The financial services sector is considered to be one of the main pillars of the Maltese economy and is also its fastest growing sector. This even more so after EU membership.
Malta has established itself as a reputable financial services jurisdiction which adopts a serious approach to regulation with embedded flexibility. Furthermore, Malta's very favourable tax regime and effective double taxation relief mechanisms together with the single passport regime, ensure an extremely attractive environment for financial services operators to carry on business.
Malta's insurance legislation is based on detailed research and analysis carried out amongst Maltese and international insurance operators and provides opportunities for captive insurance business and related activities; insurance management companies and regional operations for insurers, reinsurers and brokers. The existence of Protected Cell Company (PCC) legislation is a further attraction in the Maltese regulatory regime. The business of insurance is regulated by the Insurance Business Act, 1998 and the Insurance Intermediaries Act, 2006, together with an array of regulations and insurance rules which reflect the E.U. Directives in this sector.
Keen interest is being shown by international insurance carriers of repute to use Malta as part of their regional operations, through the establishment of fully fledged insurance companies authorised to carry on one or more particular classes of insurance business from Malta.
Minimum Own Funds, Solvency Margin, Technical Provisions and Guarantee Fund
The required own funds of an insurance company which must be unencumbered at all times, vary according to the type of insurance business to be undertaken.
Companies authorised to carry on business of insurance in Malta are to maintain at all times a minimum margin of solvency, the method of calculation of which varies according to whether the company is to undertake general business or long term business. The minimum solvency requirement must be covered by net admissible assets. An essential requirement for insurance companies, is the maintenance of adequate technical provisions including mathematical provisions. Technical provisions must be supported by equivalent and matching assets.
An insurance company must also maintain a guarantee fund of an amount of assets which is equal to the greater of the Minimum Guarantee Fund calculated in accordance with the relative regulations or the value of one-third of the margin of solvency or Malta margin of solvency.
The Solvency II Directive 2009/138/EC is an EU Directive that codifies and harmonises the EU insurance regulation. Primarily this concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency. The Solvency II framework has three main areas (pillars):
- Pillar 1 consists of quantitative requirements (for example, the amount of capital an insurer should hold).
- Pillar 2 sets out requirements for the governance and risk management of insurers, as well as for the effective supervision of insurers.
- Pillar 3 focuses on disclosure and transparency requirements.
Following an EU Parliament vote on the Omnibus II Directive in the first quarter of 2014, Solvency II is scheduled to come into effect on 1 January 2016 by which time all Insurance Companies have to be in line with the Solvency II requirements.
Protected Cell Companies
An insurance company may be registered as or convert to a Protected Cell Company.
Captive Insurance Companies
Malta is proving to be a very attractive jurisdiction for the establishment of captive insurance companies, consequent to its serious but user-friendly regulatory framework and other incentives of both a fiscal and non-fiscal nature. Under Maltese legislation, captive insurance companies are referred to as 'Affiliated Insurance Companies' (AICs).
Affiliated insurance is defined as the business of an insurance company which is registered in Malta and whose business of insurance is restricted to risks originating as specified below.
AICs may insure risks originating from a wide range of persons including: parent companies; associated or group companies; undertakings having common membership up to the ultimate beneficial owner level, with the AIC, amounting to at least 51%; individuals or entities having a majority ownership or controlling interest in the AIC; and members of trade, profession or industry associations or organisations insuring risks related to the particular trade, profession or industry.
AICs are subject to a specific licensing framework and are regulated by a set of tailor made rules, with the Insurance Business Act, 1998 and the regulations and insurance rules issued hereunder being subject to certain modifications and exemptions in the case of AICs. Minimum own funds, solvency margin, technical provisions and guarantee fund AICs are required to maintain own funds, which must be unencumbered at all times. The amount of own funds depends on the type of insurance business to be undertaken by the AIC. AICs are also required to maintain at all times a minimum margin of solvency, the calculation of which varies according to whether the company is to undertake general business or long term business. The minimum solvency requirement must be covered by net admissible assets. Moreover, AICs must maintain adequate technical provisions including mathematical provisions. Technical provisions must be supported by equivalent and matching assets. In addition, AICs carrying on general business of a prescribed nature are required to maintain an equalisation reserve, subject to certain exceptions.
It is also necessary for AICs to maintain a guarantee fund of an amount of assets which shall not be less than the Minimum Guarantee Fund calculated in accordance with the relative regulations.
Protected Cell Companies
An AIC may be registered as or convert to a Protected Cell Company (PCC).
Insurance Management Companies
An insurance manager is a person authorised to accept an appointment from an insurer or reinsurer to manage any part of its business or to exercise managerial functions therein, or to be responsible for maintaining the financial statements or other records of such insurer or reinsurer. Management functions may also include the authority to enter into contracts of insurance on behalf of the insurer or reinsurer under the terms of appointment. Even affiliated insurance companies may engage the services of an insurance management company. An insurance manager can also accept an appointment from an insurance broker enrolled under the Insurance Intermediaries Act, 2006, restricted to contracts of insurance relating to risks situated outside of Malta, to manage any part of its business or to exercise managerial functions therein or to be responsible for maintaining the financial statements or other records for such insurance broker. The carrying out of insurance management activities is a regulated activity which is subject to certain formalities.
