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malta 2010 insurance report BASICS
CAPTIVES
ADVANCED
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A model of stability in a changing landscape Report editor: Shannon Hawthorne Tel: +44 (0)20 7269 7595 s.hawthorne@pageantmedia.com Editor: Gavin Bradshaw Tel: +44 (0)20 7269 7575 g.bradshaw@captivereview.com Production editor: Melanie Rockett Senior sub-editor: Claudia Honerjager Sub-editor: Matt McLean Operations director: Sebastian Timpson Managing director: Charlie Kerr Editorial director: Gwyn Roberts Associate publisher: Nick Morgan Tel: +44 (0)20 7269 7589 n.morgan@captivereview.com Publishing manager: Tom Copping Tel: +44 (0)20 7269 7586 t.copping@captivereview.com Subscriptions: Nick Byrne Tel: +44 (0)20 7269 7571 n.byrne@captivereview.com Circulation manager: Fay Muddle Tel: +44 (0)20 7269 7590 f.muddle@pageantmedia.com Captive Review is published monthly by Pageant Media Dunstan House, 14a St Cross Street, London, EC1N 8XA UK
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With the exception of American insurance Group (AiG), the insurance industry worldwide appears to have come through the financial crisis relatively unscathed. there is one important lesson that has been learnt from this experience – that we all have to be more conscious of the interconnectivity risk that exists between and across all markets. Whether it is counterparty risk, distribution channels, the composition of products or business strategies that are placed under the microscope, it is the sheer complexity of the inter-relationships that exist across the financial system, and the fear that the next little blip could drown everything in a sea of contagion, that appears to be the only constant factor in the current downturn. this is leading the call for increased transparency, more client and regulatory disclosure, wider risk perspectives and urgent rationalisation of business models. the european Union is reviewing the regulatory structures which, when implemented in 2011, should once again place the eU at the forefront of regulatory and supervisory development. the idea is not only to give the three new european Supervisory Authorities taking over from ceiopS, ceBS and ceSR more powers in the supervision of financial services across member states, but also to channel their findings into the work of a european Systemic Risk Board (eSRB) which will be responsible for identifying and assessing systemic risks on a europe-wide basis. the eSRB, which will be composed of representatives from the european commission, the eU central banks and the three new eU supervisory authorities backed up by the national supervisors, should be in a much stronger position to identify threats to financial stability coming from both endogenous and exogenous factors. taken together, these reforms imply substantial changes in the eU supervisory structure.
in the introduction of a macro-supervisory regime, the insurance industry must also be assured that its specific characteristics are correctly represented and understood, at the same time as the principles underlying the Solvency ii Directive are being advanced as the new model upon which much of the prudential regulation in other sectors should be based. Further still, Solvency ii gives the eU the opportunity to take global leadership on standards for the industry. Based on eight years of experience as a single regulator for financial services in Malta, the Malta Financial Services Authority (MFSA) also felt that it was time to revise regulatory structure to introduce a more common integrated approach to regulation. the outgoing sector-based structure of the MFSA Supervisory council has now been replaced by a more harmonised and integrated structure that will combine sector-specific supervision with an integrated approach to authorisation, risk-based supervision and regulatory development. Accordingly, the council will now be made up of a single authorisation unit, three specialist supervision units – for banking, insurance and occupational pensions, and securities and markets – and a regulatory development unit to look into, among other things, cross-sectoral issues. it is expected that this change will ensure that the authority will have greater capability to deliver regulatory effectiveness and that it will be well equipped to meet the challenges that have been exposed by the international crisis, as well as those facing Malta as a successfully growing jurisdiction.
Joseph V Bannister Chairman Malta Financial Services Authority
THIS YEAR WE HAVE taken a different approach to our Captive Review Malta report. In past years, the report has been predominantly based around the captive insurance market with new entrants, new lines and many unique approaches to service the market. The issue from Malta’s perspective was that “as a jurisdiction” it has a thriving international insurance market, not just a captive one. With this in mind we decided to open up the floor to the international insurance market. This move has created a new dimension to the report and now three distinct sections have been created – basics, captives and advanced.
BASICS
This section is a beginners’ guide to the international insurance market. It gives a novice reader a chance to understand – through descriptive articles – about different aspects of the market from lawyers to actuaries, investment managers and banks among others. If you want to know a bit but not too much, this section is definitely for you.
CAPTIVE
‘Exactly what it says on the tin’. This section is for anything and everything captive. Whether it’s PCCs, case studies, market fluctuations, management issues or even links to South American markets, if you want to know captive, look no further.
ADVANCED
This is the ‘nitty gritty’ section of the report. For those of you who are in interested in the insurance market, know the ins-and-outs, and the intricate issues, this analytical section has been created just for you.
All topics have their merits and the general theme was not to speak just about Malta but to give you the reader a chance to make up your own opinion through objective articles on subjects of interest to an outsider looking in. From the articles inside, we hope you will be given the means to form an opinion about Malta as an international insurance jurisdiction. Tom Copping Publishing Manager
BASICS
Malta marches on 7 Dr Matthew Bianchi, secretary general of the Malta Insurance Managers Association (MIMA), highlights the benefits of Malta’s PCC legislation Access to the insurance sector 8 Dr Angela Sciberras of Dingli and Dingli Law Firm describes the effects that recent legislative changes will have on the Maltese insurance market Small versus Large: is small the new big? 11 Pierre Galea Musù of UHY Pace believes that smaller-sized businesses can offer a much more efficient and personalised service than their larger competitors Cell captives/Moving onshore 12 Nicolai Xuereb and Krista Pisani Bencini of Fenech & Fenech Advocates discuss the benefits of cell captives and redomiciling to Malta Are you strong enough for Solvency II? 14 Ian Morris of BWCI breaks down the main three pillars of assessment of Solvency II Searching for yield 16 David Curmi of Curmi & Partners discusses the investment opportunities available to portfolio managers seeking yield Globalisation and the GCC insurance market 19 Ian Sangster of QIC International LLC discusses how the Malta insurance market has developed close ties with the Middle East, and how the relationship is a symbiotic one Flexibilty and adaptability 21 Aldo Scardino describes how Bank of Valletta has the key requirements to thrive in a growing international financial services centre Supporting Malta’s growth 24 Charles Cini, Stephen Pandolfino and Chris Bond pledge that HSBC will do all it can to support Malta’s growth as a financial services centre
MALTA INSURANCE REPORT
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A LEADER IN INTERNATIONAL FINANCE
A MEMBER OF THE NATIONAL BANK OF GREECE GROUP
www.nbgmalta.com.mt
302/304 Residence 3 Townsquare Seafront Apartments Qui-Si-Sana Place Sliema
BASICS
Malta marches on Dr Matthew Bianchi, secretary general of the Malta Insurance Managers Association (MIMA), highlights the benefits of Malta’s PCC legislation MAlTA Is Now wEll established as one of Europe’s primary captive insurance domiciles, boasting sound EU regulation and legal standards. It is the only fully fledged member state with protected cell company (PCC) legislation, which provides an interesting and attractive alternative for small companies. Malta’s thriving insurance market is supported and enhanced by an efficient licensing and monitoring process in which the Malta Financial services Authority (MFsA) plays a crucial role, earning it the reputation of being an accessible and flexible regulator within the confines of the legal and regulatory order. Insurance companies (and cells) licensed in Malta have direct access to the entire
Dr Matthew Bianchi is secretary general of the Malta Insurance Managers Association (MIMA) and the partner of the Insurance and Pensions Law Department at Ganado & Associates Advocates
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EEA market through the exercise of European passport rights, which enable them to establish branches or provide services in all EEA states. Furthermore, corporate migration laws allow companies to close their operations in one country for these to be continued in Malta without a break in the legal personality of the insurance company. Not surprisingly, several global conglomerates, including some of the ‘Fortune 100’ firms, have identified Malta as the ideal place to set up their captive insurer. As the number of captives in Malta multiplied, international insurance management companies were quick to recognise the trend and to establish a presence on the island. To date, there are 12 licensed insurance managers in Malta, including most of the major international players in the industry, not to mention the world’s first insurance management PCC. Insurance managers grasped the opportunity of working closely together to promote the local insurance industry and established the Malta Insurance Managers Association (MIMA) in 2007. MIMA enables its members to work collectively on regulatory issues and the review of legislative proposals. The Association’s objectives are to safeguard the interests of its members and to cultivate local insurance management expertise, thereby ensuring the continuing excellence of insurance management services in Malta. MIMA carries out an annual survey of the Maltese insurance market and the results of its most recent survey, conducted in January 2010, provided evidence of continued market growth over the past year.
The total number of managed licensed insurers in Malta is now 41, double what it was three years ago. The total gross premium written by these insurance companies in 2009 amounted to around €670m, 23.6% above the previous year’s results. Notwithstanding the recent financial markets upheaval, this small island state has established itself as a stable and renowned EU financial services jurisdiction. It provides an intriguing alternative for captive insurance company promoters and managers seeking to operate within an EU legislative and regulatory framework. As global markets recover, it is expected that this growth will continue throughout 2010 and beyond.
MAltA’S 12 MIMA MeMBerS • Abacus Insurance PCC • Alternative Risk Management (Malta) • AON Insurance Managers (Malta) • Ark Insurance Management (Malta) • First United Insurance Management • Heritage Insurance Management (Malta) • HSBC Insurance Management Malta • International Insurance Management Services • Island Insurance Management Services • JLT Insurance Management Malta • Marsh Management Services Malta • Willis Management (Malta)
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Access to the insurance sector Dr Angela Sciberras is a lawyer and a partner at Dingli and Dingli Law Firm. She has been practicing with the firm since 2001 and her responsibilities lie chiefly within the firm’s corporate and financial services department.
MALTA’S ATTRACTIVENESS LIES with a number of factors. As a lawyer by profession, I would first and foremost mention Malta’s comprehensive legislative and regulatory framework allowing for the possibility of redomiciliation of companies and the registration of protected cell companies coupled with a tax regime catering for an imputation system on dividend distributions by Maltese companies leading to an entitlement on the part of the shareholders of Maltese companies to certain tax refunds. From the practical point of view, Malta offers an exceptional business infrastructure and supporting professional services of very high standards. It is also worth mentioning that the Malta Financial Services Authority (MFSA) as regulator is easily accessible, efficient and ready to provide practical guidance where and as necessary. According to the 2009 European Financial Integration Report, in the insurance sector access to foreign markets has occurred mainly through subsidiary companies. In this context, the most common forms of access to the Maltese insurance sector we have witnessed took place by the redomiciliation of an existing subsidiary to Malta, or by incorporating and registering a subsidiary 8
company authorised to carry on insurance business in Malta, or alternatively by the acquisition of shares in an insurance company already established in Malta and in possession of the requisite authorisation from the MFSA. In each of these three scenarios, the legislative and regulatory framework in place was comprehensive and discussions with the regulator were effective. As will be seen below, this framework has been further strengthened in the case of acquisition of shares in a company authorised to carry on business of insurance or reinsurance in terms of the Maltese Insurance Business Act. Before looking into this aspect further, however, it is also important to note that a Maltese insurance undertaking may also opt to avail itself of the European Single Passport thus obtaining access to other member states and EEA states through this right. This is particularly interesting for insurers or reinsurers having their head office located in a third country state and wishing to penetrate the markets of EU and EEA states. DIRECTIVE 2007/44/EC OF the European Parliament and of the Council amending Council Directive 92/49/EEC and Directives 2002/83/EC, 2004/39/EC, 2005/68/EC and 2006/48/EC introduced detailed procedural rules and evaluation criteria for the prudential assessment of acquisitions and increase of holdings in the financial sector (the ‘Acquisitions Directive’). This Directive is a maximum harmonisation directive meaning that member states are required to adopt the level of protection dictated by the Directive and cannot impose conditions more stringent than those in the Directive. The main goals of the Acquisitions Direc-
tive are to improve significantly the supervisory approvals process for acquisitions in financial services firms (thus including insurance companies) by increasing legal certainty, clarity and transparency and to ensure a consistent handling of merger and acquisition requests across the European Union in order to encourage greater levels of cross-border acquisition activity. As a result, in 2009 amendments were made to the Insurance Business Act so as to, amongst other matters, substitute the definition of ‘qualifying holding’ and Article 38 dealing with acquisitions and disposals of holdings in companies authorised to carry on insurance or reinsurance business and introduce Articles 38A, 38B and 38C. THE SCENARIOS ENVISAGED by Article 38(1) of the Insurance Business Act: Case 1: Acquisition of a qualifying shareholding in an authorised company is proposed. The proposed acquirer may acquire a qualifying holding in the target company either directly or indirectly. Case 2: Increase in an existing shareholding in an authorised company is proposed. This would either have the effect of increasing, whether directly or indirectly, an existing shareholding in an authorised company which is not a qualifying shareholding so as to cause it to become a qualifying shareholding or further increasing, directly or indirectly, a qualifying shareholding in an authorised company as a result of which the proportion of the voting rights or of the capital held by the proposed acquirer would reach or exceed 20%, 30% or 50% or make the authorised company a subsidiary of the proposed acquirer. MALTA INSURANCE REPORT
BASICS
Dr Angela Sciberras describes the effects that recent legislative changes will have on the Maltese insurance market
In any of the above cases, the proposed acquirer is required to notify the MFSA in writing of the decision taken indicating the size of the intended shareholding and providing the information required by Insurance Rule 29 of 2009 on the prudential assessment of acquisitions and increase of holdings in authorised companies. This Rule came into force on the 1 January 2010 in order to, amongst other matters, partly transpose the Acquisitions Directive and the relevant provisions of the Guidelines for the prudential assessment of acquisitions and increases in holdings in the financial sector issued by the 3L3 committees of European Financial Supervisors. This Rule also sets out the exhaustive set of criteria by which a proposed acquirer will be assessed and provides guidance on the interpretation of certain terms such as ‘control’, ‘voting rights’ and ‘acting in concert’. WHAT DO THE CHANGES to the Insurance Business Act and the introduction of Rule 29 of 2009 mean in practice? 1. Clarity in determining the criteria applied by the MFSA in the assessment process of a proposed acquirer. The Authority will appraise the suitability of the proposed acquirer and the financial soundness of the proposed acquisition against all five criteria as indicated below: • Reputation of the proposed acquirer by assessment of his integrity and professional competence; • Reputation and experience of those who will direct the business by evaluating both management competence and technical competence; • Financial soundness of the proposed acquirer by appraising the capacity of the proposed acquirer to finance the proposed MALTA INSURANCE REPORT
acquisition and to maintain a sound financial structure for the foreseeable future; • Compliance with prudential requirements which entails evaluating whether the proposed acquisition will have any adverse effects on the authorised company’s continued compliance with prudential requirements; • Assessment of money-laundering or terrorist financing risks in connection with the proposed acquisition. The Rule stipulates the key concepts in the Prevention of Money Laundering and Funding of Terrorism Regulations 2008 to be used for the prudential assessment of acquirers. This is closely linked to the concept of ‘integrity’ mentioned in the first assessment criterion. In line with the Acquisitions Directive, the Act clearly states that the MFSA cannot examine the proposed acquisition in terms of the economic needs of the market. 2. Knowledge on the part of the proposed acquirer as to the information required to be provided in order to allow the Authority to assess the proposed acquisition in a complete and timely manner. The Rule clearly sets out the information required by the Authority for a proper assessment of an acquisition. This information includes: the identification of the proposed acquirer by completion of the relative questionnaire, provision of information on the acquisition by, amongst other matters, giving an explanation of the overall aim of the acquisition and identifying the shareholding and voting rights in the authorised company before and after the acquisition. Finally, the Rule requires the provision of information on the financing of the acquisi-
tion. This information would include details on how the funding for the purchase of the shares will be obtained, details on the origin of any private financial resources proposed to be used and information on the use of borrowed funds. 3. A deadline has been set within which the MFSA must make assessments. The deadline is that of 60 working days. The MFSA is obliged to acknowledge a notification made within a maximum period of two working days and the aforesaid period of 60 working days will start running from the date of such acknowledgement. During the assessment period, the Authority is able to request additional information thus interrupting the assessment period for a maximum of 20 working days. Understandably, in the case of unregulated or non-EEA proposed shareholders, the assessment period may be extended to 90 working days. 4. The Authority may refuse the proposed acquisition only if there are reasonable grounds for refusal on the basis of the five assessment criteria or if the information provided by the proposed acquirer is incomplete. A public statement indicating the reasons for refusal may be issued by the Authority, whether at the request of the proposed acquirer or on its own initiative. If, on the other hand, the MFSA is satisfied after conducting its assessment, it may grant conditional or unconditional approval to the proposed acquirer and the acquisition can then take place. As a result of its comprehensive legislative and regulatory framework and high professional standards, Malta has thrived in the financial services sector and Dingli and Dingli Law Firm looks forward to participating further in this success. 9
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BASICS
Small vs Large: Is small the new big? Pierre Galea Musù of UHY Pace believes that smaller-sized businesses can offer a much more efficient and personalised service than their larger competitors
UP TO A VERY recent past, being big in business used to matter – a lot! Big meant economies of scale, effective coverage, recognition, power to execute deals and to shift weight – being big, or striving to become so, was the order of the day. And then the unimaginable happened, and fast too. In the past year and a half, this principle of being big has been hit hard, as the inefficiencies of large corporate entities, and individuals alike, were exposed and laid bare. Global household giants hit the floor like ninepins. All of a sudden, big also meant being cumbersome and unwieldy. The economic downturn hit fast, far and wide, and the services industry was no exclusion. But, as the economic turmoil took its toll, small service businesses seemed to fare better – why? Here are some reasons that may be attributed to this occurrence. Quality: Small firms continuously need to build recognition. The quality of service provided by small firms has to carry, therefore, greater emphasis. Typically small firms are available at all hours, dur-
Pierre Galea Musù is a Certified Public Accountant with 20 years’ professional experience in accountancy, financial and business consultancy services. His area of specialisation is International Tax. He is the partner responsible for International business at UHY Malta.
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ing business and out. There is a greater disposition to help and the time taken to carry out clients’ requests and assignments is usually faster. Above everything else, at all levels of business interaction, the service provided is personalised and there is the added benefit that the client would be dealing directly with the service provider. The approach is different too, right from the beginning. While marketing experts in big firms with substantial budgets promote the firm, revolving around buzz words like “Customer Relationship Management”, or CRM, Quality Charters and endless ethos statements, which in real life means that to find the right person you have to bend over backwards, in a small firm, it is usually straightforward and easy to speak to the right person, with key involvement, within minutes. One cannot avoid mentioning costs and the clear advantage that small firms have on large ones in this respect. It is obvious that the cost structures of a small firm are nowhere near the heavy overhead structures of a big firm. This meant that the small firms could weather out the economic storm more effectively than the large corporations, which had to resort to sabbaticals and three-day weeks. From a different angle altogether, when it comes to considering costs, few people realise that a large number of assignments and services can be carried out entirely by small firms, and just as well as by the big firms, with output that qualifies to the same standard. This in itself presents a huge cost-saving opportunity. Flexibility is another ‘pro’ attributable
to the small firm. Much strength lies in the ability to bend rather than break, and the ability to react rapidly is an important attribute in a world, which is seeing dramatic changes. What happened late in 2008 and throughout 2009 is living proof of this. It would seem that survival of the fittest is more like survival of the nimble nowadays, as those more adapt to change seem to be getting the best indices of success. THESE ARE BUT SOME attributes of small businesses. While big business has the clear advantage of deep pockets and vast marketing budgets with the power to spend on anything from dazzling offices to headhunting, small firms are usually much better at substance. The rate of response is fast[er] and the service is personalised and efficient, albeit not without cost! A small business still has to face the perennial and major disadvantage of lack of recognition. It is a cardinal fact that small service providers cannot compete directly with the big firms, at least not on level terms, as both resources and means do not allow it. However, there is a definitely scope of co-existence and in many aspects, small service providers can offer advantages that the large firms cannot even dream of. After all, most economies around the world are made up of a core of small- and medium-sized businesses and the opportunities that these markets present to small firms of service providers is infinite. The challenge for the small company will be to stay alert to change and to, nimbly, exploit that next opportunity. 11
Cell captives Nicolai Xuereb and Krista Pisani Bencini of Fenech & Fenech Advocates discuss the benefits of cell captives and redomiciling to Malta
AFFILIATED INSURERS WITH relatively smaller premium incomes may not always have the necessary critical mass to support a standalone set up. Enter the cell captive. Since 2004, Maltese legislation allows for the insurance business of insurers, reinsurers, captives, managers and brokers to be carried out through protected cell companies (PCCs). PCCs are companies with one or more segregated cells having segregated cellular assets, in addition to noncellular or core assets. PCCs are regulated by the Malta Financial Services Authority (MFSA) under the Companies Act (Cell Companies Carrying on Business of Insurance) Regulations and by the Insurance Business Act, in the case of insurance companies and captives, and the Insurance Intermediaries Act in the case of managers and brokers, and the rules and subsidiary legislation issued thereunder. The advantages of using an onshore cell captive set up in Malta may indeed be quite unique when compared to
Nicolai Xuereb is an associate at Fenech & Fenech Advocates. His areas of expertise include financial services, trusts and foundations.
