is still behind the US and the Caribbean in terms of captive business, European domiciles are progressively appreciating the use of captives and other risk transfer vehicles in a world which is increasingly becoming conscious about risk prevention and mitigations as well as the increasing costs associated with the management of risk.

 

 

 

 


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