The captive insurance industry is getting mightily competitive. There are more than 60 active domiciles, according to CICA’s domicile listings.
The captive insurance industry is getting mightily competitive. There are more than 60 active domiciles, according to CICA’s domicile listings. Domiciles from the US, Europe and the Caribbean contribute the greatest share to this figure, while domiciles from Canada, South America and Asia also feature. New domiciles are also entering the captive business—the US State of Florida’s captive legislation became effective on 1 July. With so much choice, captive insurance companies will look to match a domicile to its individual needs, meaning that one-size-fits-all domiciles could be overlooked.
This underlines the importance of domiciles differentiating themselves. Each jurisdiction needs a unique selling point, and while it may not be the only reason why a captive insurance company chooses a particular domicile, it acts as an additional benefit that a captive insurance company will not be able to get anywhere else.
Malta is a domicile that understands the importance of differentiating factors. When it became a member of the EU in 2004, it moved quickly to implement Protected Cell Company (PCC) legislation.
Clive James, the COO of Kane, which recently moved its Malta office to new premises as it looks to expand its captive and life and pension administration businesses on the island, says: “PCCs were first established in Guernsey in 1997. A number of domiciles quickly recognised that they provided an alternative market potentially for smaller captives, but also that they were a much more efficient way of using capital. The upfront costs and running costs are less in a PCC, and also they’ve proven to be robust structures. Malta recognised that if it wanted to differentiate itself from its competitors in the EU, the PCC legislation could help achieve this.”
Dr Matthew Bianchi, a partner in the insurance and pensions practice at Malta-based law firm Ganado & Associates, Advocates, explains that a PPC is a normal trading company with the ability to establish ‘cells’ within itself, so that assets that are attributable to the cell (cellular assets) can be segregated from assets that are not attributable to the cell (non-cellular assets).
He adds: “The liabilities of the core—as the non-cellular assets are known—may not be satisfied out of the assets of the cell. Seen the other way, creditors of a cell have their claims insulated from claims of creditors of the core and of creditors of other cells. Our law provides for mechanisms which ensures this principle remains satisfied at all times.”
Captive owners subscribe to cell shares that are issued by a PCC in order to establish cells in that PCC. Bianchi says: “The proceeds of the cell share issue constitute the first cellular assets attributable to the cell. While the core of the PCC is capitalised to meet minimum capital requirements in terms of current solvency legislation, the cell is capitalised with any additional capital that will be required in order to carry on the proposed operation through the cell. Compared to standalones, cells may present a less capital-intensive alternative. This prospect may be particularly attractive to small and medium-sized captive owners.”
“PCCs are used for financial products and insurances, ranging from financial warranties right through to smaller captives,” adds James. “We’ve also seen some transformer business and life business go through PCC structures as well. The reason they are so capital efficient is because the capital is in the core. You don’t need to put two or three million euros in to actually set up the business. This is one of the reasons why they are becoming increasingly popular in Malta.”
Malta’s PCC ability is the tip of the iceberg. As a part of the EU, it also offers captive owners easy access to the EU through the passporting regime, an available regulator and lower costs when compared to other EU domiciles. It also enables captive owners to establish Incorporated Cell Companies (ICCs) through regulations that were enacted in 2011, says Bianchi.
James adds: “What Malta has sought to do is capitalise on the many benefits it can offer from a captive perspective in what is a relatively competitive market place, and has put in place a regulatory structure which is focused on captive insurance rather than the broader general insurance market.”
To stay competitive, Malta has to get innovative, according to Bianchi. He says that innovation is a key component to the success of captive insurance, especially in light of the current economic and regulatory scenario.
“Though innovation may consist of incremental improvements as for instance improvements to pricing and the understanding of risks, innovation of the disruptive type is also key. We understand that the application of Solvency II will likely herald a period of innovation in the insurance market at large including in the captive insurance and alternative risk transfer sphere. Malta has already confirmed its aptitude to innovation: It is the only EU member state with protected cell and incorporated cell legislation on its statute books.”
Although Malta has differentiated itself from its European competitors and focused on its captive insurance offering, this does not mean that the island will rest on its laurels. James points to Munich Re’s decision to set up in Malta—“from a reinsurance perspective, [that] is a fairly big move”—and the fact that the island is looking at insurance-linked securities (ILS), as indications that Malta does not consider itself to be a niche captive insurance domicile.
James says: “I would add that while [Malta’s] legislation is capable of dealing with such structure, it’s also important to make sure the infrastructure is there as well. The ILS is an area that we at Kane are closely involved in, but at present much of this business is conducted by our operations in Cayman and Bermuda. At the end of the day, however, it’s a finite market out there and Malta has to recognise that it needs a wide skill set to expand on their current business model.”
As a captive insurance domicile, Malta is doing the business. There are 13-affiliated insurance and reinsurance companies (as pure captives are known in terms of Malta’s insurance legislation), eight PCCs, 17 protected cells and 25 insurance principals operating from Malta, says Bianchi. During 2011, the annual gross premium written for entities under management was nearly €1.8 billion, according to Malta Insurance Managers Association figures. Innovating to stay ahead of competitors will help Malta to continue to attract captive insurance business to its shores, and as time goes on, it can decide whether it needs to diversify so that it can attract other types of business. CIT