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other models for doing affiliated insurance business, opening up alternative risk management solutions which may otherwise have remained uneconomic to pursue. More common use of the layman’s term “rent-a-captive” is perhaps indicative of the possible potential for the regulated but flexible PCC model. The PCC requires authorisation from the MFSA to carry on the business of affiliated insurance in terms of the applicable regulatory framework, particularly the Insurance Business (Companies Carrying on Business of Affiliated Insurance) Regulations. The MFSA will specify in more detail any further specific conditions which would be applicable before a new cell within the PCC company is set up, typically by the issue of non-voting preference shares, depending on the classes of risk to be underwritten, the captive’s business plans and scale of operations. The directors of the PCC are dutybound to keep cellular assets segregated and separately identifiable from core assets of the corporate entity. Similarly, assets attributable to a particular cell are to be kept separate and distinct from assets attributable to other cells. Legally the cells and the core are one corporate entity as the cells do not have a separate legal personality notwithstanding that they may each be managed by a separate third-party insurance manager Although normally creditors of a cell unable to meet its obligations may resort to the assets in the core to settle debts
due to them by that particular cell, in the case of cells that are used solely for the carrying on of captive business, the cell may prevent recourse to the assets of the core through a written agreement with any third parties who are actual or potential creditors of the cell and if specifically stated in the constitutional documents of the PCC. PCCs offer numerous opportunities including: • a single corporate body with distinct cells having ring-fenced assets and liabilities; • transfer of cellular assets to other persons and the extension of the protected cell assets concept to the transferee; • “rent-a-captive” solutions allowing the purchase of a cell within an existing PCC to write policies from within that specific cell; • possibility of being converted into a PCC from a traditional insurance company or captive; • Setting up a cell within a PCC (although still requiring a licence) would be a less demanding exercise as the PCC would already be known to and regulated by MFSA. For those looking to establish a captive insurer, a third-party managed cell company may prove to be a very cost-effective proposition. Malta offers not only the necessary legal and regulatory framework for captive cells but also experienced insurance managers maximising potential for the benefits of affiliated risk management. MALTA INSURANCE REPORT
BASICS
Moving onshore LEGISLATIVE INTERVENTION HAS ensured that moving to Malta is an easy, cost-efficient and straightforward procedure. Corporate entities which are registered under the laws of an approved jurisdiction outside Malta, and which carry on business of insurance including captive companies, may migrate to Malta to an attractive EU-approved fiscal regime, a robust but flexible regulatory environment and access to EU markets through the single-passport route. The Continuation of Companies Regulations coupled with the Insurance Business (Continuance of Companies Carrying on Business of Insurance) Regulations make it possible for a company registered outside Malta to move from its country of origin to Malta without liquidating or terminating policies on risk. Said company would “continue” as a company formed and registered under the Companies Act, without the need to re-register as a new corporate entity. Regulated insurance companies and captives are specifically allowed to redomicile by the Maltese regulatory framework. Insurance companies and captives can redomicile to Malta if they are a foreign entity that: • is a body corporate, registered, incorporated or constituted under the laws of an approved country or jurisdiction outside Malta; • carries on business of insurance; • is similar in nature to a company as known under the laws of Malta; and • would, if it were a Maltese company, qualify to be authorised under the Insurance Business Act or, in the case MALTA INSURANCE REPORT
of insurance brokers and managers, the Insurance Intermediaries Act. The law of the foreign jurisdiction must allow continuations or redomicilation to other jurisdictions. Alternatively, the possibility of a merger with a Maltese company could be explored. Approval of continuation per se is divided in two phases. The first is a provisional certificate of continuation establishing the continuation date and issued upon receipt/approval by the Registrar of the requisite documentation. Upon issuance of a certificate to this effect, the company would be deemed to be a body corporate incorporated under the Companies Act and is, from then on, subject to all the obligations and capable of exercising all the powers of a company which is so registered. The second phase of the redomicilation must be finalised within six months from the issuance of the provisional certificate, by which time the company must submit evidence to the Registrar that it has ceased to be a company registered in its country of origin. A final certificate of continuation will then be issued. Companies migrating to Malta to carry out a licensable activity would require a new licence from the MFSA before commencing operations. In practice, simultaneously with the corporate procedures for redomiciliation, the captive would submit a licence application to the MFSA. The Registry of Companies liaises closely with the MFSA Authorisations Unit to provide timely feedback and to issue the necessary licence contemporaneously
with the approval of the redomicilation. The continuation procedures ensure that, with only minimal technical requirements, the redomiciled company would continue its life in Malta without becoming a “new” legal entity upon continuation. It would thus retain all its assets, rights and liabilities as those it had before moving to Malta, hence “continued”, and without the need to run-off policy portfolios. Legislation allowing redomicilation of insurance companies and captives to Malta dates back to 2003. Since then the island has continued to increase in its popularity as an attractive base for insurance businesses, particularly since EU membership in 2004 and joining the Eurozone in 2008. Historically, Malta’s appeal lay mainly with its geographical position and moderate climate. Today, its legal and regulatory framework, strong reputation, availability of trained human resources, competitive costs and approachable and efficient regulator are a few of the factors which are turning Malta into an onshore EU domicile of choice for financial services businesses.
Krista Pisani Bencini is an associate at Fenech & Fenech Advocates. Her areas of expertise include financial services, corporate law and asset finance.
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Are you strong enough for Solvency II? Ian Morris of BWCI breaks down the main three pillars of assessment of Solvency II
IN OCTOBER 2012 THE new Solvency II regime will come into force. Under this system all insurance companies within the European Union (EU) will be regulated to a common capital requirement and risk management standard. There will be three pillars of assessment, all of which are subject to an overall supervisory review process. Not only do these standards apply at an individual company level, but they also have to be met at a group level. Pillar 1 – Demonstrating adequate financial resources Pillar 2 – Demonstrating an adequate system of governance Pillar 3 – Public disclosure and regulatory reporting requirements Consultation papers issued by CEIOPS (the Committee of European Insurance and Occupational Pension Supervisors) have been the basis for the discussions as to how various aspects of Solvency will be adopted.
Ian Morris joined BWCI in Guernsey 20 years ago after working in the UK insurance industry for Legal & General. Morris is head of insurance services for the BWCI Group an actuarial consultancy. He provides both actuarial and consultancy advice to life and general insurance companies.
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KEY CONSULTATION PAPERS issued towards the end of 2009 contained significant implications for future capital requirements under Pillar 1. To date many companies may have estimated their capital needs under the quantitative impact study known as QIS4. This showed the impact of the proposed capital requirements under the standard model proposed before the recent financial crisis. However, following the financial crisis the approach to determining capital and the assumptions to be made for the standard model have been reviewed. As a result, new proposals could lead to a substantial increase in capital requirements.
Consultation paper 74 issued by CEIOPS considered correlations between risks and the credit that should be given for diversification. Perhaps not surprisingly under the influence of recent financial events, the revised proposals imply an increase in minimum capital requirements. A key argument is that the recent crisis showed that correlations appeared to increase in stressed circumstances so less credit should be given for diversification than had previously been assumed. However, some of the respondents have questioned the arbitrary nature of some of the increases and have suggested that the requirements are seeking a stronger level of capital than intended by the underlying legislation. In particular, they have suggested that too much reference has been made to the recent crisis rather than seeking a more balanced perspective using statistical analysis over a longer period. It has also been suggested that the arguments backing the proposals would not meet the statistical quality tests for an internal model. While that is not a requirement of any legislation, it is arguably a telling comment both on the difficulty of meeting the required tests for internal model requirements and the willingness of the authors of the consultation paper to strengthen the tests previously proposed without rigorous statistical backing. Ultimately there is a degree of subjectivity in many of the assessments so the final outcome will be remain a matter of judgement and in many cases statistical data is insufficient to resolve issues conclusively. OVERALL, CEIOPS calculated that the changes to the various tests might increase capital requirements by 24% for life insurers MALTA INSURANCE REPORT
BASICS
and 13% for non-life insurers. Clearly this is only an estimate and the implications for individual insurers may vary significantly from the average according to their investment strategy and risk profile. Consultation papers 69 and 70 issued by CEIOPS considered equity and market risk. Key conclusions include the need to increase the level of stress tests to determine capital requirements. For equities, the stress test moved from 32% to 45% for securities listed within the EEA and OECD. The figure of 32% was arguably too low but the scale of the movement is very significant. Interestingly the test is proposed to be variable in line with the average of a market index over the prior year. The aim is to prevent companies being forced sellers in a falling market. Arguably this could lead to an equity bias as there is no variability for stress testing other market risks. Other areas of market risk covered included stress tests for interest rate movements, interest rate volatilities, property movements and currency movements. In each area the requirements have been increased. The results follow some detailed analysis of recent data and the impact in stress scenarios. In addition, a minimum downward stress of 1% in interest rate movements will apply (but subject to a floor of a 0% interest rate after stress). As with the correlation analysis, it is perhaps not surprising that following the financial crisis that many stress tests have been strengthened. However, despite the careful analysis, many correspondents again felt that too much weight had been given to recent events and that perhaps the outcome represented an over reaction. MALTA INSURANCE REPORT
In particular, the cost of holding corporate bonds has increased which may diminish enthusiasm for this asset class. CEIOPS did not offer any specific comments on the potential impact of the equity and market risk changes. Nevertheless, the scale of the proposed changes is clear and insurers that may have felt comfortable with previous proposals need to review the position. Although the proposals are not final, there are some key conclusions that can be drawn. If the proposals are approved, the minimum capital levels may increase by significant levels. While some proposals may be eased, the trend to higher capital requirements seems unlikely to change. The attractions of an internal model may increase if this is seen as a way to reduce the impact to the standard model. However, regulators may have reservations about internal models using assumptions that produce results very far from the standard model. Thus capital requirements for all insurers may increase. As internal model approval is not guaranteed, companies will need to understand the implications in the event that approval is not granted (or not granted in time). Companies that were comfortable with the outcome of the standard model under QIS4 may need to review their position and the results of QIS5 (due to take place in autumn 2010) will be more significant. MALTA HAS A RANGE of domestic and international insurance companies. Each company will need to review the potential capital impact of Solvency II. As suggested above, companies may benefit from partici-
pating in QIS5 to help assess the impact. If the capital requirement is of concern, then companies will need to review their approach to managing assets and liabilities to see if there is any scope to reduce the capital required. For smaller entities, the view adopted by the regulator in relation to proportionality could be important. This may not matter so much for capital requirements as these are likely to be determined by the standard formula for small insurers. However, other aspects of the Solvency II regime under Pillars 2 and 3 could be of equal or greater significance to smaller entities and there may be some scope for considering what, if any, impact proportionality may have. BWCI HAS BEEN HELPING clients assess the implications of Solvency II through working through QIS4 and other advice and consultancy. The time to full implementation is now less than three years and, while that may seem a lengthy period, there is a considerable amount for companies to review and assess. A key initial task is to undertake a gap analysis to assess the tasks needed and many companies are already undertaking such reviews. BWCI can assist with such exercises in addition to the technical challenges for actuaries in meeting the requirements of Solvency II. The consultation periods for these papers are now closed. The responses are being reviewed by CEIOPS before delivering their final advice to the European Commission. Once the European Commission has confirmed the requirements, each insurer will need to decide how to manage their future capital requirements. 15
Searching for yield David Curmi of Curmi & Partners discusses the investment opportunities available to portfolio managers seeking yield
David Curmi trained and qualified in the UK, spending four years with a top investment bank in the UK, before going back to University in Oxford. Today he is the managing director of Curmi & Partners, a specialised investment management firm set up in 1978.
16
ONE OF THE BIGGEST dilemmas facing portfolio managers today is the search for yield. With short-term interest rates having been brought down in an unprecedented fashion to combat the effects of the financial crisis on the wider economy, life and, possibly even more so, non-life companies face an uphill struggle to achieve the sorts of returns that were being achieved on low-risk short-dated paper just 18 months ago. This, however, is going to be the order of the day for some time to come in my opinion, and it could have important implications for the returns on assets achieved by insurance companies. The world is currently emerging from a credit boom of astronomic proportions, however, it is apt to use a quotation of Ludwig von Mises, an economist of Austrian school of economics fame: “There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system.” Growth had been financed predominantly through the free availability of credit from financial institutions. That same credit stimulus from banks, be it in the form of personal loans, mortgages, credit cards or even corporate loans, has now been withdrawn at neck-breaking speed. Credit lines have fallen across the board. Some of this slack has been taken up by the fixed-income market, as companies refinance their bank loans
through fixed-interest securities, but essentially we are today going through a painful period of unravelling the huge leverage within the system. This is healthy in the long term but can be painful in the interim – painful through its effect on economic growth. THE RECENT SPATE OF statistics from both sides of the Atlantic have pointed towards growing momentum in the economic recovery. But in truth, the vast majority of the economic growth seen in Q4 2009 has been a result of restocking by companies after the de-stocking in Q1 2009 and government spending. Neither of these is sustainable in the medium term and despite the substantial quantitative easing, economies have not developed real legs of their own. This means that interest rates are likely to stay low for a substantial period of time. It also means that investors need to reign in their expectations on returns especially from the fixed-income market. The real pain is being felt by those insurance companies investing at the very short end of the yield curve. Here cash rates are somewhere in the region of 0.4% to 1% depending on which currency you are investing in and where you are placed on the short-term one-year curve – barely worth the effort really! It is possible, however, to adopt strategies that will increase this yield to 2.5%-plus without taking on significant risk. This can be done through careful placement on the yield curve, using a mixture of long/short-dated instruments as well as diversification into certain industry secMALTA INSURANCE REPORT
BASICS
tors, which are presently offering better returns. The critical path though lies in one’s views on inflation. Differing views on this will push you up or down the yield curve accordingly. MUCH COMMENT HAS BEEN made about the return of inflation. This is a natural textbook response to the unprecedented quantitative easing (printing money) that central banks have undertaken. The reality, however, is different. This new money has largely not found its way into the hands of the consumer – and the little that has reached Mr/Ms Consumer has in fact not been spent but probably saved. The crisis and recession over the past 12 months have been different to most recessions experienced by the average man. The reason is that this recession was largely created by the failure of the banking system. In past recessions banks have been a powerful tool in lifting economies out of recession through their expansionary lending policies – today that has changed. Not only that, but consumers, frightened by the lack of job security and a realisation that debt must be repaid, have started to save again. The UK savings rate rose from -0.7% in Mar 2008 to +8.6% in Sept 2009. Similarly in the US the savings rate rose from 0.8% to 4.8% over the same period. This is all money that would otherwise have been channelled into spending and therefore create a multiplier effect throughout the economies. Consequently the velocity of money has slowed dramatically, thus implying that inflationary pressures are MALTA INSURANCE REPORT
“For investment strategies, medium- to longer-dated bonds remain the investment of choice at this point”
not building, and while unemployment remains high, consumers will continue to save. Furthermore there is substantial spare capacity in the western economic engines to ensure that manufacturers can continue to produce without experiencing price pressures. This leaves central banks with no choice but to keep interest rates low until such time that an economic recovery driven by private sector demand is sustainable. FOR INVESTMENT STRATEGIES, this means that the medium- to longer-dated bonds remain the investment of choice at this point. However, the big caveat lies on two important fronts. Firstly at any sign of a build up in inflationary pressures, this strategy must be tweaked, and secondly, is sovereign risk still the best place to be? With Greece and to a lesser extent Portugal facing severe financial challenges and the rating agencies warning on a potential rise in default risk, sovereign bonds may not be the safe haven they once appeared. This means that there are attractive investment opportunities for investment portfolios seeking yield through the use of corporate bonds of investment grade quality. 17
Bank of Valletta p.l.c. Institutional Investment Management Services
Your gateway to International Financial Markets in Malta TREASURY SERVICES
PORTFOLIO & RISK MANAGEMENT SOLUTIONS
At Bank of Valletta we provide our Institutional and Corporate clients with highly customised solutions that enable direct access to international financial markets. Our objective is to source the best possible prices for our clients - be it a foreign exchange rate or a yield for a money market or fixed income instrument. Your success is our ultimate goal.
Treasury Services +356 2275 3115 Portfolio & Risk Management Solutions +356 2275 3074
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www.bov.com Bank of Valletta p.l.c. is licensed by the Malta Financial Services Authority. Issued by Bank of Valletta p.l.c., 58, Zachary Street, Valletta VLT 1130 - Malta
BASICS
Globalisation and the GCC insurance market Ian Sangster of QIC International LLC discusses how the Malta insurance market has developed close ties with the Middle East, and how the relationship is a symbiotic one
TRADING WITH THE EAST and the west is nothing new to Malta. Strategically located at the crossroads of ancient and modern shipping routes, Malta has a long history of trade and would have been involved in barter with strange and distant lands for as long as mankind has hoisted sail. In 1980 Qatar came to Malta when Qatar Insurance Company signed an Agency Agreement with Untours to represent them on the island; a small step in the GCC market looking west and somewhat before we started to hear the buzzword – globalisation. The relationship has stood the test of time and this year celebrates its 30th anniversary. With the current focus on globalisation, there is certainly an opportunity for the Maltese insurance market to reciprocate and move east as GCC financial centres welcome financial institutions, insurers and reinsurers. There is however a tendency to look at “globalisation” as a relatively modern development. Indeed, there are those who will choose the advent of the World Trade Organisation as the real watershed after
Ian Sangster was transferred from the UK in 1977 to take up an appointment with his company in Dubai as the regional engineering underwriter. Having worked in Dubai, Abu Dhabi and the Sultanate of Oman Ian joined Qatar Insurance Company in 1990 as a deputy CEO he was appointed as Chief Executive Officer of QIC’s subsidiary QIC International LLC upon its formation in early 2007.
MALTA INSURANCE REPORT
which business took on a global hue. At the other end of the spectrum, the empires of old may be seen as the dawn of globalisation. Of course this was achieved by conquest at the point of a sword and while trade followed within the then-known world, it could hardly be compared with that which we are now experiencing. The invention of the steam engine and the British Industrial Revolution may be viewed as the commencement of true global trade on a very significant scale. However, if one examines the trade “agreements” of that era, it will be found generally that these were somewhat one-sided and often enforced by gunship diplomacy. During the 20th century we have experienced trade tariffs, preferential tariffs, and other assorted trading rules, not forgetting the General Agreement on Tariffs and Trade (GATT) which took effect on the 1 January 1948, which culminated in the establishment in 1995 of its successor, the World Trade Organisation. WHATEVER THE RIGHTS and wrongs of the current trading arrangements and whether they do in reality provide a playing field that is at least reasonably level, we have seen a great number of markets open up to competition. Within the insurance industry the opening of the markets is a new development and in recent years we have seen various Middle East markets both open their doors and embrace regulation. As the 20th century drew to a close, those local companies in the Arabian Gulf region who had the vision to predict the effects of globalisation on their operations and identify, not just the threats, but the considerable
opportunities that globalisation would bring have been able to diversify their operational base, product offerings, investment portfolios, risk retentions and underwriting skills. This has enabled them to meet both the challenge and competition from the influx of foreign insurers, reinsurers and brokers into their home countries. Hitherto, and even now, it was/is not uncommon for an insurance company to operate solely within their home country while enjoying a measure of protection through exclusivity, along with other national insurers, to insure governmental risks. This situation is now changing throughout the Arabian Peninsula. Critics have opined that this has been slow in happening but this is a rather unfair comment given that most of the local/national insurers have not been operating for very long. It is not that unusual to find a national insurance company celebrating its 10th or 20th anniversary – hardly sufficient time to take on foreign companies who have been in business for a century or two! While local companies with vision have moved outside their home base, diversified their offerings and established subsidiaries and other businesses of a synergentic nature, it may be considered prudent by various Middle Eastern governments to maintain a somewhat reduced measure of protection to their (relatively) nascent local insurance industries. This need not be at odds with the founding principles of the WTO and earlier agreements. No two markets are from the same mould and global organisations, if they are to be respected and hold the moral high ground, must recognise, and allow for, this basic tenet. 19
Accounting and Reporting Management Advisory Services Payroll Bureaux Services Local and International Tax Due Diligence Work Corporate Organization Company Secretarial Services Business and Project Finance
Matilda Court Flat 2, Giuseppi CalÏ Street, Ta’ Xbiex XBX1423, Malta. Phone +356 2133 1710 +356 2131 1814 Fax +356 2131 0461 info@uhymalta.com www.uhymalta.com
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Flexibility and adaptability Aldo Scardino describes how Bank of Valletta has the key requirements to thrive in a growing international financial services centre
Aldo Scardino is head of Treasury & Capital Markets at Bank of Valletta. After joining the Bank in 1989, Aldo has worked extensively within Malta’s financial services sector and has held various responsibilities relating to the areas of stockbroking, investment banking, institutional investment management and treasury management.
