PKF to promote Malta Captives in New York

PKF is to promote Malta at a conference, fully supported by experienced captive insurance managers and risk management professionals, for a day of world-class networking in New York. The avenue is the prestigious Bar Association building located at 42 West 44th Street in New York, USA.

The main topic of this conference is to see what Malta can offer to US Captives seeking to re-domicile or open up subsidiaries in the EU to tap into their European risks. One may well ask, with so much competition between EU domiciles, what can Malta offer in the insurance sector which sets it apart from other offshore centres such as the Isle of Man, Channel Islands, Gibraltar and of course the Caribbean stalwarts such as Bermuda, Barbados and Cayman Islands?

The answer is flexible and fair regulation, a competitive fiscal regime, over 70 double tax agreements and all the financial services support available at a high professional level.

The MFSA, Finance Malta and MIMA have been invited to take part and are showing interest, while a lineup of confirmed prominent speakers include individuals with years of experience in merging the needs of US captives to re-domicile or open up branches in the EU.

To start with, Hugh McCormick is one of the keynote speakers. He is a partner at Duane Morris LLP, co-author of an actuarial textbook, ‘Insurance Industry Mergers & Acquisitions’, and has published various articles on insurance securitisation. He was a principal member of AXA’s legal team in the demutualisation and acquisition of interests in The Equitable Life Insurance Society of the United States, and was similarly involved in later demutualisation transactions.

Other speakers include Bill White, managing principal for Acuity Strategic Consulting, who has specialised in developing alternative risk transfer (ART) transactions and captive insurance entities and is adept at identifying market characteristics critical to developing strategic business performance objectives. He has an extensive background in underwriting, consulting, and strategic planning and has demonstrated exceptional skills developing and managing operations in insurance and reinsurance markets;

Kenneth Croarkin, partner at EisnerAmper, who leads a number of Statutory and GAAP external audit engagements, and also provides internal control consulting services to US insurance companies and insurance brokers. He has over 20 years of professional experience; and Nicholas Frost, president at R&Q Quest Management Services Limited, president of R&Q Captive Management operations in Bermuda. He has over 25 years experience in the insurance industry and has specialised in captives in Bermuda since 1988. Nicholas has expertise in Bermuda law, investments and banking.

It goes without saying that a number of jurisdictions are active to pursue Captive owners and reinsurance companies, to re-domicile, so one may ask in the context of Malta, why are the numbers so modest and what can be done to overcome the challenge to attract more investors.

Malta continues in its efforts to attract more captives and build on its excellent regulatory reputation, efficient tax structure and competitive operating costs. With its respectable number of 62 insurance companies, nine captives, 12 PCC’s with 27 cells and eight insurers of domestic origin, it is pushing ahead to attract quality not quantity, but of course the numbers are important and no effort is to be spared to expand the internal market.

The PCC concept has also been taken further to include insurance intermediaries and now SCC (Securitisation Cell Companies). In addition, clear-cut legislation facilitates the re-domiciliation of insurance and reinsurance companies and/or captives in Malta without the need to be wound up or re-incorporated. Setting up and cost of running these companies in Malta is reputed to be on average 60% less compared to other EU jurisdictions.

One is expected to see more US captives based in the Caribbean to re-domicile onshore in Europe. One of the giants in the re-insurance world is Bermuda and as a premium jurisdiction it has proved itself to be an excellent innovator of risk products and re-insurance vehicles, but its offshore status places limitations on how efficiently it can provide solutions for continental European insurance business, now trading under Solvency II regime. 

For instance non-European insurers can easily set up vehicles, including cells as fronting facilities in Malta, in order to reduce their EEA fronting costs. But how can US captives domiciled in Bermuda benefit from advantages of Malta’s credentials as an EU jurisdiction? Even though Bermuda has moved a step closer to achieving Solvency II equivalence, this started late last year, after it announced a delegated act regarding the equivalence of the supervisory regime for insurance and re-insurance undertakings, which was submitted for approval at the EU Parliament and Council. This is now under a three-month scrutiny period. 

It is important however, to note that Bermuda’s captives and Special Purpose Insurers (“SPIs”) remain out of scope of the Solvency II equivalence assessment. This would mean that a US captive owner wanting to set up an insurance vehicle to insure European risks or enter the insurance linked securities market, will find that it is mandatory to set up in Europe. 

It is common knowledge that an insurance vehicle domiciled in an EU member state can provide cover for risks across the entire EU, subject to local regulatory requirements and thanks to this facility, most captives take advantage of the EEA freedom of passporting to write insurance directly without a fronter. 

As an EU member state and EIOPA member, Malta has continually contributed to the development of Solvency II and its expertise has grown thanks to the open dialogue PCCs and insurance management companies have had with MFSA, the local one-stop shop regulator.  

One of the challenges faced by captives is to assess which structures can reduce the amount of collateral that becomes trapped and the ongoing costs of fronting arrangements.

One other point of consideration is the treatment of fronting partners to offshore captives as opposed to onshore. Typically a Bermudian Captive would use a licensed insurance company as the fronter to write business in the EU, and the captive will then re-insure the fronter. It is common to expect that the demand for collateral will be driven by the fronter’s requirements, based on its own risk assessment, and invariably it will be a matter of commercial negotiation between the parties.

However this has disadvantages. There are no general guidelines in EU domiciles which limits or controls the amount and type of collateral that must be provided to a fronting insurance company. It is also a known fact that fronting partners assess offshore differently to onshore captives.

This collateral is trapped money which may be utilised elsewhere, so many do find that the cost of setting up a cell in an EU domicile would be more competitive, whilst having full control on its risk management tool. 

This is an opportunity Malta needs to tap into, as it has established itself as one of the domiciles of choice within Europe for captive insurance and re-insurance companies. Operating from Malta, utilising the freedom to provide services provisions that operate between EU member states, it can insure or provide insurance services to the vast European insurance market.

The ability to set up branches and freedom of services are important principles for the expansion of the European Single market. Rules make it more difficult for insurance companies from non-EU countries to gain access to the EEA, on the other hand, the main aim of Europe’s “equivalence assessment” is to ensure that a third country’s supervisory system guarantees the same protection and good governance as under the Solvency II regime.

Malta continues to enjoy a positive advantage for (re) insurance companies seeking to establish themselves in Europe. This is because such companies do not suffer additional financial costs associated with both the establishing and running of a fronting insurance company, therefore remaining an attractive vehicle to explore investment opportunities. 

Let us all meet in New York Captive Conference in the first quarter of 2016. For a copy of the programme contact the writer at PKF Fiduciaries, 35 Mannarino Road, Birkirkara, tel. 21484373, or 21493041, email [email protected]:- 

Danielle Hermansen ACII Chartered Insurer, Mgt (Maastricht) is a director at PKF Fiduciaries International Malta Limited. She has been in the insurance industry for 15 years, working both as an underwriter and broker, and specialising in commercial business. She has more recently worked in the captive insurance management industry.