A siren call by the Prime Minister urged us all to take courage and look hopeful for a brighter future. This was very much the cornerstone of his key speech given at the close of celebrations marking the 45th anniversary of Malta’s independence. The Prime Minister announced new investment which is currently under negotiation and this should translate into hundreds of jobs. This augurs well amid the job seekers who are of late only seeing and hearing of gloom from certain quarters of the press. More good news arrives in the sphere of financial services. This involves captives (termed affiliates) which are coming to Malta in larger numbers. Adding to the growing list of quality names we see that their arrival has been a favourite topic among local insurance practitioners seeking better horizons. Certainly this is good news for the financial services industry and is the fruit of a number of professional practitioners who have been active to promote the island as a competitive and well regulated centre. The attractiveness of the legislation can be measured by the ease of re-domiciliation. This means that a body corporate licensed in another jurisdiction to carry out any insurance business or to provide insurance management or broking services, may be authorised to continue as a company formed or registered in Malta. Other benefits include concessions that captive management services are zero rated for VAT purposes. A company carrying on affiliated insurance is taxable at the normal company rate of tax which currently is 35 per cent. However, if such a company underwrites risks situated outside Malta, it is able to benefit from the refund of tax on distributions from this account bringing the effective tax rate to 5 per cent. It is not surprising that the market leaders in risk management are slowly but steadily focusing on the opportunities in the sector available in the island. But what has made captives the flavour of the month? One may say that traditionally captives were in the domain of established centres such as Bermuda, Cayman Islands, Dublin, Luxembourg, Isle of Man, Hong Kong, BVI and some US States. For the casual reader it is relevant to explain what a captive insurance company is. A captive insurance company is, in its purest form, a subsidiary company formed to insure or reinsure the risks of its parent and / or associated group companies. Captives are usually formed to provide alternative risk management solutions to that of the conventional insurance market. The administration of a captive is usually, though not always, outsourced to a specialised captive manager. There are a number of reasons why captives may provide a better means of risk management than the conventional market. The main points are factors such as costs, flexibility and improved claims management. With increased frequency, corporate insurance buyers and mid-sized business owners are seeing the advantages of captive ownership. They see the opportunities that captives can provide and have been expanding their usage in a number of different ways. But they are not the only people that see the opportunity in captive ownership. To start with premiums charged by commercial insurers include amounts to cover the insurer’s profit margin and overheads.
With captives one tends to save over such overheads. As these can be significant in case of larger corporate structures it goes to show why captives are considered to be more cost effective. Captives can also be flexible in their operation. To quote an example we can say that when the market is soft, the captive can take advantage of the low rates by reinsuring a relatively large proportion of its risks. The low cost of reinsurance allows the captive to build its reserve base. Conversely the market hardens, the captive is able to retain a larger proportion of its risks, and can maintain cover for its parent even when commercial insurance is unavailable or prohibitively expensive.
The secret for their success is simple to unravel. One notes how over the past decades corporate insurance buyers have acknowledged the significance of captives and have found ways to utilise them in developing strategic risk financing programs. Once captive owners saw their numerous advantages, they rarely returned to the conventional insurance market. They are proven to be the right and cost effective solution for organised insurance services. If anything, they found additional, creative ways to maximise the potential of their captives. In spite of the recession, there is still a very competitive market among financial centres to attract captive insurance companies. But pure captive owners were not the only ones to see the opportunities from this alternative risk transfer method. Movement to captives also provided opportunities for many types of service providers. Captives allowed their parent companies to release unique services that were previously provided by a single insurance carrier. Critical insurance services such as administration/management, actuarial, legal, accounting, claims and loss control were all centralised under one roof with resultant economies of scale. Why some may criticise captives as being impersonal when handling claims, one cannot underrate their efficiency. This is manifested where the insurer is a captive, the claims handling procedures can be dictated by management, cutting down on the delays and bureaucracy that are often a necessary part of the claims handling procedures of commercial insurers. This is because of the clever way that captives generally retain a portion of the overall risk and reinsure the balance. Some may well ask how can the same facilities of a captive be obtained by forming a protected cell company and how can it be used to exploit its unique features in Malta?
It is now possible to register a PCC. This can be described as a standard limited company that has been separated into legally distinct portions or cells. The revenue streams, assets and liabilities of each cell are kept separate from all other cells. Each cell has its own separate portion of the PCC’s overall share capital, allowing shareholders to maintain sole ownership of an entire cell while owning only a small proportion of the PCC as a whole. In terms of the PCC regulations a ‘Cell Company’ is a company constituted or converted into a cell company having within itself one or more ‘cells’ for the purposes of segregating and protecting the cellular assets of the company in accordance with the Regulations. A cell company is a single legal person. A ‘Cell’ is in turn a class of shares within a cell company designated as a cell and created for the purpose of segregating and protecting cellular assets belonging to the company in the manner provided by the Regulations. A cell is not bestowed with separate legal personality. Due to its inbuilt flexibility a PCC can provide a means of entry into captive insurance market to entities for which it was previously uneconomic.
To conclude Malta’s coming of age in the insurance market is being crowned by the attention is enjoying in the captives and PCC‘s sector. For such growing sector, the Island has the necessary local expertise to ensure that the formation and running of a captive insurance company can be achieved with maximum ease. Five years since joining the EU 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 52 countries are clear examples of Malta’s growing appeal. With the tide in our favour we can go all-out to become the top financial centre in the Mediterranean.
George Mangion
Partner at PKF – an audit and business advisory firm
