Promoting Captives in Toronto

Delegates from PKF Malta shall for the fourth year be attending the opening of a two-day Canadian Captive and Corporate Insurance conference planned to open on 27 May at the Sheraton Centre Toronto. This brings together Canada’s premier captive insurance and risk management professionals for two days of world-class networking and cross-border debate on industry trends.

Undoubtedly it is Toronto’s leading insurance event and is attended by leading risk managers and representatives of leading juridictions as an opportunity to showcase their domicile. They sing in competition, trying their best to attract captive owners by giving presentations, case studies and unique selling points expertly discussed in various panels.

The PKF delegation will speak on a hot topic concerning the challenges facing captive insurance managers in Europe with the arrival of Solvency 11 regulation expected to start by 1st January, 2016.

Let us define a captive. The International Association of Insurance Commissioners (IAIS) defines a captive as “an insurance or reinsurance entity created and owned, directly or indirectly, by one or more industrial, commercial or financial entities, other than an insurance or reinsurance group entity, the purpose of which is to provide insurance or reinsurance cover for risks of the entity or entities to which it belongs, or for entities connected to those entities, and only a small part if any of its risk exposure is related to providing insurance or reinsurance to other parties.”

So in summary one can say, a captive in its simplest form is a majority owned subsidiary created to provide insurance to its non-insurance parent company. One may well ask with so much competition from offshore financial centres what can Malta offer which sets it apart from other jurisdictions such as Dublin, Luxembourg and of course Caribbean stalwarts such as Bermuda, Barbados and Cayman Islands?

So far with its respectable number of 68 insurance companies, Malta is pushing ahead to attract quality not quantity but of course numbers are important and surely we all agree that no effort by organizations such as Finance Malta (and other associations) is to be spared to expand penetration into the markets beyond fortress Europe.

Practitioners may ask why are the numbers from North America and Canada so modest and what can be done to overcome the challenge to attract more investors. The answer is not easy considering that Finance Malta as the organization geared to promote the sector faces tough competition fielded by established jurisdictions, more so when attempting to attract international companies seeking an alternative EU jurisdiction traditionally offered by tried and tested places such as Dublin, Luxembourg and Guernsey.

Some reflect how in Malta we have wisely tailored our legislation to be close to that of Guernsey, which prides itself to say it is the largest European captive domicile with 344 captives in 2013. Next comes Luxembourg which has 225 captives followed closely by Isle of Man with 125 captives.

Practitioners trying to attract more captives ought not to be discouraged with existing numbers as typically Malta has its own unique selling points – such as being the only EU member state to offer comprehensive legislation on both PCC and ICC and lately RICC vehicles. It is true that Gibraltar is a close second, offering similar facilities with its citizens enjoying equivalence of EU citizens, via a special “UK status”, nevertheless Malta has gradually and steadily developed into a premier financial centre hosting reputable insurance companies, banks and fund/pension administrations.

All this is evidenced by a number of Fortune 100 companies which have captives in Malta with numerous companies from across the world and in numerous sectors being looked after by the country’s insurance managers. The global names of Aon, Marsh, Willis, Heritage, JLT and Heath Lambert can be found in competitive convoy co-existing with the indigenous insurance management companies. Readers may ask why on a global scale are captives so numerous and what is the secret of their success?

Really and truly captives act as an attractive alternative to self-insurance, and these have long been used by companies to manage their insurance risks. Traditional captive covers are: General liability with over 30% of captives write this, next is Property (nearly 30% write this) furthermore there are Deductible buy-down for workers’ compensation with 21% and finally Deductible buy-down for auto liability – having the rest.

Moreover, captives are increasingly writing non-traditional coverages:  e.g.: Trade credit, Crime, Cyber liability together with Voluntary Employee Benefits such as critical illnesses, ID theft, pet insurance, group home, group auto and group umbrella are also becoming common. Nowadays, the captive market is as active as it has ever been, with its benefits now attracting worldwide attention quoting Bermuda, Barbados and Guernsey which historically have been the three leading domiciles for captive formations, but in the process there is constant migration of captives testing the waters in other jurisdictions.

Going down memory lane, one recalls the history of the insurance – itself being quite old commencing in the early 1500s, having ship owners which met in London coffeehouses where they retained, shared and transferred the cost of risk associated with their ships, akin to today’s captives.

Later, during the 1700s and 1800s, there were instances of mutual insurance companies being formed by members of a particular industry to provide insurance coverage. Even so the captive concept took a while to catch on. It gained momentum in the 1980s during the hard commercial insurance market, when liability coverage was either unavailable or unaffordable for many buyers.

Over the past three decades, there has been significant growth in the captive market. Today, there are more than 6,000 captives that trade around the world, compared to about 1,000 in 1980. Almost 3,000 captives are domiciled in the Caribbean; 1,200 captives are domiciled in Europe and Asia; and more than 2,000 captives are domiciled in the United States of America.

The most common types of captive structures are the Single-Parent Captive which is a company writing only the risks of its parent which in Malta is known as affiliated company. Captives can be found in a number of domiciles, both onshore and offshore typically formed in tax haven jurisdictions such as Bermuda or the Cayman Islands. Over the years, however, these offshore domiciles have been relocated onshore such as at Vermont and various US states, B.C. Canada as well as EU places like Malta, Gibraltar, Dublin and Luxembourg.

To give an example in Bermuda as the leader, it enjoys an excellent judiciary framework, good telecommunications system, world-class legal and banking systems and the added benefit of an educated work-force. The island also benefits from “economies of agglomeration” in insurance and reinsurance not only because of the concentration of captive insurers, non-captive insurers, and reinsurers but also because of the professional infrastructure including world class bankers, lawyers, accountants, actuaries, and risk management professionals.

In conclusion, one hopes that  Malta can succeed to serve as a entry point for Canadian insurance companies which otherwise have to cede a fronting company to protect their European risks. The main advantages of owning a Malta captive as opposed to a fronting company is lower costs, with access to all relevant pools in EU countries such as Pool Re for terrorism risks, Gareat for French terrorism risks, CCR for French Cat Nat risks, while one cannot underestimate the inherent advantages of writing third party risks, including customer & employee risk and all ‘admitted’ contractual and compliance requirements.

With this in mind, PKF encourages insurance practitioners to congregate at the Toronto event and help fly the Malta flag high among competition from other jurisdictions.