MALTA INSURANCE REPORT
RECENT YEARS HAVE witnessed an impressive upsurge in the Maltese financial services sector, and Bank of Valletta (BOV) has faced the challenges and opportunities that arose by adapting quickly in order to maintain its role as the leading financial services provider for those carrying out business in and from Malta. Such an achievement is most notable when placed in the extremely challenging scenario the banking industry has had to deal with in recent years. MALTA STANDS OUT AS an attractive financial services hub in the Mediterranean. EU membership, an attractive tax system, appealing operational cost structures, access to highly qualified and relatively inexpensive human resources and an accessible and business-oriented regulator continue to underpin the speedy development of Malta as an International Financial Services Centre (IFSC). At the same time, Malta continues to emerge as a preferred domicile for certain industries, such as gaming, pharmaceutical development and manufacturing, and hedge funds, as well as captives and insurance companies. WORKING WITHIN THIS environment, BOV continues to internationalise its operations from Malta and is progressively carrying out business with institutional and corporate clients which banks with a similar dimension would covet. BOV is now competing with the world’s top banks by servicing this segment which in turn has brought about
a powerful change to the way the entire organisation is structured and how it operates. BOV has been proactive vis-ã-vis Malta’s development as an IFSC. Indeed, in 2006 the Bank undertook a broad-based, externally focused strategic review which was necessary to enable it to identify opportunities for the Bank within the context of Malta’s development as an IFSC, and the servicing of the insurance industry in general. The captives and insurance sector in particular was immediately identified as an area of strategic development for the Bank. The Bank took prompt action to restructure its operations so as to enable direct access to international financial markets to its varied institutional and corporate clients including those operating within the insurance industry. The Bank effectively began to make available its extensive network of foreign counterparties within the different international markets, thus enabling its clients to source the best possible prices – be it a normal bank deposit, a foreign exchange rate, a money market instrument or a fixed income instrument. In all cases, the prices obtained for the Bank’s institutional and corporate customers were and still are not constrained by the Bank’s own position in any of these products; on the contrary, BOV obtains real-time wholesale prices directly from the most competitive market makers in a particular product at that specific moment of time that it deals for its clients. Obviously, these 21
BASICS
“Our adopted strategy continues to be question, listen, learn and research the client’s objectives and goals” clients also avail themselves of other bank services – particularly credit, trade finance and portfolio and risk management – the latter being an important element sought after by the captives and insurance industry. THE OPPORTUNITY TO access markets directly is indeed an attractive business proposition which together with the Bank’s bespoke relationship management style has enabled Bank of Valletta to strengthen existing institutional relationships and build many new ones. However, achieving success has not been an easy task. Bank of Valletta is Malta’s largest bank and boasts an extremely successful franchise domestically, but when dealing with foreign companies, this is a different matter – our major competitor is one of the largest global banks so naturally many companies who set up in Malta would tend to opt for a global bank being unaware of the Maltese banking landscape. However, once these companies commence business relationships with Bank of Valletta, they invariably develop a strong relationship with us that spans across varying services. BOV has been most successful with its institutional investment management service offering. Throughout the 22
years, the Bank has built one of the strongest financial markets team in Malta – possibly one of the best set ups in the region, albeit concentrating on its proprietary operations. Indeed, the Bank’s investment portfolio, composed mostly of very high-quality fixed-income securities, accounts for approximately half the Bank’s assets. During the past years, the Bank has made available to its institutional and corporate clients the expertise through the provision of treasury services and the structuring and creation of portfolios investing in fixed income securities that are aligned with pre-agreed investment management and risk management criteria. THE BANK EMPLOYS A strategy that yields potential for superior returns. Because the Bank’s institutional clients team manages a small number of relationships, we do not seek the standardisation route or provide any offthe-shelf products. We prefer to begin by developing a deep understanding of our client’s requirements and then construct a service agreement which is accurately tailored to address the unique needs of our client. We strive to provide our institutional clients with a framework for understanding their profiles and risk tolerances. Our adopted
strategy continues to be question, listen, learn and research the client’s objectives and goals. We question the clients’ needs and priorities, and by means of our research and analysis processes, we endeavour to propose answers and solutions that are specifically designed to help achieve the desired investment goals. To accomplish this, we have equipped ourselves with a dedicated team of qualified and experienced individuals, research and information sources, pricing and portfolio management tools, and most importantly, direct access to the vast majority of market makers in the international financial markets. Many clients are surprised to discover how important this set up is since it is one of the contributing factors that invariably yields potential for superior returns which in turn justifies the cost associated with a bespoke service. Moreover, Bank of Valletta’s fees are extremely competitive when compared with normal institutional off-the-shelf offerings available from global investment banks and high street players. In addition to the bespoke offering, BOV also offers a choice of products and services which are commonly available from any provider. Our fund management arm, Valletta Fund Management Limited (jointly owned between Bank of Valletta and Bank of New York Mellon), offers an impressive and attractive portfolio of money market and investment funds in all major currencies which undoubtedly address the requirements of the captive and insurance industry. MALTA IN SURANCE RE PORT
a tailor made professional service focussed on the institutional investor.
Investment management for the Insurance Industry • A highly experienced investment management team with knowledge of the local legal regulatory requirements • Dedicated specialist investment managers, trained in managing risk as well as returns • Strong relationships with world renowned custodians (AA rated) • Optional alliances with global investment managers whilst maintaining ‘substance’ in the local set-up • A natural choice for institutional investors who want to tap into the advantages that come with having an investment manager located in Malta
CURMI & PA R T N E R S
www.curmiandpartners.com
Finance House, Princess Elizabeth Street, Ta’ Xbiex XBX 1102 - Malta T: +356 21347 331 • F: +356 21347 333 • E: info@curmiandpartners.com Contact: David A. Curmi on dcurmi@curmiandpartners.com or Karl Micallef on kmicallef@curmiandpartners.com Curmi and Partners is licensed to conduct investment services business by the MFSA, and is a member of the Malta Stock Exchange.
claims sourcing as strategic enabler Claims sourcing is all about increased customer satisfaction, enhanced performance, a demonstrable reduction in costs, while maintaining a firm grip on your processes Successful sourcing means you can allocate your resources to your strategic objectives. The Van Ameyde Group offers a wide service offering to hundreds of clients, including captives, insurers and brokers, government agencies and corporate clients: • back-office support under the Freedom of Services Regulations, including policy administration and fiscal representation; • one-stop-shop claims and risk management for domestic as well as cross-border claims and risks. SLA compliance, fraud prevention and transparency are secured through our unrivalled, web-based IT system ECHO. We tailor services to meet customer requirements throughout Europe and beyond, allowing you to focus on your core business!
the People the Network the Technology
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www.vanameyde.com 2010_Van_Ameyde_advert_UK.indd 1
1/29/2010 12:42:06 PM
Supporting Malta’s growth Charles Cini, Stephen Pandolfino and Chris Bond pledge that HSBC will do all it can to support Malta’s growth as a financial services centre Charles Cini has been running HSBC Malta’s International Banking team for the last four years, which office also handles relationships with financial institutions. He is an Associate of the Institute of Financial Services.
Stephen Pandolfino is treasurer, head of Global Markets and Investment Banking of HSBC Bank Malta. He is a fellow of the Malta Institute of Accountants, and an associate of the Chartered Institute of Bankers.
Chris Bond is HSBC Malta’s head of Global Banking & Markets, responsible for treasury and capital markets, investment banking, asset management, custody and fund administration businesses.
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DESPITE THE ONGOING and far-reaching effects of the recent economic crisis, Malta continues to emerge as a leading global financial centre. Malta benefits from robust regulation, strategic geographical location and, of course, membership within the EU. Add to this the country’s highly skilled and educated workforce and it is clear why Malta is continuing to experience impressive growth as a financial centre – growth in which Chris Bond, head of Global Banking and Markets for HSBC Bank Malta, believes HSBC will continue to play a pivotal role going forward. “We have witnessed a significant increase in the number of enquiries received from a wide variety of areas, including retail and professional funds, insurance companies, pension funds, captive insurance companies and corporate treasury functions. HSBC’s international presence is such that we are able to make referrals from both offshore and onshore jurisdictions,” he affirms. With increasingly cautious investors now demanding that funds be domiciled in onshore jurisdictions, Malta’s appeal is continuing to grow. “HSBC’s Global Banking and Markets teams are increasing the flow of referrals to Malta through our international connectivity, as well as through the range of businesses we have here on the island,” states Bond. “Essentially we extract maximum value from being part of the world’s leading international bank and, in turn, ensure that we continue to meet the needs of our increasingly international customer base.” The fact that HSBC Global Banking and Markets maintains a close relationship with other divisions within HSBC Group
can provide numerous benefits to those seeking to establish a base in Malta. “Once companies relocate here, we work with our partners within the other business divisions, such as personal financial services, corporate banking and, of course, commercial banking, where again, we can offer the full suite of banking services, many of which are tailored specifically to international corporate executives and their companies,” says Bond. “The way in which HSBC’s Global Banking and Markets synergises with corporate and commercial banking allows us to provide the best possible service to these clients,” agrees Stephen Pandolfino, treasurer, head of Global Markets and Investment Banking. “For example, as a one-stop shop, we can quote preferential rates on foreign exchange as well as credit balances and money market instruments, and can execute share transactions and bond transactions on the international market as well as the local market.” Charles Cini, senior international banking manager, reaffirms this position. “As a bank we segregate our customers into three groups: Personal, Corporate and Institutional. I am responsible for corporate relationships owned by foreign nationals who are using Malta as a base for their activities. My team are normally the first port of call for such entities at which stage, after understanding our prospective customer’s requirements, we indicate the range of services we can provide not just from a banking perspective but also from other areas of the bank such as custody, trade services, treasury, and payments and cash management.” “We ensure that at the outset, we obtain customers’ authority to share the due MALTA INSURANCE REPORT
BASICS
diligence process with other HSBC units as necessary so that they do not need to go through the same process if they need to avail themselves of, say, custody services,” he continues. “In the case of captives, I compare our approach to a tripod, which needs the three legs to stand – in our case, these are the Corporate Banking side covering account handling, payments and day-to-day requirements, the Global Banking and Markets side providing advice and services on liquidity, exchange and similar services and finally the Personal side as we can also facilitate the opening of personal accounts for the directors.” INVESTMENT MANAGERS looking to relocate to Malta can benefit from HSBC’s fund administration and custody services arm, HSBC Securities Services (Malta), where, again, the company acts as a onestop shop and, in this case, can provide a number of services, including finance and accounting, company secretarial work and if necessary, transfer agency. “We are also one of the world’s largest global custodians and so our clients can feel reassured that they will receive a high level of service,” says Pandolfino. Similarly, on the asset management side, HSBC, through HSBC Global Asset Management (Malta), offers tailor-made solutions to captive insurance companies in managing their own portfolios, and additionally, can structure specialised products for said companies based on derivative instruments or strategies that give them the comfort of capital protection and the potential for growth, Pandolfino explains. “We have also observed a large number MALTA INSURANCE REPORT
of local companies, as well as international institutions, trying to raise finance in Malta and through our investment banking service we are able to provide advice in raising finance in the capital markets – this is a service for which we certainly are seeing a growing need,” he adds. By utilising the expertise of the HSBC Group as a whole, HSBC Global Banking and Markets is able to gain a competitive advantage with regard to more specialised areas of corporate risk, such as in interest rate and foreign exchange hedging, as well as in capital markets advisory, in particular to the public sector in raising debt, as a prime example. “This is a particularly strong team within our London operations,” says Pandolfino. “As such, if the government wants to raise finance, we are able to offer excellent support complemented by our substantial expertise where needed.” Winner of a plethora of awards, including The Banker award for ‘Best Bank in Malta’ for 2009, a key component of HSBC’s continued success is its conservative approach. “Risk management is extremely important to us,” Pandolfino comments. “Looking at the profitability of HSBC both as a global bank and a local bank, you won’t see the volatility that you might with other institutions, who may have taken undue risk in their approach to the market, in terms of investment, credit and concentration of risk. Ultimately, clients who are seeking to do business in the region who opt to work with HSBC can find comfort in the fact that they will be doing business with a professional, reputable and prudent bank.” Looking ahead, Pandolfino anticipates a bright future for both HSBC Malta and
the jurisdiction itself. “Not only does Malta offer a fantastic quality of life and a sophisticated infrastructure, but it also provides a low cost base for those companies looking to set up operations here, especially in terms of operating costs and personnel, when compared to other European jurisdictions, who are nevertheless of a very high quality,” he explains, “As such, HSBC too benefits from quality professionals who are able to provide the support and services required by our clients.” Cini reaffirms this position, stating: “As a bank, we seek to keep an ongoing dialogue with the professionals, be they lawyers, accountants or captive managers. Unless we work together it will be difficult to promote our island as a choice jurisdiction. As a bank, one of our core strategies on the Commercial Banking side is to be ‘The Leading International Business’, a concept which we work closely with professionals on, both locally and abroad. With an international network of over 9,500 offices in 86 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa, it is understandable that we continually use our network for the benefit of our customer base.” Similarly, going forward, Bond believes that HSBC’s ongoing investment into its client services will continue to encourage the substantial growth of the Maltese financial services sector. “The government has set a target for the sector: to grow from 12% of GDP to 25% by 2015,” he states, “and while this is a heady aspiration, we at HSBC will do all we can to support the growth of Malta as an international financial services centre.” 25
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CAPTIVE
Malta targets Latin American market 28 John Stivala of JLT Insurance Management Malta explains how the jurisdiction has set its sights on attracting investment from Latin American countries such as Brazil and Mexico Enhancing what we have established 31 The PwC captive insurance team tells Captive Review how Malta has matured from an emerging to a tried-and-tested captive domicile Malta’s lasting appeal as a captive domicile 34 Elizabeth Carbonaro of International Insurance Management Services talks to Captive Review about the advantages of domiciling a captive in Malta Political risk protection 36 David Sheil of Alternative Risk Management outlines how political risk cover will be a key business tool for captive managers in the wake of the recent economic crisis A changing landscape 38 Simon Tortell of Simon Tortell and Associates takes a look at the impending changes Solvency II might bring to the captive industry Captives and the middle market 40 Ron Clark of Abacus Risk Managment Services PCC explains that the European middle-market sector hasn’t quite embraced the idea of captives as of yet Insurance franchise for recreational diving risks 42 Peter Grima of International Diving Assurance (IDA) and First United Insurance Management explains how IDA’s dive-insurance captive has been a worldwide success Captivating Malta 45 Dr Pierre Mifsud of EMD outlines how Malta is an ideal captive jurisdiction, due to its strategic geographical location and robust regulatory regime European passport rights for insurance and reinsurance undertakings in Malta 47 Lawrence Pavia of Island Insurance Management Services describes the requirements companies must meet to benefit from passport rights The guide 45 KPMG outline the benefits for captives setting up in Malta
MALTA INSURANCE REPORT
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Malta targets Latin American captive market John Stivala of JLT Insurance Management Malta explains how the jurisdiction has set its sights on attracting investment from Latin America countries such as Brazil and Mexico
John Stivala is general manager of JLT Insurance Management Malta. He is responsible for the overall operation of the company and also to develop the book of business. He has 23 years’ experience working in insurance and during his career helped establish and manage eight insurance companies in Malta. John is currently Chairman of the Solvency II Sub-Committee of the Malta Insurance Managers Association.
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BY 2050, BRAZIL AND MEXICO will be among the world’s six leading economies, according to analysts at the investment bank Goldman Sachs. Latin America has a population of 550 million, with average yearly per-capita income of $4,000, immense natural resources and substantial human capital. Latin American businesses have been increasing their foreign investments in recent years and will be at the centre of worldwide investment in the coming decades. The European Commission is hoping to boost EU-Latin American relations with the creation of a joint forum that will bring together the two sides on a permanent basis and the launch of a new investment fund. The EU, which is the leading donor of development assistance to Latin America, also hopes to set up a new financial instrument to leverage millions of euros to bank-roll energy infrastructure, environmental projects and combat poverty. Latin American investment in Malta since the island’s independence in 1964 has been negligible. This is mainly because the cost structure in most Latin American countries has been lower and there are other attractive jurisdictions in the vicinity. The Maltese government has put into motion a series of initiatives to attract investment from this region. In 2009, a prominent Maltese economist was appointed as the government’s special envoy to commence negotiations with most Latin American countries on Double Tax Agreements. Incidentally a new Double Tax Agreement between Malta and the US should be ratified in 2010, after the agreement was signed in August 2008.
According to Malta Enterprise, the government agency responsible for the promotion of foreign investment and industrial development, Malta can attract investment from Latin America because it is an EU member state with a relatively low-cost base, good links to the European mainland and excellent business infrastructure. Malta Enterprise is planning a visit to Brazil and Mexico in the last quarter of 2010 to meet institutional networks and promote various forms of business co-operation. The Malta Financial Services Authority (MFSA) is confident that inward investment will continue to increase in the coming years. Malta’s success as an insurance jurisdiction has brought the country to the notice of risk managers and consultants of well-known companies, including BMW and Vodafone and the wider insurance industry with reinsurance giant Munich Re setting up a wholly owned subsidiary. The ultimate beneficial owners of almost all insurance companies established in Malta are Maltese or European. There are three insurance companies whose ultimate parent companies originate from Australia, Japan and the US but so far there has been no inward insurance investment coming from South America. The situation is expected to change in 2010. JLT Insurance Management Malta was appointed captive manager by a major conglomerate that operates several airlines in South America and is active in the exploration of oil and natural gas throughout the region. A licence application was filed with the MFSA in November 2009 and if approved, the captive should start acceptMALTA INSURANCE REPORT
CAPTIVES
ing business in the first quarter of 2010. According to a 2009 special report by AM Best, companies in countries that have shown little interest in captives are now looking at alternative risk models. Emerging markets such as Latin America seem to be embracing a different risk-financing technology, and companies in these markets are considering establishing captives in European domiciles. The shift in risk management is driven by increasingly sophisticated knowledge and better advice from insurance brokers. JLT has a strong track record of insurance and reinsurance broking in Latin America and recently expanded its operations in this region. With offices in Brazil, Colombia, Peru and Mexico, together with exclusive representation in Argentina, Chile, Ecuador and Venezuela, JLT is well placed to deliver a high-quality service to clients in the Latin American market. FOLLOWING THE LIBERALISATION of the Brazilian reinsurance market in 2007, it is now possible for reinsurance companies, including captives, with head offices outside of Brazil to reinsure risks located in Brazil. In order to carry out reinsurance and retrocession business in Brazil, a reinsurer will need to be classified as a ‘local’, ‘admitted’ or ‘occasional’ reinsurer. Local reinsurers are reinsurers established in Brazil as limited liability companies. In order to qualify as an admitted or occasional reinsurer the company: • must be registered with the Private Insurance Superintendence (SUSEP) • must have been conducting reinsurance MALTA INSURANCE REPORT
business for a minimum of five years • will be subject to minimum capital requirements and other regulatory controls According to the statute, all Brazilian insurers must offer 40% of their cession to local reinsurers. Local reinsurers will then have five days for automatic contracts and 10 days for facultative contracts to accept or reject the offer. The law does not allow foreign reinsurance enterprises domiciled in a tax haven (defined as a territory in which income tax is below 20% or that imposes legal restrictions on the access of information about the shareholders or owners of any firm domiciled in it) to register with SUSEP. With a 35% headline tax rate Malta would not qualify as a tax haven notwithstanding that shareholders are entitled to a six-sevenths refund under the full imputation system. When the double-tax treaty between Brazil and Malta comes into force the exchange of information on shareholders should not be an issue. The president of JLT Re Brazil, Nicolau Daudt, was responsible to place the first risk (with Lloyd’s) under the terms of the new regulations when he was working with another broker. “Malta is well-placed to be the leading European captive domicile for Brazilian companies in the coming years,” says Daudt, adding “Malta has the added advantage that it is the only full EU member state with PCC legislation.” The market for more sophisticated insurance solutions is growing as Brazil develops its industrial, energy and public infrastructures. Construction and engi-
neering firms have expressed dissatisfaction with locally available products. MEXICO REMAINS THE second-largest insurance market in Latin America behind Brazil, with approximately 25% of the region’s gross premiums. As of the end of the first quarter of 2008, the Mexican insurance market was made up of 95 companies, with 47 of those companies majority-capitalised from abroad. 52 of the companies include life insurance operations, while 61 companies maintain nonlife operations. In 2008, the Comisión Nacional de Seguros y Fianzas (CNSF) announced new requirements for regulatory financial reporting by reinsurers. Under the regulations, reinsurers are required to file a separate annual business plan for each line of reinsurance, and are further required to file reports three times a year regarding their operations (again, with a separate report for each line of business). The business plan must include a strategic plan and statistical information concerning risks and amounts assumed and premiums received, while the reports must include certain information regarding reinsurance contracts realised during the relevant period. The stated purpose of these new requirements is to permit the CNSF to better monitor and ensure the financial stability of the reinsurance industry. CNSF also issued new minimum-rating requirements for foreign reinsurers seeking registration to operate in Mexico. The new minimum ratings are B+ (AM Best); BBB- (Fitch); Baa3 (Moody’s); and BBB(Standard & Poor’s). 29
“ART” SOLUTIONS AND SERVICE THAT SIMPLY ADD UP Abacus has a dual focus that is unique in Malta’s captive management environment; With a wealth of experience in the management of multi-sector insurance companies throughout the world, ABACUS executives bring speed-to-market ART solutions including the creation and management of captives, protected cells and SPV’s for medium sized to smaller organisations. Additionally, as the first and currently the only Insurance Manager in Malta to be incorporated as a PCC, Abacus provides its own protected cells as an affordable solution to Insurance Managers from other captive domiciles wishing to establish a presence in Malta through which to service their customers’ needs in the EU/EEC. Already a widely popular captive domicile destination with large multi-national companies, Malta provides lower-cost logistics and a multi-lingual, highly educated workforce of professionals with easy mobility to all European member states.
