Brexit – PKF promotes Captives in London

What happens in the insurance market following the invoking of Brexit? Will this have any ramifications or changes in domiciles of Captives? So far there are more questions than answers – one will need to look out for unique opportunities but all agree that it is early days to forecast how Brexit can affect UK, Malta and other EU members.

Captive owners and insurers have a maximum of two years from the triggering of Article 50 to formulate any contingency plan, as we know that the Brexit day won’t come before summer 2019. It goes without saying that maintenance of access to European markets, in particular financial services, is a key objective for the UK in its negotiations, although certain EU leaders have already made objections to the UK’s wish to “cherry pick” particular options and benefits. Typically, both UK- and Gibraltar-based insurers are writing risks into other EU territories through the ‘passport’ provision as opposed to having a separate regulated entity in that jurisdiction; or EU based captives and insurers writing UK or Gibraltar risks, without a separate UK regulated and capitalised entity.

Press comments are already beginning to speculate on this, with the likes of companies in Gibraltar, being a dependent territory of the UK, pondering on the possibility of seeking alternative domiciles, although there is no rush as just in case Gibraltar forfeits passporting rights there is a good transitional timeline to allow for proper planning of the situation for affected captive owners. Do not be surprised that Dublin and Luxembourg are rumoured to plan road shows in Europe to catch the flow.

Nonetheless the outcomes are uncertain. Conversely any insurer may after Brexit need an additional licence to conduct insurance business in the UK. The EU captive insurer may need to form a UK branch or a new UK entity, particularly if it is insuring compulsory classes such as employers’ liability and third-party motor liability risks in the UK. An alternative would be to use a UK insurer to front the risk.

One may well ask, apart from Brexit, with so much competition, what can Malta offer which will sets it apart from other centres such as the Isle of Man, Channel Islands, Luxembourg, Dublin and the Caribbean? The answer is: a flexible and fair regulation, a competitive fiscal regime, over 70 double tax agreements, a stable government and quality financial services and unique regimes such as the Protected Cell Company legislations available to Malta. In this context, PKF Malta offers, apart from the core internal and external assurance services, specialised surveys within the local industry.

Being an independent member firm of PKFI, it works closely with international offices to deliver technical solutions to the local insurance industry. Due to continued training of staff in all aspects of insurance, PKF has the ability to give a tailor-made service which goes beyond mere compliance, thus offering a whole range of value enhancing tasks. Typically, one can mention the attendance in 2016 at the SIFMA – Insurance and Risk Linked Securities Conference in New York, having an opportunity to discuss with experts emerging trends – particularly concerning the ILS market.

This sector is becoming more popular and in the process expanding the concertina of new products to cater for a more diverse range of cedents, such as captives. The ILS vehicle provides a means by which the captive may seamlessly transfer its catastrophe risks, other than solely relying on the traditional reinsurers. Granted this market is still in its early stages, yet in the same way the non-traditional use of ILS is gathering popularity to provide capacity for embryonic cat risks, such as cyber risk and operational risk.

It is evident that opportunities for growth in the US market are opportune for Malta as an EU jurisdiction. The harvest is ripe for those who venture forth. It is pertinent to note how last year with the support of FinanceMalta, PKF participated in two promotional events in New York.

Both events aimed to promote Malta as a domicile of choice.  Questions covered topics such as migration, what does it entail, how to survive Fatca and CRS, what should investors look out for and finally what are the advantages in a European domicile. All events were well patronized and attracted a gathering of insurance consultants, risk managers and legal advisers in the field.

It served as a catalyst to place Malta on the radar screen whenever insurance managers are asked where to domicile in Europe in the shadow of Brexit. The event attracted interest from large captive managers the likes of AON, JLT Marsh and R&Q. In attendance were industry service providers providing technology solutions the likes of Verisk Insurance Solutions, Intralinks and Rante, apart from legal firms, investment managers, banking executives from Wells Fargo and Barclays, rating agencies and heads of state regulation in Delaware.  A common question from participants was about regulatory and fiscal barriers for US companies wanting to host risks in their European vehicles.

A tax expert from the PKF New York office explained in simple terms what migration entails, how to survive Fatca and CRS – essentially what risk managers should look out for. The momentum generated by the US shows encouraged us to continue in our efforts in 2017, hence attending the Captive Owners Summit this week in London.

The Summit is strictly by invitation to a select group of captive owners.  Delegates to the event can benefit from the opportunity to meet and share experiences with other insurance buyers, and learn more about how they are tackling the challenges of delivering value and innovation for their captives. The 2017 event will take place on 9 February at the Clothworker’s Hall, London. Unlike other captive owner events, the Captive Review Summit is a smaller, more intimate forum, where delegates can benefit from a highly bespoke programme of roundtables, networking and educational sessions, all carefully curated to meet their specific needs and interests.

Each roundtable is led by an experienced captive owner, alongside a respected consultant. Talking of networking, it is opportune to recall how 2016 saw the fruit of the labours by the EU Commission to introduce complex Solvency II rules. This was a milestone regulation which took a decade in the making and ventured new concepts such as Pillar I, FLAOR (Forward Looking Assessment of Own Risks), Pillar II, Pillar III, management and personnel, costs incurred to implement new software as well as the perception of the insurers in view of the regulator.

The regulation covered all insurance licensed firms including Insurance Principals (Insurers and Reinsurers), Captives and Protected Cell Companies (PCC). One augurs that the risk-based approach of Solvency II will continue to evolve and serve as a catalyst for risk managers overseeing that capital and the value allocation thereof is properly aligned to underwriting criteria.

Back to Brexit one may conclude by quoting data from Financial Conduct Authority in the UK which plainly illustrate the scale of the potential problem as it reveals 5,476 UK-registered firms which hold at least one passport to do business in another EU or European Economic Area member state. With A.M. Best warning that the removal of passporting rights of the UK following Brexit will have a weighting on UK insurers, with new setups in Europe coming at a cost, with £7.3 billion of premiums currently written in London which may be directly affected by a change in rules. This is apart from just over 8,000 companies authorised in other EU states to use these rules to do business in the UK – this is a double-edged sword. The future after Brexit for risk managers in UK may pose unprecedented challenges.

Danielle Hermansen ACII Chartered Insurance Risk Manager, 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, specialising in commercial business. She has more recently worked in the captive insurance management industry.