Malta’s insurance market continued its growth last year with the total number of insurance undertakings increasing by five percent, from 60 to 63 (without counting the individual cells), while total gross premiums reached nearly €4 billion.
Malta’s insurance market continued its growth last year with the total number of insurance undertakings increasing by five percent, from 60 to 63 (without counting the individual cells), while total gross premiums reached nearly €4 billion. The Malta Financial Services Authority (MFSA) statistics show that as of 31 December 2017 there were 10 captives, eight pure captives and two protected cell companies (PCC). Captive statistics can, however, be misleading in Malta as the restrictive definition of a pure captive means many of the PCCs and cells are not recognised as captives.
Ian-Edward Stafrace, chief risk and compliance officer at Atlas Insurance, explained: “The definition of a pure captive is very narrow, and the difference in licence conditions is minimal while third-party writers get more flexibility and therefore prefer the wider license.”
The domicile continues to see the benefits of its position as the only full EU member state with PCC legislation and an EU single market passport, which helps avoid the need for external fronting insurers.
A large part of the growth in 2017 came via PCCs, and with Gibraltar, the only other EU domicile with PCC legislation, likely to lose EU passporting rights post-Brexit this growth is expected to carry on.
Continued importance of PCC legislation
In 2014, Malta’s PCC legislation was extended to cover securitisation cell companies (SCC), making them the first EU member state to adapt cell structures for insurance-linked securities (ILS) transactions.
According to Edmond Zammit Laferla, partner at Mamo TCV Advocates, the positive effects of the legislation is still being felt in Malta.
He said: “We are seeing increased interest in the local PCC market. New cells are being taken up potentially as a more cost-effective alternative to users of the standalone captives because a cell structure is cheaper to run in terms of cost and in terms of captive requirements are even more efficient.”
Zammit Laferla predicts a potential shift across Europe, with captive owners moving away from the use of standalone captives and toward cells, which he says could be beneficial for Malta.
“Right now we are seeing the shift from the standalone captive to the cell.”
“The new horizon is captives that can be used for non-traditional risks, such as cyber risk or employee benefits and I think Malta could stand to gain there because these are new risks which are falling within the captive insurance markets.”
Stafrace says the SCC legislation is an example of Malta’s positive regulatory environment and the way in which the “government and regulators keep creating and enhancing regulations aimed at enabling rather than stifling innovation, without sacrificing stakeholder protection”.
Brexit
Looking ahead, it is impossible to ignore Brexit and the gargantuan impact it will have on Malta’s insurance market.
If the UK were to leave the single market during Brexit, it seems likely it will lose its EU passporting rights while companies based in Malta, as an EU member state, will no longer be able to sell insurance into the UK market.
As a British overseas territory, Gibraltar-based insurers will still be able to write insurance for the UK market post-Brexit, meaning we are likely to see movement between the two domiciles as insurers look to ensure continued access to their target market.
Nigel Feetham, partner at Hassans, refers to this potential movement of insurers as a “two way Brexit strategy”.
According to Feetham: “The UK Government has publicly confirmed the continuation of the common market between the UK and Gibraltar post-Brexit.”
“This should preserve passporting rights for Gibraltar-based companies writing business into the UK and therefore provides a Brexit solution that say a Maltese (or indeed other EU company) would not have.”
He continued: “At the same time there are Gibraltar-based insurers that write into the EU (non-UK business) that need an EU-based post-Brexit solution and Malta can be an attractive domicile for them.”
One such relocation has already taken place. In December 2017, St Julians Insurance Company (St Julians), a UK-focused motor insurer, redomiciled from Malta to Gibraltar to ensure access to the UK market post-Brexit, and Zammit Laferla from Mamo TCV, suggested more movement may be on the way.
He said: “The traffic is increasing. Many companies based in Gibraltar have included the option of redomiciling to Malta as part of their hard-Brexit contingency plan.”
“From my contacts in the local market, I know that there are other companies based in Gibraltar are doing the same. Malta is the closest to Gibraltar in terms of the applicable legal framework, corporate environment, political scenario and has many of the main attractive factors, so I think Gibraltar-based companies would prefer moving to Malta other than moving to larger jurisdictions such as Luxembourg.”