Abacus - your Insurance Manager of choice for Malta, your Domicile of choice.
www.abacus.com.mt Abacus Risk Management Services PCC Ltd. Registered address: LF3 GasanMamo Head Office, Msida Road, Gzira, Malta tel: (+356) 2349 0500 email: info@abacus.com.mt Abacus Risk Management Services PCC Ltd, is registered in Malta and regulated by the MFSA
CAPTIVES
Enhancing what we have established The PwC captive insurance team tells Captive Review how Malta has matured from an emerging to a triedand-tested captive domicile
The PricewaterhouseCoopers captive insurance team. From left to right: Simon Flynn, Romina Soler, Neville Gatt and Lucienne Pace Ross. Simon, Romina and Lucienne are accountants. They are assurance partners of the firm and insurance specialists. Neville is a lawyer and a tax partner of the firm. Among his areas of specialisation are international tax and the taxation of insurance companies.
MALTA INSURANCE REPORT
The changing environmenT that is emerging, and will continue to emerge, from the shadows of the financial crisis will no doubt also leave its mark on the insurance industry. one could argue that the challenges facing the captive insurance industry will be even greater. captives will, of course, have to handle ‘insurancedriven’ issues, such as the availability and pricing of adequate reinsurance cover and more intense supervision and regulation. They will, however, also need to deal with the market and economic realities of the industries in which their parent companies operate, and, consequently, of the evolving types and quality of risks that they are called to insure. at the same time, we believe that more and more organisations will seriously apply energy and resources towards weighing the benefits of setting up a captive against the cost of insuring their business risks externally. much as the financial crisis has been unwelcome, it has also forced businesses to carefully rethink their strategies and, as often happens in these situations, the opportunities for those who remain in the market are likely to sharply increase. it is therefore our view that, today more than ever, it is important for existing and potential captives to seriously consider where to domicile and from where to do business. We also firmly believe that all the companies that have set up in malta, in its short but rapidly developing life as a captive domicile, have done so because they have every confidence in the seriousness and professional standing of the jurisdiction.
as Pricewaterhousecoopers, we have now been contributing to the malta edition of captive review for a number of years. if we had to look back at what we have been saying throughout this time, which effectively stretches from the beginning of captive operations in malta, we would no doubt be able to trace a pattern that confirms that the development of the captive industry in malta has fulfilled, and probably exceeded, expectations. in previous years, we talked extensively about what we felt were the major advantages of setting up a captive in malta. at this stage, a short recap of what these principal benefits are would be useful.
“More than ever, it is important for existing and potential captives to seriously consider where to domicile and from where to do business” We are ofTen asked to outline ‘in a nutshell’ what makes malta unique as an eU captive jurisdiction. our answer is that, although a number of the benefits offered by malta can also be found in other countries, you would be hard-pressed to find another eU jurisdiction that offers all of these benefits together. setting up a captive in malta requires all 31
the necessary due diligence processes, but this is handled efficiently and rapidly by the regulator. in addition, regulatory fees are relatively inexpensive. access to, and the possibility to establish an open continuous and constructive working relationship with, the regulator on a real-time basis is something that malta prides itself to offer. subject to certain relatively straightforward rules, a captive can be redomiciled to and from malta without having to be wound-up or reincorporated. Legislation allowing the setting up of Pccs is in place and contains clear rules on the structure of such companies and the manner in which a cell’s assets are segregated and protected from those of another cell and from the company core (or non-cellular part) of the Pcc. Professional services available to support captives are readily available on the ground and range across the insurance management, accounting and legal fields, providing the market with the quality of service that meets expectations – which are justifiably very high. malta’s tax regime is stable and, as governments across the world move to tighten tax rules, malta’s tax rate of 35%, based on a full imputation tax system that results in tax refunds to shareholders, which ultimately result in an extremely competitive tax leakage, is seen as tax-efficient and acceptable. furthermore, no stamp duty is charged on insurance contracts written by captives for risks situated outside malta. finally, one of the biggest attractions of malta as a captive domicile is its eU membership. This no doubt adds credibility to 32
malta and gives all captives registered in malta the opportunity to passport their business seamlessly within the eU. over the past years, we have very visibly noted how the above points have moved from being reflections on malta’s potential to realities that captives in malta have grown into. Today they are indeed a list of tangible and verifiable reasons why malta’s potential in this market is being evermore realised. We have seen redomiciliations to malta handled in the smoothest of manners. Pccs have been set up and are operating well. The quality of the professional services available in the market has been proven time and time again and the
a trend that will reverse. companies will be under increased pressure to prove beyond doubt that they hold enough capital and that risk is properly understood, controlled and integrated into strategy, management and compensation. no doubt all this will impact business thinking, and captives also need to prepare to operate in this scenario. This is a reality of the insurance world from which they cannot, and should not, escape. our view is that the captive industry in malta will move forward from the ‘establishment’ phase to an ‘enhancement’ phase. When malta was establishing itself as a captive domicile, issues such as
“We have seen redomiciliations to Malta handled in the smoothest of manners. PCCs have been set up and are operating well” level of expertise in this field has grown exponentially. The tax system has been tried and tested by all captives that have set up in malta. captives present in malta will all vouch for the accessibility and responsiveness of the local regulator. all this has resulted in malta progressing from an emerging jurisdiction into a tried-andtested one. one of The chaLLenges that looms ahead for the insurance industry generally, and of course also for captives, is that of solvency ii. The appetite to regulate in the financial services industry is on the increase and it is clear to all that this is not
tax structuring, feasibility studies, business planning, formation and regulatory consulting were at the forefront of our offerings to the market. These services will always remain key drivers of the maltese domicile as new captives are formed here. We believe, however, that the market is fast maturing to a stage where other services will also become relevant. These include captive health checks, risk management and capital adequacy reviews, and regulatory consultancy services. We firmly see malta as being ready to deliver these enhanced services to captives, in a manner that will continue to establish it as a leading eU domicile in this field. MALTA INSURANCE REPORT
Re-locating Onshore Think Malta
25 Princess Elizabeth Street, Ta’ Xbiex, XBX 1103, Malta T: (+356) 2131 9000 F: (+356) 2134 7734 E: pgrima@firstunited.com.mt W: www.firstunited.com.mt FirstUnited Insurance Brokers Ltd and FirstUnited Insurance Management Ltd are both regulated by the Malta Financial Services Authority.
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11/02/2010 17:11
Malta’s lasting appeal as a captive domicile AS THE MALTESE INSURANCE market continues to develop, Captive Review speaks to Elizabeth Carbonaro of International Insurance Management Services about what makes the jurisdiction so appealing, and what she believes are the key opportunities for growth going forward.
Captive Review (CR): We would like to start off by congratulating you on your very recent appointment as general manager of International Insurance Management Services (IIMS). Elizabeth Carbonaro (EC): Thank you. IIMS forms part of one of the larger financial groups in Malta and I have formed part of the management of the group for the past 10 years. This recent appointment, with the specific brief to develop further the third-party client base of IIMS, is a natural progression for IIMS and a confirmation of the strategy of the group to further diversify and strengthen its business streams. CR: IIMS is an insurance management company concentrating solely on the Maltese market. Could you give a brief overview of Malta and what it has to offer to the potential investor? EC: Malta is geographically located in the middle of the Mediterranean Sea, 60 miles south of the Italian island of Sicily. It is connected to major cities in Europe, North Africa and the Middle East. This enables the business community to commute comfortably, regularly and with ease. The Maltese government has enacted a series of laws in a process that spans over two decades aimed towards promoting Malta as a financial centre of repute. Malta 34
has in place stringent anti-money laundering and terrorist-financing legislation in line with European Union and international obligations. The Malta Financial Services Authority has in place a number of memorandums of understanding (MOUs) with other major financial centres, such as China and Dubai. In addition Malta avails itself of over 50 double-taxation agreements with one of the most recent being with the US. CR: What distinguishes Malta from other financial centres? EC: Objectively, Malta offers distinguishing features as a financial services and insurance centre: 1. Malta has been able to provide consistent and reliable legislation, together with a stable and forward-looking regulatory regime. The management flexibility combined with a proactive regulatory approach has started to, and is intended, to continue to pay dividends. 2. Malta joined the EU in 2004. This has provided additional advantages to domicile in Malta. Among these are: a. Access to European markets: companies establishing in Malta have the flexibility of passporting within the EU, either under the freedom of services or establishment legislation. b. Malta joined the Eurozone in 2008; however, under local legislation, companies can opt to operate in a currency other than Euro. There are, in fact, a number of GBP-denominated companies who passport into the UK and whose main market is, in fact, the
UK. This system enables the company to match its assets and liabilities and to avoid profit leaks through currency exposures. Additionally, since most currency and banking transactions happen in the denominated currency, this also facilitates reporting and recordkeeping. c. Malta has recently revamped its fiscal regime in order to provide more transparency and an easy application of fiscal regulations. Clearly, this topic is better addressed by a taxation consultant; nonetheless, we have noted through our interaction with clients that the ease of application of the tax rules, the manner in which such taxation dovetails with the ultimate owner domicile’s taxation and the reduced tax burden on the entity has proven to be an added benefit for companies that set up in Malta. 3. Malta adopted IFRS accounting as far back as 1995, placing it on a level playing field with the major financial centres. Such IFRS accounting sets standards for transparency within the accounting process, which given the public interest element in insurance companies is of utmost importance. This in itself has also been seen as a major advantage since it facilitates accounting consolidations, where applicable. CR: It seems that the market is quite well regulated. What are the minimum capital requirements to operate out of Malta? EC: Given Malta’s compliance with EU regulation, the minimum capital requireMALTA INSURANCE REPORT
CAPTIVES
Elizabeth Carbonaro of International Insurance Management Services talks to Captive Review about the advantages of domiciling a captive in Malta
ments follow the EU directives. Based on this regulation, the minimum capital requirement depends on the type of vehicle, be it affiliated insurer (captive), general business insurer (with different minimum capital requirements if they write certain classes of business like liability), reinsurers, life companies, and so on. To give an example, a general business insurer (writing also liability business) would have a minimum capital requirement of â‚Ź3.5m. Clearly, company-specific solvency considerations (level of business being written, for example) could dictate a higher capital requirement. CR: Is Malta promoting a specific insurance vehicle? EC: The intention of the local regulatory framework is to create an environment that would be conducive to a robust but varied insurance industry and there is no preference to the type of vehicle possible in Malta. To date, 47 international insurance vehicles are operating from Malta, of which eight are affiliated companies, 27 are insurance/ reinsurance companies and a further 12 operate as cells through three protected cell companies. CR: So if I were a prospective investor, how would I go about setting up an operation in Malta? EC: Most companies looking to domicile in Malta have used the services of insurance managers in order to help them obtain a licence. A number of these companies have subsequently continued to use the services of the insurance manager for both their frontoffice and back-office operations, while others have chosen to employ their own MALTA INSURANCE REPORT
personnel, retaining the manager for the more technical matters, including matters of a compliance nature. The application for the licence is quite straightforward. The application must be accompanied by a Scheme of Operations (SOO). This will include the strategy for incorporating the entity, which considers the marketing and business and operational risk strategies (which will include insurance and investment strategies) of the company, a business plan inclusive of three-year projections as well as any use of reinsurance (reinsurance plan) or outsourced services. In the case of the reinsurance or outsourced services, draft agreements/contracts would also be included within the scheme of operations. The SOO will also be accompanied by detailed information about the promoters and key management personnel of the entity to be licensed. The regulator may take up to three months to grant or refuse a licence to a reinsurer and up to six months to grant or refuse a licence to an insurer from the date the application is made to the Regulator. Based on our experience, we have been able to submit an application within one month of the initial meeting with the client; however, needless to say, this cannot be taken as gospel. A realistic average time would be approximately two to three months. CR: What human resource is available in Malta? EC: The University of Malta offers a diverse spectrum of degrees, including law, accounting, banking and finance, IT and more recently, insurance. This allows for a large human resource pool available to service
the industry. In addition, most university students (especially those following the accounting and insurance degree) are offered stages by the large accounting firms (which include all the Big Four) and also by the local insurance companies. This allows them to gain hands-on work experience during the course of their studies. In addition, from an insurance perspective, the UK Chartered Institute of Insurers has been present on our island for a large number of years with the result that Malta can boast quite a large number of qualified insurers. CR: Looking forward, how do you see Malta developing as an insurance domicile? EC: At the risk of being accused of bias, I am very excited about the prospects of Malta as an insurance domicile. There has been a lot of interest, a substantial take-up and interesting prospects in the pipeline. In my view, if we carefully sift the enquiries which come through, remain vigilant on the level of entities wishing to set up in Malta, and provide a professional and consistent service to our clients, I am confident that we will see further growth and development in this area.
Elizabeth Carbonaro, general manager at International Insurance Management Services, started her career with PricewaterhouseCoopers, having also worked in Luxembourg for three years. She joined Middlesea Group in February 2000 and over the past few years has been involved in the insurance management arm of the group.
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CAPTIVES
Political risk protection David Sheil of Alternative Risk Management outlines how political risk cover will be a key business tool for captive managers in the wake of the recent economic crisis
WHILE MANY FEEL THAT the worst of the global economic crisis may now be over, the far-reaching impact of the recent downturn is likely to be felt for some time to come, and with the widespread discontent aroused by the crisis unlikely to lessen any time soon, for companies seeking to do business overseas, political-risk cover looks set to be a key risk-management tool going forward. TODAY MANY WESTERN FIRMS are seeking to set up operations in the emerging markets, but while these countries may be widely deemed as the best source of growth, they also often present the most political uncertainty. “The definition of political risk cover is ‘a tool for businesses to mitigate and manage risks arising from the adverse actions or inactions of governments,’ and with the social unrest (rising levels of unemployment and cost-push inflation) brought about by the financial crisis still evident in countries around the world, it is clear that this is becoming an increasingly relevant issue for companies investing into the emerging markets,” says David Sheil, operations director of Alternative Risk Management (ARM). According to Sheil, political risk can be classified into two main types: risks relating to the firm and risks relating to the country in question. “Within these dimensions, you then also have governmental risks and instability risks,” he explains. “In terms of governmental risk that might affect a firm, the most serious types of political risk are expropriation and discriminatory regulation, while in terms of instability risk, the firm may have 36
to deal with labour unrest or firm-specific boycotts. Emerging markets where international firms see the best opportunities for growth are also the same ones that can be prone to unpredictable government actions.” For firms looking to move into the emerging markets, opting for political risk cover may be of great benefit when seeking much-needed financing. “If a firm has political risk insurance surrounding their project, the tenor of that financing will become much more favourable,” affirms Sheil. “If not, the financing of said project is going to be far more expensive as any bank offering a loan will facing a much higher risk of not getting a return on their investment.” The nature of political risk is also itself determined by the categories of investor (direct or portfolio) because their exposures differ. Portfolio investors are more likely to be affected by country-level risks (increased interest rates, currency devaluation) whereas direct investors are more likely to be affected by firm specific risks such as discriminatory regulation or ‘creeping’ expropriation. Generally, firms operating in these environments may also incur additional costs as a result of the need to mitigate risk. “For example, various low levels of stock or machinery held in certain countries may be kept purposefully low given the inherent political risks; the downside is that the firm may not be operating at its maximum level of efficiency as a result,” asserts Sheil. For firms that do recognise the need to address political risk, writing some risk into a captive insurance vehicle may have
significant benefits and sometimes may be the only option, according to Sheil. “What these companies must be aware of is that by investing in these emerging markets and opting for political-risk cover, they will end up carrying a deductible and so, if they have a captive that is involved in this deductible or in taking a larger exposure, they may find that the captive is, in fact, the only place to secure some risk transfer out of the company’s balance sheet.” APART FROM TERRORISM RISKS, one of the most significant political risks on the horizon is the confluence of certain governments with their geographic access to natural resources and energy reserves, which will undoubtedly also have a significant impact on the west in the future, asserts Sheil. “An unstable and aggressive government with control over resources on which we have a great reliance will mean that natural resource companies are likely to be very interested in political-risk cover going forward,” he says. “Rates not surprisingly are hardened and for those firms that cannot source cost effective cover, a long term captive structure may be a suitable option.”
David Sheil is the operations director of Alternative Risk Management (ARM) Guernsey. He has been involved in the captive industry for 15 years and prior to joining ARM this year, he was a director of AIG insurance Management Services European Operations. MALTA INSURANCE REPORT
The solutions to the challenges facing your business are out there. You just need to know where to look*
In an insurance industry of increasing complexity and constant change, choosing the right strategy is important. But it’s only the start. The implementation of this strategy linked to constant innov ation will be the true key to success. At PricewaterhouseCoopers in Malta, we offer audit, tax or adv isory services to the vast majority of the insurance industry, including to captiv es. Our market leadership means that we hav e a specialised insurance team that is unriv alled locally in terms of industry knowledge, skills and expertise. As Malta becomes an important play er in the captive insurance market, we are best placed to provide you with the assistance that you will be looking f or when considering whether to domicile your captive here. Our multidisciplinary, global approach, set in a local context, will help you leverage the opportunities that will present themselves to y ou…and f ind the solutions that you are looking f or.
*connectedthinking
To f ind out more about how we can help contact our captive insurance team on captiv es@mt.pwc.com or at 167 Merchants Street Valletta VLT 1174 Malta telephone (+356) 2124 7000 f ax (+356) 2124 4768 www.p wc.com/mt
© 2010 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP
CAPTIVES
A changing landscape Simon Tortell of Simon Tortell and Associates takes a look at the impending changes Solvency II might bring to the captive industry
AS GLOBAL MARKETS continue to change and insurance market volatility continues, more organisations might consider the captive market for viable long-term solutions to risk management. This decision is usually driven by targeted risk-management strategies including the need for more control of cover and cost, as well as the practical reality that more organisations are realising the benefits of keeping ‘profitable’ insurance business with favourable loss ratios within the family. Capitalisation is not necessarily the driving factor behind the decision to establish a captive in the first place – a fact mirrored by current in-force EU legislation on insurance capital adequacy, which does not distinguish between captive and non-captive companies. The anticipated Solvency II regime will replace EU directives, introducing a new, harmonised EU-wide regulatory regime with economic, risk-based solvency requirements. Insurers will be required to hold capital against a range of risks, not just insurance risks, and will be required to identify, measure and proactively manage risk, particularly with the introduction of Own Risk and Solvency Assessment (ORSA). The Solvency II framework directive first introduced a definition of captives into EU legislation; however, it did
Simon Tortell, senior partner, graduated Doctor of Laws from the University of Malta in 1984, and was a founding partner of Grech Vella Tortell Hyzler-Advocates before setting up Simon Tortell and Associates.
38
not distinguish between capital requirements. On 2 November 2009, CEIOPS published its last tranche of consultation papers, amongst which, CP 79 deals with simplifications for captives. In this document, CEIOPS elaborated on the definition of a captive and provided simplified formulas for the calculation of capital requirements. This simplified method, however, comes at the expense of a higher capital charge, aimed at encouraging captives to eventually adopt the standard formula set for ‘normal’ reinsurance entities. Some argue that the very limited definition of a captive in this consultation paper will ultimately exclude many of the current existing captives from this simplification. As a result of the introduction of this regime, several ‘offshore’ jurisdictions might appear to have a relative advantage over EU jurisdictions owing to the less complicated (and maybe less onerous) capital requirements compared to those contemplated by Solvency II. As regulatory compliance continues to feature as the biggest hurdle for all European reinsurance captives, the question is raised as to whether the prospect of having to set aside more capital and the inevitable need to spend more time on regulatory compliance will lead to less captives being set up in the EU. Major jurisdictional leveraging opportunities are, however, less likely to flourish as it now looks inevitable that unless non-EU captives comply with equivalence standards laid down by the Commission, they will find it hard to do business with EU domiciled entities. Failing this, fronting insurers and reinsurers are likely to require more security from counterparties to protect their own position within the framework of EU legislation.
