More Captives – PKF conference in New York

Malta is making a bid to attract Captives seeking to re-domicile or open up subsidiaries in the EU to tap into their European risks.

The bid is being made by PKF Fiduciaries International Malta Ltd which is promoting Malta at a conference being held in the first quarter this year, fully supported by experienced captive insurance managers and risk management professionals, for a day of world-class networking in New York.

The venue is the Bar Association building located at 42 West 44th Street in New York, USA. The target sector is Bermuda with its 958 captives and reinsurance companies. 

The setting up and cost of running these companies in Malta is reputed to be on average 60% lower compared to other EU jurisdictions.   

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 taxation agreements and all the financial services support available at a high professional level. 

MFSA, Finance Malta and MIMA have been invited to participate, whilst 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. 

It goes without saying that a number of jurisdictions are active to pursue Captive owners and reinsurance companies to redomicile, 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. 

In November 2015 the European Commission announced that it found Bermuda and the Bermuda Monetary Authority (BMA) fully equivalent for all regulatory purposes under the European Union’s Solvency II regime. This however specifically excluded Captives. 

Now that the captive industry in Bermuda is well-established, many of the original benefits that offshore domiciles offered have been reduced. As both captives and onshore domiciles continue to grow and become more sophisticated in their structures, the reasons for European captives domiciling in Bermuda have greatly diminished.

The Solvency II requirements will likely see Europe-based captives based outside the EU to re-domicile onshore in Europe. Bermuda, the leading captive domicile in terms of numbers, is looking to align its captive capital and solvency rules with those of the European Union in order to remain an attractive domicile for its reinsurance companies, however since Captives have been left out of the equivalence project this could provide an edge to European domiciles at some point in the future. Is Malta geared to be at the forefront as a domicile of choice in Europe, hence the quest to attract them? 

Bermuda captives may be losing their edge and counteracting this by widening their distribution channel, primarily by making acquisitions in Europe and the US. Several have moved into the Lloyd’s market, motivated by the perception that higher capacity atypical business is placed in the London market, more than anywhere else in the world.

Other companies used the formation of overseas subsidiaries, rather than acquisitions, as a way of enhancing their European onshore distribution. The trend in the past has been to establish insurance, captives or reinsurance subsidiaries in Dublin with branch offices in European insurance centres such as London or Zurich. Alternatively, other (re)insurers establish a base in Switzerland to access the European markets. 

The Bermudian market is represented by 958 captives, by the end of August 2015, the BMA had reported the registration of 23 new (re)insurers and 14 special purpose insurers since the beginning of 2015. The most significant companies from a multinational perspective were the Class 4 (re)insurers, including property catastrophe reinsurers and global multiline reinsurers.

The market has evolved since 2001 and most of the start-ups would now have a strong presence in the US and European markets, mainly to take advantage of the capacity shortages present back then. Most have differentiated from property to casualty and multiline reinsurance.

The US market is the source of most of Bermuda’s capital, followed by Europe. This is evident in the traditional (re)insurance market as well as the new alternative capital in the form of Reinsurance sidecars, conventionally referred to as “sidecars”, and also cat bonds. Bermuda is proud of two premier global companies, ACE and XL Catlin, both of which have expanded out of their original Bermuda bases through a series of acquisitions.

Both companies reinsure much of their worldwide risks back to Bermuda to take full advantage of its tax free status. The risks underwritten in Bermuda would traditionally be limited to property catastrophe, excess of loss casualty, excess property and life reinsurance.

The trend of going global has been followed by the aforementioned 2001 start-up companies such as Endurance Specialty, AXIS Specialty, Allied World and Arch Capital, all of which operate as combined insurance and reinsurance companies writing most lines of property and casualty business with a presence in Europe through acquisition or by establishing Dublin-based (re)insurance subsidiaries and branches in London or Zurich.

More Bermuda (re)insurers will concur to write their treaty books through onshore operations in the US and Europe, partly to be closer to their customers, and partly to avoid staffing-up their Bermuda offices.

Over 1,500 captive insurers are currently licensed in the US with many others domiciled outside. Of the US domiciled captives, over 980 (in 2013) were domiciled in Vermont, being the leader in captive friendly legislation.

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.

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 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, in fact, it announced a delegated act regarding the equivalence of the supervisory regime for insurance and reinsurance undertakings, which was submitted for approval at the EU Parliament and Council. This is now under a three-month scrutiny period. 

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 PCC’s and Insurance Management companies have had with MFSA, the local one-stop shop regulator.  

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. 

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