Opinion - George M. Mangion | Wednesday, 14 May 2008

Captive insurance conference

Given that captives in Malta are slowly but surely making their mark, no stone should be left unturned to provide investors with the knowledge on how to license their own captive. PKF is on the forefront to promote this industry and participated in international conferences in Toronto, Calgary, Luxembourg, London, New Zealand and Dublin. For the second year running they have organised a promotional event to showcase the attractiveness of the island. Set at the prestigious Four Seasons Hotel in central financial district of Dublin everyone is invited to a high powered seminar on Friday 13 June. Registration is recommended but attendance is free. PKF has designed a packed programme which includes tax, accounting, feasibility rules and finally what are the requisites that are necessary for a jurisdiction to qualify as the best domicile where to locate your captive. The agenda is varied and include such items as ‘what are the best 10 practices for a successful captive.’ One may ask what is the relevance of captives to the insurance industry and how does the latest natural disasters affect the solvency of the sector.
Following recent catastrophes, like China’s most devastating earthquake killing nearly 9,000 people in western Sichuan province. It was so powerful that it was reported to have razed 80 per cent of the buildings in one county. It reached a magnitude of 7.8 on the Richter scale. Such disasters which result out of natural causes have led to great hardship to the people in Wenchuan where the dead toll was expected to rise significantly. Other catastrophes happen as a result of political events, that have lead to hardships in the global insurance industry, major insurance companies have realised that the current regulatory regime mainly that applicable to margins of solvency were no longer adequate to cater for the diversified insurer.
Is the insurance market well funded to meet these emergencies? It is all a matter of reflecting on past experiences such as the Katrina hurricane devastation and the resulting massive claims on the insurance sector. Are we doing enough to make sure that companies are solvent to meet policyholder’s claims in such turbulent times? In 2005, the European Commission decided to tackle this issue and develop a regulatory regime that is capable of catering for the today’s conditions while insuring that the EU will have a single regulatory framework, or better still a single European insurance market. This process, known as Solvency II, has lead to the most detailed revision of insurance regulatory principles in recent history. The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) was established by European Directive and comprises representatives from the relative regulatory authorities in all European Union Member States. It is a Level 3 Committee for insurance and occupational pensions following the extension of the Lamfalussy process that is working on recommendations, guidelines and standards, peer review and compares supervisory practices to enhance their convergence. It advises the Commission on directives, regulations, regulatory standards and implementation of the above. CEIOPS is in constant consultation with the industry and is in the process of finalising its final Quantitative Impact Study which will be concluded this year.
It has already issued the results of three studies (QIS1 & QIS2 & QIS 3) and now intends to publish the last one. CEIOPS is currently formulating the calculations used to arrive at the SCR and MCR; to gain further information about the possible impact on balance sheets and the amount of capital required; to dissipate information about the effect of the application of the QIS4 specification to insurance groups. So one may ask why are we adding more layers of regulations on top of Solvency 1?
The answer is simply because the market demands it. Solvency II takes a wider approach apart from the setting of adequate margins. It is intended to incorporate an entirely new regulatory structure demanding insurers to apply a comprehensive risk management framework, composed of risk based capital allocation, the assessment for the risk for solvency capital requirements, and finally the application of principles of diversification and risk mitigation.
Once finalised, Solvency II will establish the minimum capital and solvency margin based on the computation of assets and liabilities while taking a risk based approach. This will lead to an effective streamlining the use of capital within the insurance industry where together with risk spreading, insurers will be able to calculate with improved accuracy their required margin of solvency. In turn the process will benefit all those in contact with the insurance sector ranging from the insurer’s, who will be able to better utilise their capital, to the policy holders who will take advantage of a more efficient allocation of resources. It goes without saying that such efficiency in utilising of scarce resources may lead to lower premiums and greater peace of mind that insurers will not default in payment on claims. Solvency II will provide for a two tier level of control, the Minimum Capital Requirement (MCR) and the Solvency Capital Requirement (SCR). Should an insurer’s solvency margin fall below the MCR the regulator is expected to take serious action against the insurer. Although Solvency II is being designed to provide for a risk based system focussed on the internal model of the insurer, it may not necessarily be feasible for small to medium size insurers as these may find it a complex internal model. For this reason Solvency II shall also provide for what is known as the Standard Approach. This approach will nevertheless be a risk based approach, similar to that of the internal model, however because of its wide application it will make use of conservative solvency margins albeit certain inaccuracies of this model does not impinge on a specific risk profile. The relative directives and regulations also provide for further restrictions of what the minimum own fund levels may be comprised of. How does this regulatory regime affect local business? Indeed, we know that the solvency margin requirements for Captives in Malta is based on EU Directives. For Captives carrying out general business the solvency margin under the existing regime is calculated either on a premium basis or on a claims basis, whichever is the highest. While for Captives carrying out long term business, the solvency margin is calculated according to the class in which it operates. Definitely, with the advent of the implementation of Solvency II, Malta’s margin of solvency requirements will have to be adapted to reflect the specific risk portfolio of the Captive concerned.
As a concessionary measure in the case of small or medium sized Captives, to reflect the requirements provided for the Standard Approach. European insurance regulatory framework while recognising the importance of adopting a risk-based approach to the determination of required margins of solvency, will undoubtedly benefit from the implementation of Solvency II. This will also be a most welcome reform in Malta which enjoys state of the art regulation and has already attracted a fair share of global insurance operators who took advantage of the favourable tax regime in the user friendly approach for setting up Captives. Malta’s coming of age in the insurance market is being crowned by the attention as a new member in the Eurozone. Malta has become an increasingly attractive domicile for multinational companies in which to form a captive. We have taken bold steps towards implementing a robust regulatory regime which is in line with the European Union Insurance Directives.
The ability to ‘passport’ insurance to all territories within the European Economic Area (EEA) and the double tax agreement held with 49 countries are clear indicators of Malta’s growing appeal. This will shortly include a tax treaty which is expected to be signed with USA. Delegates wishing to attend should email, call or fax their registration form by not later than 20 May to Christoph Rollnik on email addres [email protected]

George M. Mangion
[email protected]