Domiciles around the world will increasingly be forced to implement increased oversight, tighter standards and transparency, particularly as they aim to achieve proof of a high standard of regulation. Non-EU captives are therefore likely to find that Solvency II has profound implications for the rest of the captive market, raising the capitalisation bar across to non-EU jurisdictions and enforcing the implementation of tougher regulatory standards. THE PAST YEAR HAS seen a slowdown in the insurance market and naturally in the creation of new insurance vehicles as companies have been more focused on survival. Signs of economic improvement, however, can already be seen. As capacity starts to contract again and insurance premiums rise, alternative longer term insurance arrangements, particularly for certain lines of business, will be sought once again. As captives around the globe may struggle under the increased regulatory and compliance burden, current existing and start-up captives may increasingly turn toward managed-captive models, and potentially a shift to the use of protected cells instead of pure captives, where capitalisation, compliance requirements and related costs may not be as threatening as to the self-managed pure captive model. The regulatory changes of Solvency II are set to dramatically change the captive market globally. Nevertheless, in spite of the increased challenges, the European captive market is still well placed to thrive as opportunities for leverage between the EU and non-EU jurisdictions diminish and new operating models come to the forefront. MALTA INSURANCE REPORT
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Captives and the middle market Ron Clark of Abacus Risk Managment Services PCC explains that the European middle-market sector hasn’t quite embraced the idea of captives as of yet
THE WIDER OPPORTUNITIES presented by captives and alternative risk transfer (ART) solutions have been well understood generally by the risk and insurance managers of large global corporations ever since captives hit the scene in the 1950s. Given the risk complexity and the magnitude of assets at stake within this segment, it is hardly surprising that today close to 50% of such companies have created at least one captive vehicle with which to optimise insurance coverage and maximise their underwriting profits beyond the levels afforded by traditional insurance programmes. However, captives do not have the same level of notoriety within the “middle market” in Europe despite the introduction in certain domiciles, of protected cell company (PCC) or similar legislation ideally suited to these smaller entities. By comparison, the interest in captives within the middle market in the US appears much greater, although a direct comparison is difficult given the different definitions of corporate segmentation on each side of the Atlantic. The greater level of interest in the US may also be due to specific legislation such as the 831(b) Captive Insurance Companies legislation which permits certain tax breaks favouring the creation of so-called “Mini Captives”. The proponents of a wider use of captives by the middle market would probably agree that the take-up rate for captives within this segment in Europe is not yet at the level it should be given the obvious benefits to be derived. The seemingly complex nature of ART solutions and a general lack of awareness of the advantages of captive ownership resulting from certain inertia on the part of some professional advisors are certainly contributory factors. 40
THE GLOBAL BROKERS: Marsh, Aon and Willis have secured podium positions when it comes to the conception and placement of traditional risk-transfer (TRT) programmes for national flag carriers and other large corporations. Concurrently with their “traditional” broking service, a substantial ART consultancy business (including the creation and management of captive insurance companies) has been developed. This has created a win/win situation for such brokers in advising their clients in TRT and/or ART solutions. However, the middle-market segment has not traditionally been the global brokers’ target market as they are better geared to service larger corporations through their extensive networks. THE INDEPENDENT BROKER: By comparison, independent brokers are traditionally well positioned in the middle market but tend to be less familiar with and therefore less comfortable than their larger competitors in proposing ART solutions to their clients. As a result, competition between the “independents” in most areas for middle-market business tends to centre on lowest price/broadest coverage, which do not typically encourage dialogue with prospects on ART solutions despite the potential advantages. However, these brokers ignore at their peril the advantages of captive solutions for suitable clients and especially for those rapidly expanding businesses that could be lost to the larger brokers given their more proactive approach in this regard. Many independent brokers are unconvinced of their added value in the domain of ART solutions and are concerned that their commission income will reduce should their clients become captive owners. However, these concerns can be mitigated by entering into a
strategic alliance with experienced insurance managers such as Abacus to provide the ART skills, which may be lacking and by adopting a fee-based consulting approach to the provision of integrated ART/TRT services. Independent brokers and indeed other professional advisors (accountants, auditors, banks, lawyers etc) who create such partnerships with insurance managers could trigger additional growth in ART solutions for the middle market. The potential for such collaboration can be seen in the recent signing of an important agreement between Abacus and a leading French automotive equipment manufacturer for the creation and management of a PCC in Malta. In this particular case, the “intermediary” was a non-broking firm. DOMICILE CAN ALSO PLAY a major role in determining the feasibility or otherwise of creating a captive especially for middle-market entities given their more acute capital and expense constraints compared to those of most large corporations, the Belgian market’s traditional preference for Luxembourg as a domicile given the geographical proximity and language and legal system affinities are positive elements, for example, which could be outweighed by the lack of PCC legislation. Accordingly, potential captive owners with modest premium volume may well consider other domiciles with PCC or similar legislation and other advantages more suited to smaller entities (see below) to be more appropriate. KEY CONSIDERATIONS: Irrespective of size, any organisation contemplating captive creation should take into account the presence or otherwise of the following with regards to choosing a domicile: • A sound political and regulatory enviMALTA INSURANCE REPORT
CAPTIVES
ronment with an accessible and flexible Regulator; • An OECD/EU-compliant fiscal environment untainted by reputational issues; • A highly qualified financial services workforce including experienced captive managers; • A convenient geographical location with relatively easy access; • A sustainable and effective low-tax environment rather than a “deferred tax” system; • Double-taxation treaties with countries relevant to the captive’s parent organisation. Additionally, middle-market entities should be particularly attentive to following as they could have a direct impact on the profitability of the new venture: • A low-cost operating environment with regards to salaries, rents, and other overheads; • Captive legislation permitting direct captives rather than only reinsurance captives so as to benefit from EU “passporting” rights enabling the issuance of their own policies throughout the EU. This avoids costly “fronting” arrangements and the issuance of collateral security in favour of “fronters”; • Protected cell or similar legislation is particularly advantageous to middlemarket captives; • Lower initial capital requirements for the creation of a cell compared to a standalone captive (the required “Minimum Guaranteed Fund” normally required within the EU for a standalone captive is met at the “core” by the PCC owner); • Simplified administration results in lower administration costs and economies in senior management’s time. MALTA INSURANCE REPORT
MALTA – THE IDEAL EU DOMICILE for middle-market captives : Being the only full EU (and Eurozone) member state with PCC legislation (part of its advanced “Affiliated Insurance Company” legislation) and benefiting from other important advantages, Malta could be considered the domicile of choice for the middle-market segment given: • A highly qualified financial services workforce; • An extremely approachable and flexible regulator (the Malta Financial Services Authority); • Maltese direct-writing captives are able to issue their own policies throughout the EU (see “Choice of Domicile: Key Considerations “above); • An OECD-compliant tax environment: Malta has implemented the internationally agreed tax standards endorsed by the G20 finance ministers and by the UN Committee of experts on international co-operation on tax matters; • A low-cost environment compared to many other EU captive domiciles with regards to salaries, rent and other overheads; • A refundable tax credit system on dividends paid to non-resident shareholders of captives which can essentially reduce the impact of corporate tax payable by the captive from 35% to 5%; • An extensive and growing network of double-tax treaties with over 50 countries together with the refundable tax credit system make Malta a particularly attractive tax environment. Although the Abacus experience of strategic alliances with various professional firms
is encouraging, the most interest has been shown by non-brokers in exploring opportunities within their client base. This is somewhat ironical given the obvious interest expressed by clients of these other firms when we engage them in joint discussions. It would therefore appear that much more could be done by independent brokers to promote ART solutions within such a seemingly receptive audience. Other areas worthy of consideration within the ART domain by those better capitalised independent brokers are: • The creation of a direct writing PCC or insurance cell(s) on their own behalf in which to place suitable profitable client business and generate an additional revenue stream and tax-efficient reserves and/or; • The establishment of a management cell in Malta at a modest cost through which to manage their clients’ captives via a service agreement with Abacus (as the only insurance manager in Malta incorporated as a PCC, Abacus is able to create management cells and administer them on behalf of other service providers).
Ron Clark is a director of Abacus Risk Management Services PCC, Malta. He has spent most of his professional career involved in global accounts and captive business. Before Abacus, he spent 13 years with the Zurich Insurance Group and has occupied several underwriting managerial and CEO positions in Europe and the US.
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Insurance franchise for recreational diving risks Peter Grima of International Diving Assurance (IDA) and First United Insurance Management explains how IDA’s dive-insurance captive has been a worldwide success
DAN EUROPE SUBSIDIARY International Diving Assurance Ltd (IDA) is offering a diverisks insurance franchise to insurers outside the European Union. For over 25 years DAN Europe purchased its membership dive packages from the retail insurance market. This profitable experience encouraged it to establish its own captive insurer International Diving Assurance (IDA) which was licensed as a general business insurer in January 2008. IDA’s annual insurance packages are designed for the recreational and professional diver and for dive schools or clubs. A wide option of packages, limits and plans are available to suit different needs and requirements. Short-term products are also available in certain countries with dive-holiday potential. These packages are available on the DAN web portal which provides an online shop window where the various plans on offer can be researched and compared. The portal is also configured to provide quotations and/or pricing of the insurance and services selected with online policy purchase and policy issuing capability. Mid-term amendments such as plan upgrades or policy renewals are also automated. The DAN packages offer recreational or professional divers assistance and emergency medical insurance including medical evacuation and repatriation, personal accident, third party and professional liability and legal defence coverage while diving. Some additional travel medical coverage for low limits is also provided to ensure that the bundled emergency assistance services are able to also respond in a non-diving emergency. Dive clubs and/or schools coverage is limited to third-party and professional 42
10 reasons to rely on dan The DAN worldwide network, the medical dedication of the DAN team and its financial and administrative resources are designed to provide divers in distress with help when needed most. 1. Niche insurer: Specialised dive risk insurer domiciled in Malta with freedom of services authorisation to trade in the EU and EEA 2. Online systems: Effective online policy issuing web portal which can be customised on a per country basis 3. Worldwide reach: 400,000 members worldwide, access to over 500 preferred provider hyperbaric clinics, risk management inspection programmes, over 26 years of experience with over 15,000 emergencies managed annually 4. Dive medicine core competency: DAN Europe alone engages 180 DAN specialist hyperbaric doctors providing medical assistance in 10 different languages on a 24/7 basis 5. Best dive insurance benefits and premiums: The widest, broadest range of benefits and services at the lowest premiums are the result of the diving skills and financial resources available in house. 6. Claims quality: DAN Europe alone handles over 3,000 emergencies or assistance call annually 7. Worldwide payment guarantees: DAN hyperbaric doctors (DMOs) have authority to confirm treatment and confirm Guarantees of Payment 8. Assistance not insurance benefits: DAN pays medical providers and contractors directly providing worldwide payment guarantees on over 1,000 claims annually 9. DAN research: DAN finances ongoing leading edge medical research with the aim of making diving surer and safer. Its quarterly medical and safety publication disseminates risk and research information and its safety campaigns and training courses help divers directly 10.Legal net: Our global network of qualified lawyers (also expert divers and DAN members) provides legal advice/assistance when needed
liability and legal defence of the establishment. However, in certain countries where it is either mandatory or customary to provide short-period emergency medical and accident packages, these can also be offered in support of client diving establishments. IDA’s policies provide insureds with access to an international 24/7 emergency hot line
and medical assistance provided by DAN and the IDAN network. Diving and/or medical claims notified are managed by the DAN DMO (Diving Medical Officer) on call with authority to approve immediate medical treatment anywhere in the world. The claims arising from these emergencies and other more routine cases are then MALTA INSURANCE REPORT
CaPtIVes
managed and administered centrally at IDA’s claims offices. Diving accidents require rapid, knowledgeable and specialist response which, if deployed in a timely manner, saves lives and avoids long-term disability. DAN’s ongoing research into the causes of diving risk, effective medical treatment and measures that could be taken to reduce or avoid these risks have and will continue to reduce the incidence of diving losses and their severity. The combination of the DAN medical know-how, network and resources and IDA’s online portal and niche dive-risk expertise creates a business co-operation opportunity in many popular dive destinations or in markets with a growing diving population. IDA is interested to co-operate with interested professional insurers outside the EU who see potential benefit to support their local diving industry in partnership with our leading edge dive-risk skills and resources. Entering into a business co-operation proposal with IDA and the DAN team will mean that as a domestic insurer you will have exclusive use and access to our web portal and insurance packages for residents of your country. We will make the IDA policy wordings and systems available to you online and subject to a business co-operation agreement between us. Whenever an individual insured makes an online application, our portal will issue the selected policy to residents in your country in your company name. You will have access to details on all policies issued by our online system to residents in your country to ensure that the terms of our business and reinsurance agreements will be properly managed and controlled. We will support and train your representatives and MALTA INSURANCE REPORT
also provide our worldwide claims handling facilities for all claims in your country or anywhere in the world. If you have a growing local diving population and require the specialist medical and insurance skills and services IDA and DAN provide, or if you operate in a country that is or has ambitions to become a diving destination market than we would be interested to work with you. DAN Europe is an international non-profit medical and research organisation dedicated to the safety and health of recreational scuba divers which was founded in 1983. Its core mission is to provide emergency medical advice and assistance for underwater diving emergencies and injuries. DAN promotes diving safety, training, education and research programmes, which have and are helping to reduce diving risks. In this way DAN supports the growth of the diving industry and of individual divers by providing the most accurate, up-to-date and unbiased safety and medical information on issues of common concern to the diving public helping reduce diving risk. In the early 1980s, leading diving doctors in the US, Europe, South African, Australia and Japan established emergency services networks and hot lines to provide assistance to divers in distress. Although established independently, these organisations provided similar 24-hour diving emergency hotlines and non-emergency diving medicine information services. After many years of unstructured cooperation, these independent organisations established an international network named DAN (Divers Alert Network) and International DAN (or IDAN) was formed in 1991 to
provide a common uniform worldwide emergency network for divers in distress wherever they dived in the world. Each member of IDAN supports and promotes DAN’s mission and operates to standards and protocols agreed by International DAN. Each IDAN member organisation is independently administered and depends on the support of its local establishment, as well as on local divers to provide hotline, emergency, safety and educational services. Each IDAN member develops and administers its own insurance plans dependent on its demand and on insurance rules and regulations in its country or the countries it operates in. Today International DAN is a worldwide network of multilingual 24-hour diving emergency alarm centres with access to over 500 approved hyperbaric facilities and a growing number of diving-hyperbaric specialists on call to respond to and treat diving emergencies and to accept diving medicine referrals. Every year the DAN hotlines receive more than 15,000 diving emergency calls and the DAN Diving Medical Officers (DMOs) answer to thousands of medical and safety questions. Over 400,000 DAN members around the world benefit from insured Emergency Medical Services and Medical and Hyperbaric Treatment worldwide.
Peter Grima is director of International Diving Assurance (IDA) and of First United Insurance Management and is a Chartered Insurance Pra ctitioner.
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261131 Malta Captive MGT advert final:Layout 1 30/06/2009 16:25 Page 1
www.jltcaptives.com
Captives and Cells in EU Domiciles How beneficial would this be for your organisation? JLT Insurance Management offer consultation and feasibility studies that will address these matters and answer frequently asked questions such as, benefits, costs, regulatory and operational issues, choice of domicile, application process and timing? For more information email: John Stivala: john_stivala@jltgroup.com Nick Wild: nick_wild@jltgroup.com
JLT Insurance Management is a trading name of JLT Insurance Management Malta Limited. JLT Insurance Management Malta Limited is part of the Jardine Lloyd Thompson Group plc. A company incorporated with liability limited by shares. Authorised and Regulated by the Malta Financial Services Authority. Registered in Malta number C40470
CAPTIVES
Captivating Malta Dr Pierre Mifsud of EMD Advocates outlines how Malta is an ideal captive jurisdiction, due to its strategic geographical location and robust regulatory regime
Dr Pierre Mifsud is a partner at EMD Advocates. He holds a doctorate in law and a Master of Arts degree in Financial Services from the University of Malta, and has lectured on insurance law and financial services both locally and overseas, apart from contributing several articles on the subject. 45
TRADITIONALLY A CAPTIVE insurance company is known to be a limited purpose corporate entity set up by a non-insurance parent company and licensed to insure all or some of the risks emanating from the parent’s and/or group’s business. Under Maltese legislation, captive insurance companies are referred to as Affiliated Insurance Companies (AICs) and are regulated under a set of tailor-made rules. Insurance Directive 21 of 2003 (now replaced by Insurance Rule 21 of 2007) has considerably broadened the traditional definition of captive insurance by including risks originating with: • Parent or group companies • Undertakings having common membership up to the ultimate beneficial owner level, with the AIC, amounting to at least 51% • Individuals or other entities having a majority ownership or controlling interest in the AIC • Members of trade, profession or industry associations or organisations insuring risks related to the particular trade, profession or industry. It is also possible to structure an AIC as a cell within a protected cell company (PCC). PCCs only apply in the case of the business of insurance. A PCC is a regular company constituted as a cell company which is able to create one or more cells for the purpose of segregating and protecting the cellular assets of the company. The assets and liabilities of a particular cell are segregated from those of other cells and from those of the core. To this end, the creditors of a particular cell have
no recourse against the assets of other cells within the PCC. Insurance undertakings and insurance intermediaries may also take advantage of the single-passport regime and upon the fulfillment of the prescribed formalities, passport into Malta or out of Malta from/to an EU or EEA state through the establishment of a branch or by providing services on a cross-border basis. Maltese legislation also provides for a company continuation procedure whereby insurance companies resident in a foreign domicile with equivalent legislation can re-domicile to Malta and vice versa. AICs benefit from reduced application and supervisory fees and also from a shorter statutory application processing time of a maximum of three months. MALTA IS AN IDEAL CAPTIVE jurisdiction due to the fact that it ticks all the right boxes. It has a strategic geographical location in the centre of the Mediterranean Sea between Europe and North Africa. The regulator, being the Malta Financial Services Authority, is pragmatic, firm and accessible in its approach. The insurance regulatory framework is robust but allows market operators the degree of flexibility required to be in a position to operate efficiently and successfully. Malta also boasts a skilled and multilingual workforce and competent legal, financial, insurance and banking professionals who could readily service a captive operation. The attractive tax regime and competitive cost of running a captive are certainly other primary factors which place Malta firmly on the map for this kind of business. MALTA INSURANCE REPORT
European passport rights for insurance and reinsurance undertakings in Malta Lawrence Pavia of Island Insurance Management Services describes the requirements companies must meet to benefit from passport rights
ONE OF THE MAIN advantages offered by Malta as a domicile for the setting up of a (re) insurance and/or an affiliated1 (re)insurance operation is no doubt the passport rights to which, entities regulated by the Malta Financial Services Authority (MFSA), can be entitled to once licensed. The concept of a passport for insurance and financial services in general is an EU mechanism allowing companies that are authorised to operate in one jurisdiction to do the same in another without the need to seek additional authorisation in this second jurisdiction. This, in the view that passporting has as one of its fundamental tenets the acknowledgement of the high-regulatory capabilities and regulatory standards of each ‘home’ supervising authority and is a mechanism aimed at enhancing the creation of a single market. The provisions under Maltese law that enable insurance companies to benefit from passport rights are contained in Legal Notice 89 of 2004 - Subsidiary Legislation 403.14 ‘European Passport Rights For Insurance and Reinsurance Undertakings Regulations’, an overview of which shall be given in the following paragraphs. EXERCISE OF PASSPORT RIGHTS: Legal Notice 89 of 2004, as subsequently amended, brought into force a number of regulations to enable the exercise of passport rights. The said piece of legislation is divided into different parts, each dealing with either the passport rights of European insurance and reinsurance undertakings operating in Malta through a branch or in exercise of a European freedom to provide services – found under Parts I and V respectively; or else with the passport rights of Maltese insurance and reinsurance undertakMALTA INSURANCE REPORT
Notification requirements in the exercise of Passport Rights – Maltese Insurance Undertakings establishment
services
1. Details of the EU/EEA state within which the undertaking proposes to establish a branch
1. The nature of commitments being proposed for cover or risks proposed to be undertaken
2. A scheme of operations setting out the class or classes of long-term business or general business and the structural organisation of the branch
2. The EU/EEA state in which it intends to operate
3. The name (and hence the appointment) of a general representative who must possess sufficient powers to bind the undertaking in relation to third parties and to represent the undertaking in relations with the authorities and courts of the home member state 4. The address of the branch from where documents may be obtained and to which correspondence to the general representative may be sent
ings operating from Malta, as set out in Parts II and III of the said legislation. For the purposes of this article, the main point of focus shall be the passport rights available to Maltese insurance and reinsurance undertakings. As provided for by the various clauses of this piece of legislation, passport rights are granted on the basis of a process of notification and subsequent consent by the competent authority; in this case the MFSA. The hallmark of this process is no doubt its transparency and efficiency where, as shall be detailed hereunder, the competent authority is legally bound to provide its notice of consent within a period of not more than one or three months, depending on the case, or where such a consent is withheld, adequate reasons in support of this decision are to be provided to the entity making the notification. PART II: Exercise of passport rights by Mal-
tese Insurance Undertakings: In dealing with the exercise of passport rights by Maltese Insurance Undertakings, Part II of these regulations distinguishes between branch operations (regulation 9) and operations on the basis of freedom to provide services (regulation 10) and one notes how the notification requirements vary in the extent of detail expected from the insurance undertaking’s notification to the competent authority. The table above summarises the details expected in such notifications as set out in regulations 9 and 10. The aforementioned requirements are in turn further explained and amplified by means of insurance rules issued by the MFSA, more specifically by Insurance Rules 24 and 25 of 2009 which deal inter alia with the contents of the scheme of operations expected out of a Maltese insurance undertaking having the intention to establish a branch, the need for a general representative to present a Per47
caPtives
sonal Questionnaire2 and details on personnel and internal controls. CONSENT: Once notification of the intention to establish a branch is presented to the authority, and unless the authority has reasons to doubt the adequacy of the administrative structure and financial situation of the Maltese insurance undertaking or the good repute, professional qualifications or experience of the senior management or general representative, it is bound to communicate its consent or otherwise to the foreign competent authorities and the entity itself within a period of three months. Similarly, albeit in a shorter time frame, where the notification is made with respect to the exercise of a European right for the provision of services, the authority is expected to signify its consent within a period of one month. Under both circumstances and following the granting of consent, the insurance undertakings are bound to notify the competent authority of changes to their passport details, such as changes of address, management or organisational structures. As already indicated beforehand, the responsible authority for supervising the insurance undertakings remains the ‘home’ regulator unless some functions are granted to the host regulator by the Single Market Directive. PART III: Exercise of passport rights by Maltese Reinsurance Undertakings: In a similar manner to that in Part II, Part III sets out that a reinsurance undertaking shall not establish a branch or provide services in an EU/EEA state in exercise of a European right without the written consent of the competent authority. In addition to the written consent, the 48
Maltese reinsurance undertaking interested in establishing a branch in an EU/EEA state is to also reflect and remain cognisant of the requirements set out in Rule 24 of 2009. The said rules require that the reinsurance undertaking seeking to establish a branch is to provide the authority with the following information: • The address of the branch which shall also be that of the general representative; • Details relating to the general representative including the name, a copy of the representative’s appointment with sufficient powers to bind the Maltese reinsurance in relation to third parties and a personal questionnaire; • The type of reinsurance activity in accordance with article 4(2) of the Reinsurance Directive 2005/58/EC. Once the consent is granted, such an undertaking is to ensure that it does not effect any changes to the information aforementioned without notifying beforehand, and no less than one month before implementing the change, the competent authority, which has to approve such changes. The latter is then committed to communicate its acceptance, or otherwise within a month. OTHER MATTERS TO CONSIDER: The process of availing oneself of a European passport right does not end with the aforementioned notifications and is a process which needs close attention and overseeing either from within the entity itself or else through the professional support of the company’s dedicated insurance manager. Insurance mediation general good provisions: Upon notification by the home regulator,
the host regulator will, within a specific time frame, reply to the home regulator advising of any general good requirements and consumer-protection issues that are to be observed by the entity exercising its passport rights. Adherence to such general good requirements is essential to ensure the continued compliance with the licence conditions. Tax representation: One of the main areas that one will need to give due attention will no doubt be the need to ensure tax compliance once passport rights are exercised. Once operating in the various states, the entity will have to ensure that its tax dues are properly reported to the relevant authorities and that these are paid in accordance with the rates prevalent at the time. Equally, and perhaps more important, is that this is done in a timely fashion. To this end a tax representative will need to be in place within practically each state, which can be quite complex, not to mention expensive, if not properly taken care of. Here again, the role of the company’s professional insurance manager will be crucial to assist in the negotiation with and eventual appointment of the right tax representative that can give the expected level of service at an adequate cost. Captive insurance companies are referred to as Affiliated Insurance Companies under Maltese law 2 A detailed document setting out the experience, qualifications and other information upon which the authority bases its assessment of suitability of an individual to occupy such a post 1
Lawrence Pavia is managing director of Island Insurance Management Services. He specialises in risk management, particularly that relating to property and business interruption.