An insurance manager is required to possess own funds, the amount of which varies according to whether it holds any appointment and if so, depending on a number of other factors. An insurance manager needs to have a policy of professional indemnity insurance in its favour and must also affect a fidelity bond. Furthermore, an insurance manager must keep money held by it in a fiduciary capacity, separate from its own money. These requirements will not apply for the time during which the insurance manager holds no appointment.
Protected Cell Companies
An insurance management company may be registered as or convert to a Protected Cell Company (PCC).
The Insurance Intermediaries Act, 2006, implements the provisions of Directive 2002/92/EC on insurance mediation. This Act consolidates all insurance intermediaries' activities (i.e. insurance agents, insurance managers, insurance brokers and tied insurance intermediaries) carried out in or from Malta under one Act.
Cross-border insurance intermediaries' activities carried out by European insurance intermediaries and Maltese insurance intermediaries are provided for in the European Passport Rights for Insurance Intermediaries Regulations, 2005.
In granting authorisation to an insurance company or insurance intermediary, the Malta Financial Services Authority must be satisfied that: sufficient information is available on the persons having any proprietary, financial or other interest in, or in connection with the company; all qualifying shareholders, controllers and all persons who will effectively direct the business of insurance are fit and proper to ensure the company's sound and prudent management and that the company discloses any close links it may have with any other person. This apart from the fulfilment of other specific criteria or requirements, which vary according to the activities undertaken.
Protected Cell Companies (PCC)
The concept of a PCC only applies in the case of the 'business of insurance' which includes the business of insurance companies; the business of reinsurance companies; the business of affiliated insurance companies (also known as captives); the business of an insurance manager and the business of insurance broking. A company can only be formed as or convert to a PCC with the written approval of the Malta Financial Services Authority.
A PCC has separate and distinct cells, with the assets and liabilities of a particular cell being segregated from those of other cells and from other assets and liabilities of the company. To this end, the creditors of a particular cell have no recourse against the assets of other cells within the PCC. Notwithstanding this, a PCC is a single legal person and the creation by a PCC of a cell does not create, in respect of that cell, a legal person separate from the company.
The minimum capital requirements applicable to a company (not being a PCC) operating in the insurance business sector apply to the PCC as a whole and not individually to each cell. The required margin of solvency of the PCC shall be calculated on a cellular basis and any deficit in the cells shall be funded through non-cellular assets. The Minimum Guarantee Fund applies to the PCC as a whole.
Where any liability arises which is attributable to a particular cell of a PCC:
- the cellular assets attributable to the relevant cell shall be primarily used to satisfy the liability;
- the company's non-cellular assets shall be secondarily used to satisfy the liability, provided that the cellular assets attributable to the relevant cell have been exhausted;
- any cellular assets not attributable to the relevant cell shall not be used to satisfy the liability. Any liability not attributable to a particular cell of a PCC shall be solely the liability of the PCC's non-cellular assets.
Incorporated Cell Companies
The Companies Act (Incorporated Cell Companies Carrying on Business of Insurance) Regulations came into effect on the 1st February 2011, thereby enabling the establishment of Incorporated Cell Companies (ICCs). ICC Regulations apply to the business of Insurance as defined under the Insurance Business Act and Captive Insurance in terms of the Insurance Business (Companies Carrying on Business of Affiliated Insurance) Regulations 2003.
This new vehicle, takes the concept of segregation one step further than that which had been brought about by the Protected Cell Company (PCC) legislation a few years earlier. In this way, not only is Malta now the only full EU Member State with PCC legislation but is also the only EU member state to have ICC legislation in place.
The ICC Regulations allow ICCs to form individual incorporated cells, thereby giving each incorporated cell (IC) limited liability as well as a distinct and separate legal personality from other cells and from the ICC core.
At the same time, the ICC may still be structured to retain certain core features that will allow it to scale up the desired efficiency levels.
A definite advantage of the separate legal personality of an Incorporated Cell (IC) is the clear separation of assets and liabilities between itself and any other cell of the same or another ICC. This flexibility in the ICC structure allows ICs to enter into binding agreements with one another and with the ICC core, thereby facilitating the possibility of financial guarantees or reinsurance arrangements between cells as well as between the cells and the ICC core, where in the case of reinsurance, the core acts as the reinsurer to the fronting cell. An ICC does not have the power to transact on behalf of any of its incorporated cells and vice versa.
While PCC Regulations provide for secondary recourse to non-cellular assets if the cellular assets attributable to the relevant cell have been exhausted, such recourse is not provided for under the ICC regulations as the ICC and each cell are a separate legal entity.
Both ICCs and ICs require individual authorisation in term of the Insurance Business Act. In view of the ICs legal and operational independence, the individual ICs are required to abide by the statutory financial obligations applicable to insurance companies and affiliated companies. The ICC Regulations also provide that a non-cellular company or even a PCC may be transformed into an ICC.
Reinsurance Special Purpose Vehicles
The Reinsurance Special Purpose Vehicles Regulations provide a regulatory framework for the establishment of these vehicles in Malta based upon the Reinsurance Directive. These regulations deal with authorisation and establish the conditions under which the activities of such vehicles are to be carried out in compliance with the requirements of the Solvency II Directive. The main aim of RSPVs is to issue financial instruments in order to be able to fund their exposure under the risk transfer contract to professional clients. It is now also possible to list such instruments on the European Wholesale Securities Market ('EWSM') which is a European regulated market for wholesale debt securities.