“We haven’t seen any captives as yet being directly affected by Brexit, most probably because the risks they insure are international. As yet we haven’t seen any major movements out of Malta for captives.”
While there may be increased movement away from Malta, according to Romina Bonnici, senior manager of regulatory and compliance at Mamo TCV Advocates, the potential benefits of Brexit are undeniable.
Bonnici said: “There are opportunities for Malta post-Brexit. The 29 March 2019 is fast approaching and UK entities are now pressed towards taking a more concrete decision about their future.”
“Insurance undertakings which undertake cross-border business in the EU see Malta as a potential jurisdiction for setting up a newly domiciled-entity and a number of them have already made that decision including discussing branch options with the Prudential Regulation Authority encouraged by their December consultation paper.”
Stafrace had a similar view on the issue and suggested the ambiguity around the Brexit terms represents an opportunity for Malta.
He said: “The uncertainty behind Brexit, particularly on what market access UK and Gibraltar will be granted, is an opportunity for Malta to provide support and solutions. In the medium term, Malta will likely be the only member of the EU single market with insurance protected cell legislation.”
“Should a hard Brexit become a reality, companies could maintain direct access to 30 member states of the European Economic Area (EEA), through Maltese Cells. Such could retain or reinsure back the risks.”
“On the flip side, access to the UK market for EU based entities will possibly be hindered and the two year implementation period proposed in December 2017 is yet to be fully agreed.
Some Malta-based companies and cells cover UK risks and therefore would commence triggering their Brexit contingency plans due to the remaining uncertainties.”
ILS
One potential avenue for growth in Malta is the ILS market, and according to Zammit Laferla, the sector is primed for expansion despite the domicile having been “the last kid on the block”.
Zammit Laferla explained: “From an international perspective the ILS insurance market is growing exponentially and it is now tapping into the non-traditional areas such as the health and the life insurance markets.”
“Malta could be the ideal jurisdiction because our legal infrastructure is based on the different ILS legislative frameworks from around the world and we have taken the best aspects of all of those.”
“Now it is a question of attracting high profile names because one high profile name will attract the others, that’s how the market works.”
“All of the local players are pushing ILS and firmly believe in our framework. It would be very advantageous to make use of the ILS structure, and I think it’s a question of getting the first couple of big companies here.”
Emerging technologies
After their slow uptake of ILS, the Maltese Government are determined not to be the last kids on the blockchain and have targeted emerging technologies as an area of expansion.
Stafrace explained: “The Government has made making Malta the blockchain capital of Europe a priority. These are exciting times with our financial services community merging with the tech start-up community to shape the future of this new sector.”
According to Stafrace, work is underway between the government and regulators to identify the changes in the domicile’s legislative and administrative framework that are necessary to become a leader in blockchain.
He added: “Technology has the potential of transforming the entire insurance value chain including product development, customer acquisition, underwriting and claims management.”
“With the increasing purchasing power of millennials and digital natives, more insurance is being purchased directly online. With full access to the EU single market, cells based in Malta can be ideal digital insurers.”
Zammit Laferla said: “This year it is looking like Malta will develop a regulatory framework to govern the use of blockchain technology, which I think would shall place Malta on the map in this new digital era and shall push forward the application of this innovative technology in different sectors including the insurance industry, which continues to experience an intriguing transformation of the traditional underwriting, claims handling and fraud prevention processes for the direct benefit of policyholders.”
Warning signs
Malta’s promising future is somewhat shrouded by some recent criticisms from the European Commission. It was one of seven member states highlighted by Pierre Moscovici, European commissioner of economic and financial affairs, taxation and customs, as having “aggressive” tax regimes.
The 2018 European Semester Country Report on Malta accused its tax rules of having the potential to “facilitate aggressive tax planning” and said the current anti-avoidance provisions in place were “not detailed or strong enough”.
Moscovici said the tax practices were problematic due to their “potential to undermine fairness and the level playing field in our internal market and to increase the burden on EU taxpayers”.
He warned that the European Commission “must ensure that fair taxation becomes a rule—a rule without exceptions inside and outside the EU”.