MALTA INSURANCE REPORT
INVESTMENT FUNDS SECURITIES LAW TRUSTS CAPTIVE RE-INSURERS PENSIONS & QROPS INTERNATIONAL BANKING CORPORATE FINANCE MERGERS & ACQUISITIONS JOINT VENTURES PRIVATISATION TAXATION EU PASSPORTING SHIPPING AVIATION CORPORATE SERVICES LITIGATION & ARBITRATION EMPLOYMENT INDUSTRIAL & LABOUR TELECOMS, MEDIA & TECHNOLOGY INTELLECTUAL PROPERTY COMPETITION PUBLIC PROCUREMENT ENVIRONMENTAL LAW RESIDENCY PROPERTY CONVEYANCING MEDICAL & HEALTH ENERGY & RENEWABLES
Eyes see opportunity where minds comprehend Ganado & Associates Advocates, a leading law firm with a predominantly international practice, provides integrated legal services across all practice areas. Our multi-disciplinary team takes a constructive hands-on approach to deliver a bespoke service for the setting up of financial services businesses in Malta. For more information on how we can help please call +356 2123 5406/7/8, email lawfirm@jmganado.com or visit www.jmganado.com
Ganado
& Associates ADVOCATES
11433_GA_HEDGEFUND_FP.indd 1
12/08/2009 15:37:40
Captives play an integral role in corporations’ efforts to maximise returns, but the erosion of trade barriers, the move by large multinationals towards a global operating model and increasing pressure on entities to manage their exposure to risks and to reduce costs are among the many reasons for setting up a captive insurance vehicle in a jurisdiction such as Malta A CAPTIVE INSURANCE company is formed by industrial, financial, or commercial groups or governmental organisations, with the purpose of underwriting all, or a selection of, the risks of that institution and its affiliates. Captives, referred to as ‘affiliated insurance companies’ under Maltese insurance legislation, are defined as: “insurance companies whose business of insurance is restricted to risks originating with shareholders or connected undertakings or entities”. Maltese captive companies may insure the risks of a wide range of persons: • parent companies or associated or group undertakings; • individuals or other entities having a majority ownership or controlling interest in the captive; and • members of trade, industry or professional associations insuring risks related to the particular trade, industry or profession. Insurance legislation and regulation – why set up a captive? There are various reasons which may trigger the formation of a captive. Among the more common, one finds: • the lack of a commercial market for certain lines of coverage; • the desire to recapture underwriting profits and investment income that would otherwise be earned by the commercial underwriter; and • a means to access the reinsurance market. The following represent some of the advantages accruing to groups choosing to set up a captive insurance company: • the group increases its risk-management awareness and control;
MALTA INSURANCE REPORT
• cost-related advantages, related to the ability to insure otherwise uninsurable risks, tax advantages, and increased long-term market stability; and • improved communication flows with insurers. Why domicile a captive in Malta? It is clear from the interest that Malta is generating in international circles that financial services groups are increasingly catching on to the benefits of locating or relocating some of their operations to Malta. There are numerous benefits which accrue to companies that set up shop in Malta. The island is a EU member state and has successfully established itself as a model jurisdiction in financial services regulation over the past decade. Setting up operations in Malta gives companies the added comfort of operating within an enlarged European market and an OECDrecognised tax environment that offers tax-efficient alternatives. Captives that establish their operations in Malta can benefit significantly from an environment that is politically stable, an English-speaking workforce that is highly specialised and professional, and a regulator that is pragmatic and accessible and that maintains smooth communication flows with all players in the sector. Malta can also be a relatively low-cost base, both in terms of cost of labour as well as the cost of facilities, such as office premises and maintenance. There is notable international interest in Malta’s captive regime. Aon Insurance Managers, Marsh Management Services, Heath Lambert, Willis and JLT, all captive insurance managers of international repute, have commenced operations in Malta.
The regulatory framework Captives in Malta are regulated by: •The Insurance Business Act 1998 and any rules or regulations made thereunder; and the requirements determined by Insurance Rule 21 of 2007: Business of Affiliated Insurance. •The Malta Financial Services Authority (MFSA), as the single regulator in Malta for the financial services sector, regulates the operations of captive insurance companies in Malta. Licensing requirements An application, provided in a prescribed form by the regulator, should be submitted to the MFSA in writing by interested parties. The application is required to be accompanied by the submission of a Scheme of Operations, which includes information regarding the investment strategy, business strategy, outsourcing agreements and financial projections and resources, among others. This scheme has to be signed off by the directors, while the projections need to be reported on by an approved auditor or the insurance manager, and the actuary in the case of life business. Other licensing considerations include: • the company has to have appropriate own funds for the type of business it proposes to carry on (see section below); • the company’s objects must be limited to the business of affiliated insurance and operations arising directly thereafter, to the exclusion of other commercial business; • the proposed directors and shareholders will have to undergo a due
51
diligence process by the regulator to ensure the company’s sound and prudent management; and • all qualifying shareholders, up to the level of the ultimate beneficial owners, need to be properly identified. It is vital that the promoters submit a complete application, which also gives comprehensive narrative information regarding the prospective captive. It is best practice for the promoters of the captive to hold meetings with the MFSA early on in the application process so as to create a co-operative platform between the regulator and the promoters, and enhance mutual understanding of expectations. Accounting standards Companies formed and registered in Malta are required, by virtue of the provisions of the Companies Act 1995, to prepare their financial statements in accordance with International Financial Reporting Standards (IFRS). Capital requirements – own funds Captive insurance companies are required to possess own funds amounting to not less than the applicable minimum guarantee fund determined by the regulations. Such funds are to be unencumbered at all times. The minimum guarantee fund that is required to be maintained depends on whether the captive is engaged in general business or long-term business. Where the captive is a reinsurance captive, the minimum guarantee fund is equal to €1.1m. In the case of general business captives, a minimum guarantee fund in the region of €2.3m to €3.5m, depending on the type and class of business carried out, is to be maintained. Life insurance captives are required to maintain a €3.5m minimum-guarantee fund. The components of own-funds are to consist of:
52
• Paid-up share capital which must not be less than 50% of the value of own funds requirement; and • a mixture of issued and unpaid share capital, preferential share capital, subordinated loans, retained profits and reserves (not technical provisions or equalisation reserve). Equalisation reserve Captives engaging in credit insurance business are required to maintain an equalisation reserve. There are instances where the captive would fail to be exempted in this regard, namely when net premiums in respect of a financial year in respect of credit insurance business are less than 4% of the total net premiums written in that financial year and less than €2.5m. Solvency requirements and technical provisions Captive companies are required to maintain at all times a margin of solvency. Moreover they are required to maintain adequate technical provisions. 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. Reinsurance captives are not required to cover technical provisions but must adopt a prudent person’s approach in portfolio management of the investments. Applicable exemptions Captive insurance companies in Malta are exempt from: • publishing accounts in newspapers – however, a copy of the audited financial statements must be supplied to any person requesting such copy; • contributing to the Protection and Compensation fund; • localisation rules and custody of assets rules; • covering their technical provisions by equivalent and matching assets to cover currency risk;
• depositing the minimumguarantee fund with an external institution; and • a number of obligations on cessation of business of insurance. Procedures and fees An application for the licensing of captives is processed within a maximum statutory period of three months. In practice, this time frame depends on whether the application process progresses smoothly, including whether documentation submitted is accurate and complete in all respects. The fees applicable to captives are outlined in the following table: Application for authorisation Acceptance of application Continuance of authorisation
€1,800 €2,500 €5,000
Protected cell companies Under Maltese protected cell company (PCC) regulations, a licensed captive may be registered as, or converted into, a PCC. A cell company is a single legal person, having within itself one or more cells, these being different classes of shares, for the purposes of segregating and protecting the cellular assets of the company. A company may also have assets of a non-cellular nature. Prior to being constituted as a cell company, or prior to being converted to such, the company has to apply to the MFSA in order to obtain the regulator’s written approval. There are certain obligations pursuant to operating as a PCC. These include: • informing all persons with whom it transacts that it is a PCC; • the directors have a duty to keep cellular assets ‘separate and separately identifiable’ from the core assets of the company and from the assets of other cells of the company; and •separate records, accounts and
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statements have to be kept for the different cells of the company. Captive insurance managers An insurance manager is a person appropriately licensed by the MFSA to accept appointments from companies to manage any part of their business, to exercise managerial functions therein, or to be responsible for maintaining accounts or other records of such company. Management functions may include the authority to enter into contracts of insurance on behalf of such company under the terms of appointment. An insurance manager is required to possess own-funds amounting to: •a minimum of €16,803 if its activities are restricted to servicing captive insurance companies, the higher of €16,803 or 4% of annual gross premiums receivable if it does not enter into contracts of insurance on behalf of its clients or the manager has the authority to collect and hold premiums on behalf of its clients; •the higher of €58,234 or 4% of annual gross premiums receivable if its activities are not restricted to servicing captive insurance, and include the authority to enter into insurance contracts on behalf of its clients. An insurance manager is required to take out a policy of professional indemnity insurance. It is also required to keep clients’ monies separate from its own. Passporting With Malta being a member state of the EU, European insurance undertakings may passport their activities into Malta, and likewise this right applies for Maltese insurance undertakings to passport into EU/ EEA countries. This may be done either through the setting up of a branch or through the freedom to provide cross-border services. Insur-
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ance companies availing themselves of these rights have to adhere to the notification requirements in force. Taxation The Maltese tax system is a full imputation system that eliminates the economic double taxation of company profits. The tax treatment applicable in the calculation of the tax liability due on the activities of a captive, not deriving income from Maltese immovable property, which insures risks will be liable to tax on such income at 35%, subject to relief for any foreign tax suffered. When the captive distributes a dividend to its shareholders, these receive a sixsevenths refund of the tax paid by it. Such a tax refund when received by shareholders who are not tax resident in Malta and thus not subject to tax in Malta, has the effect of reducing the total tax paid in Malta to 5% or lower where double taxation relief is claimed. The tax treatment described above is also available to branches of foreign companies registered in Malta for tax purposes. Each cell in a PCC is treated as separate from other cells for income tax purposes. Advance revenue rulings are valid for five years, but can be renewed provided there is no material change in circumstances. A ruling is binding for the shorter of five years or two years following a change in legislation. Indirect tax issues The supply of insurance and insurance related services (excluding administration services), offered by captives and their managers are exempt without credit for VAT purposes. The new VAT place of supply rules effective 1 January 2010 bring about VAT registration obligations on insurance captives on the procurement of services for which they are liable
to pay the tax. Where insurance services are provided to non-EU established customers, captives and their managers are entitled to recover VAT incurred on supplies they procure which are attributable to the supply of insurance services to such non-EU established customers. Malta does not levy an insurance premium tax, and although stamp duty is imposed on policies, it will be due not merely if the risk is located in Malta, but only when the contract is either executed in Malta or when having been executed overseas such contract is used in Malta. The term ‘insurance’ for the purposes of the law does not include reinsurance. The law also exempts certain risks. Other tax matters • Technical provisions and movements in equalisation reserves are allowable deductions in the computation of taxable income; • Redomiciliation or continuation of foreign captives to or from Malta is allowed; • Malta does not impose capital duty or wealth taxes; • Captives resident in Malta can benefit from the 51 Double Taxation Agreements which Malta has in force; • Malta does not have thin capitalisation rules; • Malta does not have CFC legislation; • Captives operating in Malta would not fall subject to transfer pricing rules; • There is no withholding tax on dividends paid to non-residents; • Non-residents are exempt from tax on interest and premia paid to them from Malta provided that the debt claim in respect of which the interest or premium is paid is not effectively connected with a Maltese permanent establishment through which a non-resident recipient carries on a trade or business in Malta.
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TDN1248-ARM Captive Review Advert V2:Layout 1
10/2/10
08:28
Page 1
• Captives • Protected Cell Companies • Incorporated Cell Companies
The Independent View
2nd Floor St Andrew’s House Le Bordage St Peter Port Guernsey GY1 1BR
Tel: +44 (0) 1481 714704 Fax: +44 (0) 1481 714319 Email: info@arm.co.gg www.arm.co.gg
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Achieving effective risk management practice under Solvency II 57 Cultivating an era of risk awareness is one of the main aims of the Solvency II Directive, according to Dr Matthew Bianchi and Dr Nicholas Curmi of Ganado & Associates Solvency II: How will it impact on insurance companies passporting into the EU? 58 Juanita Bencini and Josianne Briffa of KPMG discuss the potential impact that the Solvency II Directive will have on insurance companies within the EU The benefits of a protected cell 60 Ian-Edward Stafrace of Atlas Insurance PCC discusses how owning a protected cell in Malta is an effective and efficient method of eliminating fronting costs IFRS 4 Phase II and Solvency II – heading in the same direction? 62 Sarah Curmi of Deloitte outlines the main similarities and differences of Solvency II and IFRS Phase II
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Achieving effective risk management practice under Solvency II Cultivating an era of risk awareness is one of the main aims of the Solvency II Directive, according to Dr Matthew Bianchi and Dr Nicholas Curmi of Ganado & Associates
SOLVENCY II IS LARGELY about setting improved risk-management standards for the insurance industry rather than simply being about rationalising capital requirements for insurers. Indeed, the principal objective of the Solvency II Directive (the “Directive”) is to instil a genuine culture of risk awareness in the day-to-day operations and working practices of insurance companies in order to strengthen policyholder protection in the long term. Recent emphasis has, however, shifted towards the quantitative assessment of risk and perhaps now that Pillar I has been examined in some detail and with the next Quantitative Impact Study (QIS) exercise due to be launched in the second half of 2010, more focus should be put on the significance of Pillar II and how the qualitative aspects of the Directive are to be implemented in practice. These qualitative principles represent the rationale of the Directive and are designed to encourage risk-management practice that is pre-emptive and not reactive. SOLVENCY II REQUIRES insurers to integrate an effective risk-management system into their organisational structure and decision-making processes in order to enable them to identify, assess, manage, monitor and report the risks they are or might be exposed to. This system should take into account all material risks that may affect an insurer’s ability to meet its obligations to policyholders. This should include those risks included in the Solvency Capital Requirement (SCR) calculation under Pillar I, as well as all other risks that may be materially relevant to the insurer’s business and which may not be covered under the SCR, including liquidity, strategic and reputational risk. This MALTA INSURANCE REPORT
comprehensive identification and assessment of risks should include contingency-planning and ‘stress-tests’ in order to adequately prepare insurers for unexpected and adverse scenarios which may impact on their operations, solvency and risk profile. As a fundamental part of its risk-management system every insurer will be required to carry out its own risk and solvency assessment (ORSA) in order to identify whether the particular risk profile of an undertaking deviates from the assumptions underlying the SCR. The ORSA is intended to perform a dual function, firstly as a means for the insurer to obtain a true and practical understanding of the risks it is assuming and secondly as a tool for supervisory control. Supervisors will be given a range of remedial actions to correct any deficiencies in the insurer’s risk management system or even to impose additional capital requirements if they are dissatisfied with an insurer’s ORSA or the quality of its risk processes. The onus will be on the insurer to show that adequate processes are in place and continuous reassessment will be essential to cater for any changes in the insurer’s risk profile. The success of this approach to supervision will necessarily depend on the continual dialogue between the insurer and the supervisor, requiring both sides to work together constructively in developing effective systems and controls in accordance with the provisions of the Directive. The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has to date published two Issues Papers in 2008 outlining their views on the Pillar II system of governance and ORSA. These papers provide a general overview of the risk management function required by the
Directive and how it may be implemented, but the lack of detailed guidance still leaves some uncertainty as to their application in practice. A significant consideration made by the Directive is the proportionality of systems and processes in relation to the “nature, scale and complexity” of the insurer’s operations and the risks inherent in its business. Each insurer must therefore be given the freedom to develop its own bespoke systems and controls that implement the principles outlined in the Directive according to its individual risk profile and to demonstrate their adequacy to their supervisor. Even so, further guidance is still essential in order to support and steer insurers towards Pillar II compliance.
Dr Matthew Bianchi is the partner of the insurance and pensions law department at Ganado & Associates, Advocates in Malta. He regularly advises insurance managers, insurance companies, captives, protected cell companies (PCCs) and insurance intermediaries. Dr Nicholas Curmi is a member of the insurance and pensions law department at Ganado & Associates, Advocates and is secretary of the Malta Insurance Managers Association’s Solvency II Sub-Committee.
