Malta’s presence in the captive insurance market for US groups with European risks is expanding, as its insurance undertaking cells now total 79
Breaking into the US market, home to 333.3 million consumers and a GDP of around US$25.4 trillion, is a significant goal for many European businesses. Despite its allure, achieving success in this competitive arena is challenging.
In the 1960s, European luxury car manufacturers, eager to tap into the booming US retail sector, devised an innovative strategy. They offered American families the opportunity to pick up their new cars directly from Europe, showcasing the premium lifestyle associated with these brands.
These customers enjoyed free flights, luxury accommodations, and private factory tours, driving their cars on scenic European roads before having them shipped back to the US.
According to the publication European CEO, these ingenious overseas delivery programmes hastened the arrival of upmarket European cars on American roads, and despite the winding down of many in the intervening years, many high-end brands still use versions of them in their marketing strategies.
Fast forward to today, and Malta’s captive insurance sector is adopting a similar hands-on approach to attract US businesses. Last year, FinanceMalta, a public-private partnership promoting Malta as a financial hub, for the first time sponsored and participated in the Captive Insurance Companies Association (CICA) International Conference in California. This move, recommended by the Malta Insurance Management Association (MIMA), aimed to position Malta as the ideal jurisdiction for US groups with European risks.
The FinanceMalta delegation included representatives like Elizabeth Carbonaro from WTW and MIMA, Ian Stafrace from Atlas Insurance PCC, Beppe Sammut from Ganado, and Andrea Nurchi from FinanceMalta. Over 500 delegates attended Carbonaro’s session on international domiciles, which proved to be highly productive. According to FinanceMalta’s 2023 annual report, nearly every interaction at the conference generated potential new leads, highlighting the success of this direct engagement strategy.
Seeking innovative mitigation solutions
In the captive insurance industry, meeting these US groups at the source is nothing new — many international domiciles have done so for many years — but the message in this case is somewhat different.
Malta has the unique distinction of being the only EU member state with protected cell company (PCC) and incorporated cell company (ICC) legislation, “providing clients with additional choice and flexibility in how they choose to establish and structure their captive vehicle,” says David Hogg, Aon’s regional managing director for captive and insurance management in EMEA.
Hogg notes: “US companies are continuing to proactively seek new and innovative ways to mitigate increasing insurance spending and better manage their total cost of risk.
“Europe is a geographically and culturally diverse region with differing local regulatory and compliance requirements, in addition to those required under Solvency II, which can create challenges when looking to implement a consistent insurance programme throughout a group.”
Hogg explains that historically, US companies with a European footprint have turned to the commercial market to navigate these challenges and issue fully compliant policies within Europe, which they then reinsure to their North American-domiciled captives.
“The commercial insurer normally charges a frictional ‘fronting fee’ for services provided and often requires supporting collateral from the reinsurance captive,” Hogg adds. “Depending on the volume of premium ceded, these frictional costs can often be significant.The fronting company may also have internal controls and restrictions on the policy form that are insurmountable, regardless of whether the policy is reinsured to a client-owned captive.”
As a result, Aon and others are “continuing to see a trend towards larger companies establishing their own European captives or cells within the Solvency II regulatory environment in order to assume greater control of their insurance programme and to control the frictional costs associated with fronting”.
Traditional P&C lines have typically been the focus of these captives or cells, but more recently, Aon has seen an increase in the formation of European captives to issue professional indemnity, cyber, product recall, and other more specialised coverages in areas where commercial market capacity may be more limited.
For US groups with risks in Europe, PCCs are particularly compelling. Protected cells, which have been a captive insurance capability of Malta for two decades, “are often more cost-effective than owning a standalone carrier or captive, particularly within the EU, where the costs of robust regulation are significantly reduced when shared within a PCC structure,” says Ian-Edward Stafrace, chief strategy officer at Atlas Insurance PCC, which was the first adopter of this type of captive insurance vehicle. He continues: “Malta is the only EU PCC domicile offering direct access to the European Economic Area (EEA).”
Having been active in the UK since 2010 and recognising the challenges Brexit brought, Atlas went one step further in January 2024 and became the first EU-based PCC to obtain a UK branch licence.
This move “reinforces Atlas’ century-long innovation legacy and supports the continuity and growth of seamless cross-border insurance services across the UK and EEA for the cells it hosts,” Stafrace observes.