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Solvency II : How will it impact on insurance companies passporting into the EU Juanita Bencini and Josianne Briffa of KPMG discuss the potential impact that the Solvency II Directive will have on insurance companies within the EU
OVER THE PAST FEW years, Malta has witnessed a steady interest from large multinational groups of companies seeking to offer insurance services to third parties (normally their business clients in other EU jurisdictions) to use Malta as the base from where to carry out their insurance operations. The favoured model is the setting up of insurance principals in Malta that write business in other European member states by exercising their rights to passport, primarily under the freedom of services. Although these companies are sometimes referred to as “captive�, in reality they are not, since they are insuring third-party risks. A cursory view at such insurance operations shows that in their majority they write only one class of business which is simple in nature, often involving insured risks that are stable and predictable. The types of contracts that are written are not particularly complex and their investment strategies often complement a conservative approach to doing business, with investments being prudently managed and not exposed to severe market fluctuations. These businesses tend to be, in their majority, small to medium sized (SMEs). With Solvency II just round the corner and with Malta seeming to be very much the jurisdiction of choice for such setups, the question necessarily arises: how will Solvency II affect these insurers that have already set up shop in Malta and those that are thinking about doing so? The direct response to the question can be found in the application of the principle of proportionality, a general concept of law which underpins the Solvency II framework 58
throughout. The proportionality principle is explicitly intended to reduce the strain of the requirements of Solvency II on SMEs, establishing the idea that companies should have measures in place that are appropriate to the size of their business and risk exposure. The application of the proportionality principle rests on three basic criteria, these being the nature, scale and complexity of the insurer’s business and risks. Proportionality should result in less stringent requirements for companies that can prove they underwrite less risky and complex business and have relatively simple organisational and operational structures. Conversely, tougher measures are likely to apply to firms operating with greater complexity and risk. THREE PILLARS OF SOLVENCY II: The proportionality principle shall apply to the calculation of capital requirements (Pillar I), to the review of risk management and governance processes (Pillar II) as well as to the disclosure requirements (Pillar III). What does this entail for a number of existing insurance setups in Malta and for those with an eye on the jurisdiction? Under Pillar I, Solvency II presents insurers with two choices for calculating regulatory capital, either in accordance with the standard formula or using a full or partial internal model as approved by the supervisory authorities. It may be envisaged that many of the existing setups in Malta will be opting for the standard formula particularly because they often form part of groups for which insurance business is not a core activity and therefore they cannot
turn to the larger group for expertise and assistance. On the other hand, the Solvency II Directive is not prescriptive about the nature of internal models, and therefore the level of sophistication of full or partial internal models can match individual implementation plans and budgets. In view that these insurers often lack company-specific data of appropriate quality, they can utilise simplifications and proxies to calculate the best estimate of technical provisions, provided this is still proportionate to the underlying risk profile of the portfolio. This enables them to minimise resources in the form of, for example, actuarial expertise or IT-implementation costs. Likewise, they are expected to utilise the hierarchy of simplifications available to calculate the risk margin for technical provisions, albeit, as results of QIS exercises across the EU have shown, the majority of SMEs will need assistance with understanding the methods for stipulating the risk margin, and this before they can make a final decision with respect to the level of simplifications being most appropriate in their case. Beyond capital considerations, insurers have to comply with the requirements of Pillars II and III of the Solvency II framework. Under Pillar II, insurers are expected to have a system of governance that is proportionate to the nature, scale and complexity of their businesses. Indeed, for the types of insurers being considered, the proportionality principle is fundamental in guiding their compliance arrangements under Pillar II. It is acceptable that their organisational structures MALTA INSURANCE REPORT
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reflect their risk profile and hence one expects that key individuals within these entities will be multi-tasking under a Solvency II regime. Entities may also take proportionality into account when considering the qualifications, expertise and experience required for the performance of certain mandatory functions under Solvency II, in particular the actuarial function. A fundamental element of the proportionality principle is the possibility for outsourcing of certain functions or processes. One envisages that foreign insurers that set up shop in Malta will be looking at this solution since maintaining internal teams is generally not cost-effective within their business model. Outsourcing in itself is not a candidate for any proportionate treatment. However, these entities will find a more-than-prepared market for their requirements. The support network of the financial services sector in Malta is such that outsourcing will invariably become a sought after solution to compliance arrangements under Solvency II. Undertakings may look to outsource for instance their compliance function and their internal audit function. Undertakings will be expected to have an appropriate understanding of the nature and significance of the risks they face, but at the same time may be also proportionate in how they organise their risk-management functions and the approaches they use. For instance, their assets often take the form of single-type class of investments which are conservative in nature, such as bank deposits or bond holdings. In these cases, asset-liability management functions do not need to be overly complex. MALTA INSURANCE REPORT
Under Solvency II all insurers have to carry out their Own Risk and Solvency Assessment (ORSA). The level of complexity and sophistication employed in carrying out this exercise depends to a certain extent on the risk profile of the undertaking. The rationale of the ORSA is for the undertaking to understand its financial condition and solvency position, and enable it to interpret risk exposure and risk appetite, providing a much firmer base for decision making. While supervisors will want to see an internal assessment that reflects specific risks based on company data, in doing so, insurers will not be expected or obliged to introduce internal models or modelling. The proportionality principle takes on a crucial role under Pillar III. Reporting to the supervisor is expected to be commensurate to the risk profile of the undertaking, and small insurers will possibly also find that they are exempt from certain reporting duties relative to public disclosure. The proportionality principle applies to all elements of Solvency II and its implementing measures. Proportionality, however, works in two ways: it justifies simpler and less burdensome ways of meeting requirements for low risk-profile portfolios, but also increases the likelihood that undertakings, in fulfilling requirements, will need to apply more sophisticated methods and techniques for more complex risk portfolios. For example, certain low-risk companies may face severe Pillar I demands as a result of risk concentrations, but find some relief in less rigid governance requirements under Pillar II, as a result of their relative simplicity. The Maltese insurance market is charac-
terised by small to medium-sized companies, so over the years the regulator has built up a wealth of expertise in dealing with this type of companies. Although Solvency II will be adopted uniformly across all of the 27 EU member states, what will distinguish Malta from the rest with regards to the insurance companies that passport into Europe is that the regulator is focused on this type of entity and therefore companies can expect a regulatory response to their needs which is pragmatic, business driven and sensitive to their requirements within the Solvency II framework.
Juanita Bencini is the partner responsible for KPMG Malta’s financial services regulatory services line. She has 10 years’ experience in the financial services industry and has assisted several clients to obtain a licence from the MFSA.
A Certified Public Accountant by profession, Josianne Briffa joined the Regulatory and Compliance Advisory Services team of KPMG in Malta in 2003. As part of her work, she follows closely developments in the Solvency II project and she has also carried out a study entitled: ‘Shaping up ahead of Solvency II: embedding the concepts of risk and capital management in insurers’.
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The benefits of a protected cell A PROTECTED CELL of a protected cell company (PCC) creates an attractive opportunity for different purposes such as: • commercial or affinity groups looking for a captive vehicle (referred to as ‘affiliated insurance’ in Malta) • captive owners wishing to reduce their captive’s fronting costs in the EEA • any business planning to sell insurance to third parties in the EEA IN RISK-FINANCING strategies, captives tend to be associated mainly with large organisations. Many risk managers may have not considered creating a captive because of the perceived high-minimum capital requirements. Protected cell legislation provides risk managers with a “low-cost” alternative bringing the benefits of captives to smaller entities. Many standalone captive owners on the other hand could well discover the potential cost savings of converting their standalone captives to protected cells. Malta is the only full EU member state that offers PCC legislation. Maltese PCCs therefore provide a direct writing facility into Europe avoiding fronting costs and collateral requirements. Owners of nonEU reinsurance captives could establish protected cells specifically to eliminate the need for fronting arrangements. Protected cells are not only attractive for captive risks. Any entity can establish a protected cell in Malta to sell insurance directly to consumers across the EEA. As one of Malta’s leading insurers with just under 150 staff, Atlas Insurance PCC’s active core business allows greater flexibility for international cell owners to set 60
up direct writing cells as opposed to other PCCs with inactive cores. Atlas Insurance PCC, being an independent PCC, also provides insurance managers the opportunity to manage cells introduced by them. The main key benefit of the PCC model is that a promoter may write insurance business through a cell by complying with the minimum guarantee funds and capital requirements set out by the EU directives through the use of the core capital of the PCC. While for general insurers EU minimum own-fund requirements start from €2.3m, through a PCC a prospective cell owner with an annual premium of €1m could sufficiently capitalise an insurance cell from as little as €180,000 depending on the classes to be written and any buffer requirements. Reinsurance outwards from the cell could potentially reduce the capital requirement even further by up to 50%. Protected cells provide smaller investors access to the reinsurance market. Reinsurers being the wholesalers of the insurance world provide a lower cost per unit of cover versus the primary insurance market. Reinsurers provide greater control over the amount of risk retained by relating reinsurance premiums more directly to experience. Reinsurers are also in a better position to underwrite unusual risks. Protected cells also benefit from lower running costs versus standalone companies. Since with a protected cell one does not need to set up a separate company, there is no need for a board of directors and other relative costs. Owners benefit
from shared and simpler administration. Cell owners also share overhead costs with other owners and with the PCC, while at all times retaining full protection from their respective possible financial problems. The Maltese PCC regulations make provisions for adequately securing the assets of each cell from the liabilities of other cells and those of the PCC’s core. Hence, although a PCC is a single legal entity, each cell operates independently from other cells and is treated as if it were a separate company for income tax purposes. There are also tax advantages for owners of cells covering risks situated outside of Malta. Captives are a risk management tool used by typically large organisations who set up their own insurance companies, as owner and insured, underwriting their own insurance programme, retaining those layers of risk that they consider predictable and reinsuring what risk they chose not to retain. PCCs lower the access point to the captive solution, allowing smaller firms to access the same benefits without the need to put up large amounts of capital and with lower frictional costs. Protected cells could also be used for special purpose applications where a wholly owned insurance subsidiary would not be viable. By facilitating access to the reinsurance market and specialist risk-bearers, protected cells can help in the long-term funding of many otherwise uninsurable risks or supplement conventional market cover where it does not provide full cover eliminating the inflexibility of conventional wordings. MALTA INSURANCE REPORT
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Ian-Edward Stafrace of Atlas Insurance PCC discusses how owning a protected cell in Malta is an effective and efficient method of eliminating fronting costs
Establishing a protected cell in Malta allows the cell owner to: • insure directly the cell-owner’s risks in the EEA • insure on a non-admitted basis the cell owner’s risks globally where such is allowed • reinsure the cell owner’s other risks in non-EEA countries where nonadmitted business is not allowed • sell insurance to third parties in the EEA, possibly as a bolt-on insurance product to a non-insurance sale ELIMINATING THE NEED for fronting insurers in EU: most EU countries require risks to be insured by a local insurance company or one based within the EU. One option is to write the business through a fronting insurer based in the EU and reinsuring the risk in a non-EU reinsurance captive or cell reinsurer such as in Guernsey. The disadvantage is that it can be expensive and may incur not just fronting fees but also the cost of letters of credit requested as support by the fronting insurer. The second usually less expensive option is using a cell of a PCC established in a European domicile benefiting from EU passport arrangements and writing the business direct. Cells in Malta can be established as fronting facilities which in turn reinsure most, if not all, of the risk written by the cell. The reinsurer could be a reinsurance captive already established in a non-EU territory although regulators and the PCC would tend to insist that reinsurers are rated or meet other acceptable security criteria. The fronting cell is usually expected MALTA INSURANCE REPORT
to retain at least 10% of the insurance risk though this could be reduced further, subject to regulatory approval if the PCC’s overall retention is higher than 10%. A fronting cell writing an annual premium of €1m could be sufficiently capitalised from as little as €90,000 depending on the business, and after benefiting from an allowance of up to 50% on the solvency margin for outwards reinsurance. With Malta being a EU member state, the European market is a natural target for business to be written by a cell licensed in Malta, enjoying the freedom to provide services in the countries forming the EEA. The direct writing insurance cell lends itself very well to short-tail risks such as warranty, property damage, theft, marine cargo, travel cancellation or professional indemnity covers on a claims-made basis. Long-tail classes are also possible although, depending on the risk gap, further buffers or guarantees may be required by the PCC to ensure its core is adequately protected from secondary recourse. While captive insurance and reinsurance cells are allowed, subject to certain conditions, to have non-recourse agreements limiting claims to the extent of the cellular assets with no right of secondary recourse to the PCC’s non-cellular assets, such are not allowed in respect of direct writing cells. Policyholders of a cell are entitled to believe that they have the same level of protection required to be in place for other EU insurers. Policyholders must therefore be able to have secondary recourse to the core that, unlike the cells,
is subject to ‘own funds’ requirements dictated by EU insurance directives. For this reason, as one of Malta’s leading insurers, Atlas Insurance PCC’s active core business allows greater flexibility for international cell owners to set up direct writing cells as opposed to other PCCs with inactive cores, which tend to prefer not to take on risk on their core capital. Atlas would accept cells to be set up in its PCC that meet the same underwriting philosophy and risk appetite it would apply to Maltese risks. Protected cells are a cost-effective, extremely flexible and secure alternative to owning a standalone insurer or captive. Owning a protected cell in Malta, a full EU member state, enables direct writing of risks across the EEA whether these are of the cell owner (captive risk) or of third parties. Protected cells in Malta can hence be used to eliminate fronting costs and are particularly well suited as profit centres for the sale of insurance to third parties.
Ian-Edward Stafrace has 10 years’ experience as business intelligence analyst, risk manager and commercial insurer working for Atlas Insurance PCC with specialisations in the areas of captives and protected cells. He is a member of Atlas’s international business team and risk management committee. He is a Chartered Insurer and Associate of the Chartered Insurance Institute and Member of The Institute of Risk Management. 61
IFRS 4 Phase II and Solvency II – heading in the same direction? Sarah Curmi of Deloitte outlines the main similarities and differences of Solvency II and IFRS Phase II
THE IMPLICATIONS FROM Phase II of the International Accounting Standards Board’s (IASB) project on insurance contracts do not appear to rank as highly on managements’ priority lists, despite both regimes sharing similar timelines and issues. Although Solvency II (SII) and Phase II have different objectives, companies will have to address similar implementation issues. An integrated or closely aligned approach to their implementation is likely to minimise costs and maximise benefits. This article explores similarities and differences between the two as they currently stand. There are significant similarities when one compares the composition of assets and liabilities under both proposals, given both are seeking to achieve market consistent valuations. Some differences exist in the ‘market value of assets’ caused by valuation rules and counterparty limits under SII, when no such rules apply under International Financial Reporting Standards (IFRS). These differences go beyond the scope of this article. Although having a different objective, 62
the measurement models under both regimes use a building block approach based on three components: current best estimates of probability weighted future cash flows, the time value of money and an explicit margin. BEST ESTIMATE SIMILARITIES: Both require the explicit reporting of the amount representing the unbiased best estimate of the probability weighted cash flows on a prospective basis including estimates of relevant claim inflation. Differences exist in the best estimate approaches used; these are highlighted in the next section. DISCOUNTING: Both require the explicit discounting of liabilities at a rate that is independent of the assets held to match those liabilities. As per Quantitative Impact Study 4 (QIS4) completed in July 2008, insurance liabilities under SII could be discounted using swap rates. The principle under Phase II is that the discount rate should capture the liability’s characteristics. The IASB is proposing that the effects of uncertainty about the amount and timing of future cash flows should be reflected through a risk adjustment as part of an explicit margin. RISK MARGINS: Both require that the effects of uncertainty about the amount and timing of future cash flows should be reflected through a risk adjustment as part of an explicit margin – in contrast to implicit ‘margins’ under current practices. OF COURSE, THE TWO regimes have different objectives. Whilst both propos-
als aim to satisfy the needs of users of the reported figures to understand the value of insurance contracts on a realistic basis, Phase II proposes to address existing and potential shareholders investment decision needs with a valuation of the insurance contract. Conversely, SII focuses on protecting policyholders’ interests above all by building a new risk-based regime using a similar approach to measure how insurance liabilities affect the insurers’ economic and regulatory capital requirements. SII has a wider scope that will apply to all the regulated entity’s business. Phase II will apply to contracts that meet the definition of an insurance contract in IFRS 4. Therefore, regulated products which do not meet this definition will still be subject to SII requirements, which may be different from the applicable IFRS, generally IAS 39. Furthermore, IFRS is mandatory for listed entities in the EU (and all regulated entities in Malta) whilst SII applies to qualifying insurers in the EU, irrespective of their listed status. SII requires liabilities to be estimated using an exit value notion; that is, on the basis of the price that would be paid to transfer the liabilities to a market participant. The Phase II measurement of an insurance contract is based on the current estimate of the cost to fulfil the present obligation created by that contract. In both cases, market values should be used when observable. Reinsurance without transfer of risk and other techniques such as securitisation and use of derivatives will be outside the Phase II scope and captured by other IFRS, generally IAS 39. These assets will have MALTA INSURANCE REPORT
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to be recalculated using SII rules which may result in different amounts than those reported under IFRS. All cash flows under Phase II should be market consistent; however, entity specific data may be used after excluding entity specific efficiencies/inefficiencies not consistent with a market participant’s view. Under SII, the best estimate of cash flows affected by non-hedge-able risks is calculated using unadjusted entity specific factors. This could result in different amounts for the same liability. Most commentators have urged the IASB to reconsider the adjustments for market consistency. They argue that the high level of judgement necessary may reduce the model’s reliability. Under SII the risk margin will be based on the cost of capital. A risk premium, currently equal to 6%, is applied to future solvency capital requirements (SCRs) to determine the cost of capital. Under Phase II the proposed principle for a risk adjustment that captures the effect of uncertainty associated with the contractual cash flows is the amount an insurer would rationally pay to be relieved of the risk. Under Phase II, the measurement of an insurance contract should not result in the recognition of an accounting profit at inception. In order to eliminate this day one difference, a residual margin is included as part of the explicit margin in the measurement at inception. The SII liability includes all cash flows expected under the legal terms and conditions of the contracts in force at the measurement date. SII would reflect the possibility of cancellation in the probability to collect premiums. Instead Phase II MALTA INSURANCE REPORT
attempts to develop an approach which attempts to identify, before measurement, which premiums should be considered. The IASB proposes to consider in the best estimate all future cash flows including those cash flows whose amount or timing depends on whether policyholders exercise options in the contracts. To identify the boundary between existing contracts and new contracts, the insurer would consider whether it can cancel the contract or change the pricing or other terms; in other words, whether the policyholder can maintain his right to ‘guaranteed insurability’. Phase II requires an insurer to take into account the credit standing of the insurance contract, inclusive of guarantees which may come from parties external to the reporting insurer (for example, a policyholder protection fund). Accordingly, changes in the insurance contract’s credit characteristics impact the valuation of insurance liabilities. This proposal has attracted much criticism because the credit standing of an insurance contract is heavily influenced by an insurer’s own credit standing. This issue is particularly relevant for an insurance contract where no external policyholder protection exists such as those issued by reinsurers. Any such adjustment is prohibited under SII. WILL THEY CONVERGE or diverge? It would appear that both regimes will be launched around the same time. However, whilst SII is set to be implemented in 2012, Phase II appears to be progressing slowly, even though the IASB is expecting to publish a final IFRS for insurance by June 2011. Indeed, it has yet to publish the
results of its field testing and an ED, which is planned for May 2010. SII, on the other hand, has gone through its fourth QIS and companies are now looking at how they will implement the requirements set out in the Directive, particularly, those concerning internal models and the ‘use test’. WE BELIEVE THAT, regardless of the differences between the two regimes, there are tangible opportunities for synergies and companies should consider the requirements of SII and Phase II in an integrated way to minimise implementation costs and maximise benefits for their businesses. In particular, the common ground on the use of unbiased cash flow estimates and observable market rates is a clear indicator of overlaps in data and technology requirements, training and awareness programmes on when the insurer plans to design new suites of management information. Planning upfront to achieve these synergies, in our view, will be essential to ensure a successful implementation of both regimes and build a stronger framework for both risk and financial reporting purposes.
Sarah Curmi is a partner within the Financial Services Industry assurance department at Deloitte. She is also insurance leader for the Malta firm.
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Abacus Risk Management Services PCC LF3 GasanMamo Head Office • Msida Road • Gzira • Malta
Bank of Valletta
Abacus Risk Management Services PCC Ltd.
Contact: Baudoin Deschamps, director & insurance manager Tel: +32 4754 60600 Fax: +32 2706 4760 Email: bdeschamps@abacus.com.mt Web: www.abacus.com.mt Abacus Risk Management Services PCC Ltd, an Associate Company of GasanMamo Insurance Ltd, provides the set up and efficient management of your captive, protected cell(s) or other insurance operations in Malta by a team of experienced professionals overseen by Abacus Executive Directors with more than 60 years combined experience in the complex world of captive and global insurance. Abacus’ protected cells also provide foreign insurance managers the opportunity to establish a presence in Malta at reasonable cost hereby enabling their clients to benefit from Malta’s direct writing, tax efficient and compliant European jurisdiction. Abacus, the insurance manager of choice for Malta, the domicile of choice.
ARM (Alternative Risk Management) 2nd Floor •St Andrews House • Le Bordage • St Peter Port •Guernsey • GY1 1BR Contact: David Sheil, operations director Tel: +44 1481 714704 Mob: +44 7781 137431 Fax: +44 1481 714319 Reg Number 41019 Alternative Risk Management Limited is licenced by the Guernsey Financial Services Commission Web: www.arm.co.gg ARM is an established leading independent captive manager with operations in Guernsey, Jersey, Bermuda and Malta. Our client base ranges from multi-nationals to SME businesses in the UK, Europe, South Africa and the US. We provide full captive insurance company management services including provision of ,and access to, Protected Cell Companies including Windward Insurance PCC Limited. The management team have extensive experience in the captive insurance industry and ART market having held senior positions in offshore regulators, and multinational insurance companies.
Atlas Insurance PCC 47-50 Ta’Xbiex Seafront •Ta’Xbiex • XBX 1021 • Malta Contact: Michael Gatt, managing director Tel: +356 2343 5221 Fax: +356 2134 4666 Email: michael.gatt@atlas.com.mt Web: www.atlaspcc.eu The Atlas Group of companies today forms one of Malta’s foremost insurance and financial services organisations. The flagship company of the Atlas group is Atlas Insurance PCC limited. Atlas’ progression from agency to insurance company on 1 May 2004 laid the base for the change to a protected cell company in November 2006. This evolution was also a first for Malta and the EU. This development took advantage of Malta’s aim of establishing itself as a financial services centre within the Union. The interest shown in Malta and the new legislation together with the advantageous tax structures has been the stimulus for Atlas’ successful emergence on the international scene.
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BOV Centre •Cannon Road •Santa Venera •SVR 9030 Treasury Management Services Contact: Ian Messina Tel: +356 2275 3115 Email: ian.messina@bov.com Institutional Portfolio & Risk Management Services Contact: Antoine Briffa Tel: +356 2275 3074 Email: antoine.briffa@bov.com Web: www.bov.com Bank of Valletta plc is a leading banking and financial services provider in Malta having a vast network of branches, investment shops, business centres including internet banking. The bank’s core business incorporates private and business banking, investment banking, fund management, fund services, bancassurance, stockbroking, wealth management and trustee services. Bank of Valletta plc is licensed to provide investment and trustee services by the Malta Financial Services Authority.
BWCI PO Box 68 • Albert House • South Esplanade• St Peter Port• Guernsey •GY1 3BY Contact: Ian Morris Tel: +44 1481 728432 Fax:+44 1481 724082 Web: www.bwcigroup.com The BWCI Group has been providing actuarial consulting services to insurance clients for over 30 years. We are a member of Abelica Global, the international network of leading actuarial consultants. Our insurance consulting services are provided through BWCI Limited. We have specialist knowledge and expertise in a range of jurisdictions including Malta, Guernsey, Isle of Man and Gibraltar and the UK. We provide advice to both general insurance and life insurance companies. Insurance consulting is headed by Ian Morris supported by an experienced team including four qualified actuaries. For more information please visit our website at www.bwcigroup.com or contact us at insurance@ bwcigroup.com
Curmi & Partners Finance House • Princess Elizabeth Street • tA’ Xbien XBX 1102 • Malta Tel: +356 2134 7331 Fax: + 356 2134 7333 Email: dcurmi@curmiandpartners.com
Deloitte Deloitte Place • Mriehel By Pass • Mriehel • BKR 3000 • Malta Contact: Sarah Curmi Tel: +356 2134 5000 Fax: +356 2134 4443 Mobile: +356 9943 0235 Email: scurmi@deloitte.com.mt Web: www.deloitte.com/mt Deloitte provides audit, tax, consulting and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 140 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte’s more than approximately 169,000 professionals are committed to becoming the standard of excellence. In Malta,
Deloitte is among the nation’s leading professional services firms, providing audit, tax, consulting and corporate finance services through an excess of 200 people. Known as an employer of choice for innovative human resource programmes, it is dedicated to helping its clients and people excel.
Dingli and Dingli Law Firm 18/2 South Street •Valletta • VLT 1102 •Malta
D&D
Dingli & Dingli Law Firm
Contact: Kevin F Dingli / Angela Sciberras Tel: +356 2123 6206 or: +356 2123 8256 or: +356 2124 7604 Fax: +356 2124 0321 Email: kevin@dingli.com.mt / angela@dingli.com.mt Web: www.dingli.com.mt Dingli and Dingli is a Maltese law firm established in 1982. The firm enjoys a solid reputation for efficiency and effectiveness, achieved through the deployment of a strong team effort when handling assignments, harnessing the power of partnership to the full. Although the firm handles all types of legal work, it is especially active in the fields of company law, financial services, international tax planning, maritime law, ship finance, admiralty, aviation law and intellectual property law. Numerous exciting legislative innovations in recent years have resulted in substantial growth both for Malta and the firm itself, giving rise to a number of interesting and sometimes unique opportunities for international investors.
EMD Advocates Vaults 13-15 • Valletta Waterfront •FRN 1913 • Malta Tel: +356 2203 0000 Fax: +356 2123 7277 Email: info@emd.com.mt Web: www.emd.com.mt EMD Advocates is a dynamic and established boutique law firm providing both traditional legal services and specialised legal and advisory services. Our approach is very client centred and our ethos is to add value to a project through our ability to think out of the box and provide tailor-made, efficient solutions. The firm boasts a strong international legal practice with particular emphasis on niche areas such as insurance law, investment services law, local and international taxation, corporate law and employment law. We have vast expertise in assisting promoters with applying to the MFSA for the necessary authorisation so they can conduct financial services business and have an excellent working relationship with the regulator.
Fenech & Fenech Advocates 198 Old Bakery Street • Valletta • VLT 1455 • Malta Contact: Joseph Ghio / Rosanne Bonnici Tel: +356 2124 1232 Fax: +356 2599 0644 Email: joseph.ghio@fenlex.com Email: rosanne.bonnici@fenlex.com Web: www.fenechlaw.com Established in 1891, Fenech & Fenech Advocates provides valuedriven, tailored legal services in all practice areas. Recognised as a leading Maltese law firm with a largely international practice, Fenech & Fenech Advocates is rooted in tradition but committed to innovation. The firm’s dynamic financial services team draws on the multi-disciplinary expertise of the firm to maximise Malta’s potential as an EU jurisdiction of choice for insurers, captive companies, insurance managers and protected cell companies. Fenech & Fenech Advocates advises on the regulatory, tax and
MALTA INSURANCE REPORT
corporate implications of setting up and licensing insurance businesses in Malta and efficient cross-border structuring.
FinanceMalta Effective
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Garrison Chapel • Castille Place • Valletta• VLT1063 • Malta Contact: Bruno L’ecuyer, head of business development Tel: +356 2122 4525 Fax: +356 2144 9212 Email: info@financemalta.org Web: financemalta.org FinanceMalta, a non-profit public-private initiative, was set up to promote Malta’s international Business & Financial Centre, both within, as well as outside, Malta’s shores. It brings together, and harnesses, the resources of the industry and government, to ensure that Malta maintains a modern and effective legal, regulatory and fiscal framework in which the financial services sector can continue to grow and prosper. The founding associations are: the Malta Funds Industry Association, the College of Stockbrokers, the Malta Bankers’ Association, the Malta Insurance Association, the Association of Insurance Brokers, and the Institute of Financial Services Practitioners.
FirstUnited Insurance Management 25 Villa Eden • Princess Elizabeth Street • Ta’Xbiex • XBX1103 Contact: Peter Grima, managing director Tel: +356 2131 9000 Fax: +356 2134 7734 Email: pgrima@firstunited.com.mt Web: www.firstunited.com.mt We provide regulated outsourced services to insurers, re-insurers and insurance intermediaries. Our clients include niche insurers and captives and specialist insurance intermediaries. Our services help you take advantage of freedom of services helping you provide insurance services across the European Union from Malta. We have the resources and experience to design and implement these structures in the captive and niche specialty field providing underwriting, claims, project management. insurance accounting, compliance and company administration services.
Ganado & Associates, Advocates 171 Old Bakery Street • Valletta • VLT1455 •Malta Contact: Matthew Bianchi Tel: +356 2123 5406/7/8 Fax: +356 2122 5908 Email: mbianchi@jmganado.com Web: www.jmganado.com Ganado & Associates, Advocates is a leading business law firm with a predominantly international practice, provides integrated legal services across all practice areas. Our multi-disciplinary team takes a constructive hands-on approach to deliver a bespoke service for the setting up of financial services businesses in Malta. In the insurance area, the firm boasts a dedicated insurance team which advises a number of well-established international insurers including captives.
MALTA INSURANCE REPORT
HSBC Bank Malta plc
JLT
233 Republic Street • Valletta • Malta • VLT1116
Alfred Craig Street • Ta’ Xbiex • XBX 1111 •Malta
Contact: Charles Cini Tel: +356 2597 2678 Email: charlescini@hsbc.com Web: www.hsbc.com.mt
Contact: John Stivala Tel: +356 2343 0346 Email: John_Stivala@jltgroup.com Contact: Nick Wild Tel: +44 1481 737120 Email: Nick_Wild@jltgroup.com
HSBC Bank Malta plc forms part of one of the largest banking and financial services organisations with an international network of around 8,500 offices in 86 countries and territories across the world. It is the island’s leading financial institution and the largest publicly listed company on the Malta Stock Exchange. The Bank provides a comprehensive range of financial services to meet the expanding requirements of its personal and corporate customers. Services provided include personal financial services, commercial banking, investment banking, and wealth management. Through specialised subsidiary companies, the Bank is also very active in the areas of life assurance, fund management and stockbroking.
IIMS
JLT is an international group of risk specialists and employee benefits consultants and one of the largest companies of its type in the world. We offer a distinctive choice to our clients and partners through our combination of independence, scale and specialism. As an independent business, we are able to operate with autonomy and flexibility. We have the scale to meet the complex demands of the world’s leading companies and to deliver global servicing whilst recognising the unique needs of each client. By developing highly specialised services, we provide a depth of expertise and experience, made possible through the personal determination of our 5,500 highly motivated and skilled people.
(International Insurance Management Services)
KPMG
4th Floor • Development House • St Anne Street • Floriana FRN9010 • Malta
Portico Building • Marina Street • Pieta’ •PTA 9044 • Malta
Contact: Elizabeth Carbonaro, general manager Tel: +356 2569 4561 Email: elizabethc@middlesea.com
Contact: Juanita Bencini, partner, regulatory & compliance advisory services Tel: +356 2563 1053 Fax: + 356 2566 1000 Email: juanitabencini@kpmg.com.mt Web: www.kpmg.com.mt
International Insurance Management Services Ltd (IIMS), a wholly-owned subsidiary of Middlesea Insurance plc, provides a comprehensive range of back-office services to clients who are seeking to establish an insurance or reinsurance company in Malta. With over 20 years experience in insurance and reinsurance company management, IIMS is a leading insurance manager in Malta. IIMS boasts of highly qualified personnel in the various financial disciplines which allow it to provide a full range of management and administrative services tailor-made to suit the specific needs of its clients. IIMS is enrolled in the Managers List and authorised under the Insurance Intermediaries Act 2006 to act as an insurance manager.
Island Insurance Management Services Insurance House, Psaila Street • Birkirkara • BKR02 • Malta Contact: Stanley Mifsud Tel: +356 2385 5555 Fax: +356 2385 5238 Email: s.mifsud@islandins.com Web: www.islandins.com Island Insurance Management Services Limited is an MFSA licensed independent provider of insurance management services. Island Insurance Management Services was formed in 2007 with the intention of partaking in Malta’s development as a favourable captive insurance domicile within a respected financial services jurisdiction. Since its incorporation and apart from acting as manager, it has carried out other consulting work for third parties evaluating the Malta domicile. The directors and officers of Island Insurance Management Services Limited are seasoned insurance professionals and possess more than 25 years of industry experience.
KPMG in Malta is a professional firm with over 240 staff including partners, providing audit, tax and advisory services. The Maltese practice is part of a strong global network of member firms operating in 144 countries, having 137,000 people working in member firms around the world. KPMG in Malta has a dedicated financial services audit team and a dedicated regulatory and compliance advisory team which assists promoters seeking to obtain an insurance licence from the MFSA. Complementing our mainstream audit and tax offerings, we also provide advice to insurance companies on regulatory matters including issues surrounding Solvency II, the assessment and management of regulatory risks and governance issues. We combine a strong local presence with access to a global network of experienced insurance professionals
MIB 53 Mediterranean Building • Abate Rigord Street •Ta’ Xbiex • MSD 1122 • Malta • Contacts: Joseph Cutajar FIRM, ACII, Mediterranean Insurance Brokers (Malta) Tonio Briffa ACII, managing director, MIB Insurance Agency Web: www.mib.com.mt Established in 1976, the MIB Group today employs over 50 insurance and ancillary services specialists. It comprises three companies independently focusing on the demands of distinct sectors of insurance services consumers. Mediterranean Insurance Brokers offers independent insurance broking and risk management services to the full spectrum of insurance buyers with unique access to the resources of a leading global broking network. MIB Insurance Agency, representing major local and international security, provides expert capabilities and support to the intermediary market in particular Tied Insurance Intermediaries (TIIs). MIB Management Services provides independent claims management, back-office administration and alternative risk transfer solutions.
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Mazars Malta Sovereign Building • Zaghfran Road • Attard • Contact: Paul Giglio insurance audit partner Email: paul.giglio@mazars.com.mt, Alan Craig, consultancy partner Email: alan.craig@mazars.com.mt Ruth Borg, tax advisor Email: ruth.borg@mazars.com.mt General email: Contacts@mazars.com.mt Web: www.mazars.com.mt Mazars Malta is a leading mid-tier firm in Malta, specialising in assurance, back office, taxation, consultancy and company set up services. Established in 1998, Mazars Malta (previously Attard Giglio + Co) built on the experience of its partners and staff and has specialised in insurance, holding structures, and internal audit. We are committed to give our clients an efficient and value for money service assuring a high level of commitment and quality. Our size allows us to offer our clients a wide range of specialised services whilst retaining a personal touch while, as an integrated member firm of Mazars, we are able to draw experience and resources from Mazars worldwide.
MIMA 171 Old Bakery Street •Valletta •Malta • Contact: Matthew Bianchi, secretary general Tel: +356 2123 5406 Email: mbianchi@jmganado.com The Malta Insurance Managers Association (MIMA) is the representative body for all Maltese insurance management companies. MIMA was established in 2007 to safeguard the interests of its members at both a local and European level and to cultivate Maltese insurance management expertise in order to ensure that the island remains a leading centre for insurance and insurance management services. Ranging from well-known international names to more boutique firms, all MIMA’s members have the knowledge and experience to advise on the successful start-up and day to day operations of an insurance business, whether captive or otherwise.
NBG Bank Malta 302/304 • Residence 3, Townsquare • Qui-Si-Sana Place, Sliema/Malta • Contact: Maria Meilak, PA to the managing director Tel: +356 2056 2100 Fax: +356 2132 0991 Email: info@nbgmalta.com.mt Website: www.nbgmalta.com.mt NBG Bank Malta (formerly Finansbank (Malta)) was established in 2005 and is a wholly-owned subsidiary of National Bank of Greece, which is the oldest and largest among Greek banks, boasting a dynamic profile internationally, particularly in Greece, Turkey, Bulgaria, Romania, FYROM, Serbia, Cyprus, Egypt, Albania, UK and South Africa. NBG Bank Malta is designed to be a fast serving, efficient and flexible corporate banking unit. Our goal is to provide a full range of financial products and services that are tailored to meet the constantly changing needs of our corporate customers and private individuals.
PwC 167 Merchants Street •Valletta VLT 1174 • Malta Contact: Simon Flynn, partner Tel: +356 2564 7605 Fax: +356 2124 4768 Email: simon.flynn@mt.pwc.com
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PricewaterhouseCoopers is the leading and largest practice of accountants and auditors in Malta. It forms part of the worldwide leading professional services organisation of PricewaterhouseCoopers, drawing on the knowledge and skills of 163,000 people in 151 countries and giving a worldwide coordinated service to clients under the surveillance of an international partnership that supervises the ethical and professional standards across the PricewaterhouseCoopers network. In Malta, PricewaterhouseCoopers provide a range of services designed to contribute towards the future growth, efficiency and prosperity of its clients. It has a specialised and experienced insurance team and provides assurance, advisory and taxation services to a large number of insurance clients, including many captives.
in specific fields, such as legal, underwriting and tax will ensure that we assist you from initial assessment stages through to feasibility and implementation. We split our services into Corporate Advisory and Corporate Services.
QIC International LLC
UHY Pace, Galea Musù & Co. is a member of UHY International, an international association of independent accounting and consulting firms, whose organising body is UHY International Limited. UHY is one of the world’s leading business advisory, consulting and accounting networks, operating across 242 offices in 76 countries. Our member firms are knowledgeable of local regulations, market practice and cultural norms in their respective countries. UHY is represented in Malta, providing financial accounting and business consulting services, by UHY Business Advisory Services Limited, which specialises in small and medium-sized enterprises. Our international affiliation allows us to share knowledge and seek solutions to maintain our consistently high standards.
10th floor • Alfardan Tower • West Bay Financial District • Doha • State of Qatar • Contact: Ian Sangster, chief executive officer Tel: +974 491 0508 / 491 0510 Mob: +974 550 3255 Fax: +974 491 0515 Email: isangster@qici.com.qa QIC International LCC (QICI) is the overseas arm of the QIC Group and is represented in various GCC countries, where it has either branch operations or subsidiary companies, and in Malta. It is the majority shareholder in the newly formed Q Re LLC which has a global mandate but for the moment essentially has an Afro-Asian underwriting footprint. QICI, an S&P “A” rated company, was licenced by the Qatar Financial Centre Regulatory Authority on 12 February 2007 and has now completed three successful years of trading.
Simon Tortell & Associates Contact: Simon Tortell Tel: +356 2122 8862 Fax: +356 2122 3567 Email: simon@simontortell.com Web: www.simontortell.com Simon Tortell & Associates is a recently established law firm with a team that includes several long established and respected practitioners with dedicated focus to financial services matters, who work together with a number of young and enthusiastic associates. While the firm’s core practice lies in financial services and corporate law, we also provide clients with the full spectrum of legal services including all commercial and civil law matters. We offer our services to a diverse range of clients from leading investment banks and multinational companies to retailers and individuals. Our team remains focused on providing all our clients with an efficient and specialised service.
South Risk Partners 52 St. Angelo Mansions • Block 10 • Vittoriosa Waterfront • Vittoriosa • BRG 1737 • Malta • Contact: Joanne Alamango Tel: 356 2701 1497 Fax: 356 2201 02970 Email: j.alamango@south-risk.com South Risk Partners is a Malta based risk advisory firm offering comprehensive and seamless client solutions. Industry, economic and regulatory environments all demand time and financial constraints in order to maintain competitiveness, whether you are a company operating in the insurance industry and wish to carry out your business in a more efficient and cost-effective manner, or any other company wishing to enhance or improve their risk management, we can provide solutions. Our understanding of corporate structures, risk and operations coupled with expertise
UHY PACE Matilda Court • Flat 2 • Giuseppe Call Street • Ta’Xbiex • Malta Contact: Pierre Galea Musù Tel: + 356 2131 1814 Fax: + 356 2131 0461 Email: pgm@uhymalta.com
Van Ameyde UK 34 The Mall • Bromley, Kent • BR1 1TS • United Kingdom Tel. +44 208 315 0700 Fax +44 208 460 1713 Email: enquiries@vanameyde.co.uk Web: www.vanameyde.com The People, the Network, the Technology: the Van Ameyde Group specialises in international claims and risk management for major international insurance companies, captives and brokers, government agencies and corporate clients. We represent clients throughout Europe, providing back-office services and handling the entire claims process. Internet insurers rely on our proven BPO services. In addition, we conduct risk analyses, surveys and industrial valuations. Van Ameyde has: • The professionals • The international network of offices • The unrivalled ECHO IT system We tailor services to customer requirement throughout Europe and beyond, allowing you to focus on your core business!
Vodafone Malta Vodafone House • Msida Valley Road • B’Kara, BKR9024 • Malta Tel: +356 9211 1401 / 332 Fax: +356 9211 1358 Email: ipsales.mt@vodafone.com Web: vodafone.com.mt/bandwidth Vodafone Malta is proud to be the local provider of choice for high-speed bandwidth, hosting & co-location services and international private leased lines. With its very own submarine cable, Vodafone is connected to the land transmission system for onward connection to Milan where redundant international carriers route all traffic to anywhere around the world. Businesses can also opt to co-locate their equipment in a carrier-grade data centre equipped with 24x7 surveillance & monitoring, resilient uninterrupted power supply, fire frightening & prevention systems, climate control and maximum access security procedures. Vodafone guarantees 24x7 technical support, multiple carrier connectivity and an outstanding level of service that is synonymous with the Vodafone brand.
MALTA INSURANCE REPORT
HSBC as your International Business Bank in Malta. Malta has earned itself a firm reputation as a well-
So just tell us your ideas and needs and we will guide
regulated centre for financial services and international
you towards realising them with proactive advice and
trade. Its strategic geographical location at the centre
personal support.
of the Mediterranean also makes it easily accessible from major destinations. All this together with the
For more information on how HSBC’s International
legislative and favourable fiscal framework, which is in
Banking Centre in Malta can assist your business
line with EU standards, has enabled the Maltese
expansion please contact:
economy to develop strongly and expand further. Charles Cini HSBC Malta’s International Banking Centre represents
Senior International Banking Manager
a wealth of financial sector expertise that provides a
Business Banking Centre
one stop solution for those companies seeking to
Mill Street
locate their business into Malta.
Qormi QRM3101 Email:charlescini@hsbc.com
HSBC can provide you with a real local insight and
Telephone: +356 2597 2678
understanding to help you set up or expand your
Business Customer Service: +356 23808000
business in Malta. Our range of products and services,
Website: hsbc.com.mt/businessbanking
including Electronic Banking, Trade Finance, Receivables Finance and Payments and Cash Management, will enable you to navigate through any challenges you may be faced with.
Business Banking
Approved and issued by HSBC Bank Malta p.l.c., 233, Republic Street, Valletta VLT1116
63851
malta
flawless structure seamless opportunities Malta is host to a myriad of captive re/insurance companies, protected cell companies and cells that have come to enjoy the domicile’s stable regulatory environment and EU membership benefits. Malta offers re/insurers and cells:
European Union Membership - Malta’s status as an EU member allows companies and cells the ability to passport their services throughout the European Union and EEA states. Maltese insurance law and regulation implements all relevant EU directives. Redomiciliation Legislation - Companies established in other countries can seamlessly transfer to Malta without any break in their corporate existence.
Protected Cell Legislation - Protected Cell Companies can be incorporated in Malta, enabling cell promoters to write insurance through a cell. The law ensures proper protection and insulation of cell assets and liabilities from those of other protected cells and the core of the protected cell company.
A Stable Regulatory Framework - The Malta Financial Services Authority (MFSA) is reputed to be “firm but flexible” - encouraging discussion with promoters at all stages of an application process and also on an ongoing basis. Extensive Double Taxation Treaty Network - Malta has over 45 tax treaties with various EU and non EU countries.
more information on:
www.financemalta.org
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FinanceMalta - Garrison Chapel, Castille Place, Valletta VLT1063 - Malta | info@financemalta.org | tel. +356 2122 4525 | fax. +356 2144 9212 FinanceMalta is the public-private initiative set up to promote Malta’s international Financial Centre
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