Malta PCCs provide additional benefits that are attractive to US groups, such as eliminating the need for a fronting partner, while stakeholders raise the bar for captive substances. Stafrace says: “With their shared economies of scale, PCCs can help address substance requirements as cells form part of a broader single entity that provides shared board, governance, key functions, premises, and resources.”
He continues: “Maltese PCCs provide confidence in being onshore in the EU while avoiding the complexities, costs, and time associated with a standalone company.
Furthermore, EU Solvency II recognises cells as ring-fenced funds, meaning there are no minimum capital requirements for individual protected cells having recourse to the core, as these apply at an overall company level. Cell owners retain complete legal protection of their assets from liabilities of the core or other cells.”
For US groups Malta is seeking to attract, the speed and agility with which providers such as Atlas can meet their needs are even more compelling. For instance, Atlas collaborated with a global captive manager on behalf of a client who had a Vermont captive and desired to establish a protected cell to mitigate its exposure to EU-based risks.
Stafrace says: “As discussions progressed, it was clear in December that there would not be sufficient time to license a cell for its 1 January renewal. Atlas underwrote the renewal through its core, thereby reinsuring the US captive, given that it had already received passports to all the countries where the risks were located for the necessary insurance classes.
“Atlas provided a quick solution within a couple of weeks during the holiday season while allowing much more time for the setup of a cell to be considered within the same PCC.”
Meanwhile, Hogg emphasises that swift implementation and the agility of regulators and service providers are crucial for domiciles to effectively address the evolving needs of clients and market participants.
He further explains: “Thankfully, the EU has a highly mature and experienced infrastructure that can support the captive insurance business. The Solvency II regulatory environment is comprehensive, but also proportionate to the nature, scale and complexity of the business to be undertaken, which in turn provides options for organisations to select a domicile which most appropriately aligns with their business strategy.”
PCCs in Malta cater to a wide range of sectors, from risk-financing captive solutions to insurtech innovators retaining underwriting profits. The later client set provides Stafrace with his next practical example of the benefits of the jurisdiction’s PCC regime.
Stafrace says: “In the insurtech space, an intermediary providing embedded insurance established a cell to become its own carrier, thus gaining control over capacity, retaining profits, and expanding offerings across the EU and UK.
“This approach enabled the company to test, refine, and scale its solutions without relying on insurers and without the substantial time, investments, and expenses required to set up an insurance company.”
He adds: “With the pace of change continuously increasing, organisations appreciate the ability to adopt an agile, iterative approach to setting up their insurance vehicles with real options to scale and evolve.
“As an independent PCC host, Atlas also extends the win-win opportunities for global insurance and captive management companies, brokers and consultants, and their customers.”
Given the benefits, it is no surprise to see that Malta’s cell growth continues to outpace standalone companies. Last year, Malta’s insurance undertaking cells grew by three per cent to 79, while the number of non-domestic insurance companies and captives reduced by three per cent to 57, while the total gross premiums written for risks outside Malta in 2023 reached €7.6 billion.
Carbonaro observes that the growth trend for cells “has increased primarily for captives, and primarily those that are not considered to be complex captives, therefore retaining a smaller number of risks”.
She continues: “The cell offers a very cost-efficient solution. The governance structure at the core significantly reduces management time for the cell owner, alleviating a significant burden in the era of Solvency II and enabling the captive owners to focus on their primary underwriting risks.
“The cell structure also gives cell owners a robust platform from which they can operate. The PCC structure will have substance on the ground in Malta, made up of a complement of individuals that have the necessary expertise, experience, and competency to run the captive efficiently with minimum input from the group or with as much input from the group as desired by the group.”
Carbonaro notes: “From a cost perspective, a cell is typically cheaper to run than a standalone captive, so the ongoing running costs will be lower; how much lower will depend on whether the cell is a direct writing cell or a reinsurance cell and the types of risks that will be placed in the captive. Typically, however, cells can generate savings of up to 30 per cent of costs.
“From a capital point of view, the cell does need to be solvent in its own right, so in the case of captives, the primary benefit is that the cell will not need to hold the regulatory minimum capital as this is held within the PCC as a whole.”
“Do I see this trend persisting? Logically, I do, as the benefits are pretty compelling.”
How much of an advantage does Malta have because it is the only EU member state with PCC and ICC legislation? The increase in cells established in Malta, according to Carbonaro, best illustrates the advantage. She elaborates: “Cells are also occasionally seen as the stepping stone into the captive world, so once groups become more familiar with the captive world, or indeed, if groups decide to place more risks into the captive or decide that they want more control or complete autonomy, they are able to convert the cell into a captive. A cell, in particular, allows for a simpler structure at the group level from a European point of view.
“Therefore, while the results of the cell will normally be fully consolidated into the results of the group, from a governance point of view, it allows for less management time, thereby allowing management to concentrate on their business and risks.”
A strategic opportunity for global captives
Malta’s regulatory framework, tailored to understand and enable captives while adhering to EU standards, has been instrumental in the sector’s growth, according to Stafrace. The jurisdiction also boasts an efficient environment with lower operational costs versus other EU domiciles, as well as a highly qualified and experienced local workforce. It is already home to a growing number of insurance operators, and it has EU and OECD-compliant financial and tax regulations, along with more than 70 double taxation treaties.
Stafrace describes the Malta Financial Services Authority as a “well-established, respected, yet approachable regulator”. It is a member of the European System of Financial Supervision, which includes the European Banking Authority and the European Insurance and Occupational Pensions Authority (EIOPA), as well as the Single Supervisory Mechanism within the European Central Bank. Further benefits include a well-diversified and resilient economy, with Fitch affirming the jurisdiction’s ‘A+’ long-term rating with a stable outlook in March and the European Commission’s spring 2024 economic forecast projecting it would have the highest economic growth rate in the EU in 2024 and 2025. He asserts: “Having the euro as its official currency, reliable and well-developed IT infrastructure, excellent flight connections, and a safe and pleasant lifestyle further attract international business to Malta.”
Malta is clearly capable of meeting many captive insurance needs and it is uniquely placed to do so with its PCC regime. And more and more of those US groups that FinanceMalta is reaching out to are learning of these benefits, just as Europe’s upmarket carmakers did with US consumers in the 1960s.
“Malta’s insurance-protected cells provide a strategic opportunity for global captives seeking more efficient EU and UK risk coverage and market access,” Stafrace summarises.
“With its favourable regulations, EU membership, and experienced PCCs and insurance management companies, Malta offers cost-effective, flexible, and agile solutions for businesses seeking to address and thrive through emerging captive insurance challenges.”
Hogg concurs, stating: “A well-educated and multilingual workforce serves Malta’s sophisticated and mature insurance market, which is highly competitive.”
“As an EU member state for over 20 years, Malta is a Solvency II-compliant jurisdiction with a business-friendly environment that supports the insurance industry and provides the ability to establish both reinsurance and direct-writing captives.
“At Aon, we have a hugely experienced insurance management business that provides a full suite of management services to our captive clients in Malta — including many from the US who choose Malta due to the advantages that it can provide.”
Rising competition for Malta’s market
Once interested US groups learn of Malta’s benefits, the work to understand how they can best utilise them to meet their own unique needs is paramount.
Hogg notes: “The strategy, risk profile, and subsequent needs of every organisation will be unique. However, all organisations will need to consider the benefits, costs, and compliance requirements needed to directly write insurance in Europe versus doing so on a reinsurance basis.
“We also need to take into account any specific contractual requirements an organisation may have, the availability of fronting carriers, and the specific operational requirements of certain captive domiciles. We would always recommend that an organisation undertake a detailed feasibility study that would take a holistic view across all European domiciles in order to identify those domiciles best aligned to each organisation’s unique requirements.”
Indeed, US groups considering a jurisdiction will need to understand “the additional governance that is required within a European captive when compared to offshore or US domiciles,” Carbonaro says.
She adds: “Though I believe it is fair to say that even European offshore domiciles have strengthened both their governance and capital structures, so while they might not be at the level of Solvency II, they are taking a risk-based approach both from a capital point of view and also from a governance point of view.”
Carbonaro also points to EIOPA “finally acknowledging that captives carry a much lower systemic risk than normal insurance companies”.
“The reforms, therefore, whilst not being as ‘reformative’ as we would have liked, do go some way towards reducing the regulatory burden on captives, hence allowing NSAs to take a more proportionate approach in overseeing them. Looking at it from a jurisdictional perspective, arguably the interest being shown by other European jurisdictions to develop as captive-friendly domiciles, does create more competition for Malta, however, what impact this will have remains to be seen.”
Hogg predicts captives in Europe will continue to grow and expand into new lines of business and emerging risk areas: “We have seen this in recent years in the cyber market, where clients have continued to use captives to retain risks and/or access alternative forms of capital.
“Employee benefits also continue to grow as a new area for both new and established captives across Europe, and this is a trend we anticipate will continue in the coming years.”
