The ability to ‘passport’ insurance to all territories within the European Economic Area (EEA) and the double tax agreement held with 42 countries are clear examples of Malta’s growing appeal for ‘captives’
News that captives are coming to Malta has been a favourite subject among insurance practitioners. Certainly this is good news for the financial services industry and augurs well for a number of professional practitioners who have been active to promote the island as a competitive and well regulated centre.
With the tide in our favour we can strive to become the Bermuda in the Mediterranean. But what are captives and why are they seeking shelter in Malta? Over the past few years risk managers and others with corporate risk financing responsibilities have become increasingly refined in their risk management techniques.
Captive insurance companies are vehicles that can offer in-house responsiveness to risk in a very selective way, while providing other advantages. For many companies, particularly those with geographically dispersed subsidiaries, a captive offers an effective means of ensuring centralised control of a diverse risk management programme. There are a number of unique benefits. To start with, the captive should provide coverage for lines of business that are either difficult to insure in the conventional market or that provide significant cost savings by retaining the risk. It can obtain better risk management information by distributing loss costs equitably among profit centres and designing more effective loss control programmes.
A properly designed captive provides its insured with the ability to create a risk financing programme that offers flexibility, stability and control. Captive insurance companies have direct access to reinsurance markets, allowing flexibility in developing and designing coverage.
Cash flow benefits can be achieved as captives often receive a commission for placements, and premium payments are often due in instalments rather than requiring 100% prepayment. Underwriting profits are retained and there is the ability to earn investment income on claims reserves and unearned premium reserves Companies have the option to purchase selected services from outside suppliers while performing other services in-house.
In this respect we meet a new concept of protected cell companies (PCC). A protected cell company is, broadly speaking, a company that operates in two divisions, namely, the cellular and the non-cellular. The latter represent the core of the company whereas ‘cells’ represent distinct classes of shares within the company. This innovative design helps to create a segregation designated as a cell and created for the purpose of isolating and protecting cellular assets belonging to the company. A cell does not have 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. The overheads of a protected cell captive can be shared between the owners of each of the cells, making the captive cheaper to run from the point of view of the insured.
Affiliated Insurance Companies (AICs) are an interesting aspect of our island’s insurance legislation. This refers to the business of an insurance company which is registered in Malta and whose business of insurance is restricted to risks originating with shareholders or connected undertakings or entities. The flexibility of the vehicle can be demonstrated by the ease that AIC s may insure risks originating from a wide range of persons including: parent companies; associated or group companies; individuals or other entities having a majority ownership or controlling interest in the AIC, and members of trade, industry or profession associations insuring risks related to the particular trade, industry or profession. Typically AIC’s have to carry an equalization reserve but the companies are exempted from this obligation if the net premiums written in a financial year in respect of that financial year are less than Lm500,000 (approx. EUR250,000); or the net premiums written in a financial year in respect of that business are less than 4% of net premiums written in the financial year in respect of all its general business are less than Lml million Maltese liri (approx. EUR2,500,000), and company has no equalisation reserve to bring forward from previous financial year. Captives can be used to meet special requirements, fill gaps in claims-made policies, offer additional limits of liability and supplement any restricted forms obtained from the conventional insurance market. Furthermore, the unique Malta legislation allows for the cell company to combine any number of ‘cells’ who in turn are individually mirrored by a distinct class of shares.
The ‘cell share capital’ is accordingly the amount of the proceeds of the issue of the cell shares to the cell shareholder/s. Invariably one can note that the share capital attributed to a ‘cell’ constitutes the initial cellular assets attributable to it. All this marks a highly sophisticated type of corporate vehicle which as a protected cell company will afford limitless flexibility. Thus, for example, any profit or loss will be exclusively attributed to the shareholders by the cell company. In case of profits generated after all losses are made up then these can be distributed by reference to the assts and liabilities accruing to the particular cell irrespective of the performance of the other co-existing cells. As the captive matures and its surplus grows, it becomes capable of retaining greater portions of an organization's risks, thereby reducing dependence on commercial insurance while improving the captive's position with reinsurance markets.
The attractiveness of the legislation can be measured by the ease 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. A company carrying on affiliated insurance is taxable at the normal company rate of tax which currently is 35%.
However, if such a company underwrites risks situated outside Malta, it is able to operate the foreign income account and non-resident shareholders may benefit from the refund of tax on distributions from this account bringing the effective tax rate to 4.17%. Another tangible fiscal benefit is that of an outright exemption from duty under the Duty on Documents and Transfers Act, 1993 in respect of any contract of insurance relating to a risk situated outside Malta. Furthermore, captive management services are also zero rated for VAT purposes under the Value Added Tax Act. Captive Managers, have been offered a substantial fiscal package under the Income Tax Act. Although managers are subject to the standard tax rate of 35%, they are entitled to a number of concessionary deductions meant to encourage insurance mangers to set up in Malta.
Malta’s coming of age in the insurance market is being crowned by the attention it is enjoying in the captives sector. For captive insurance companies, 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. Malta is becoming an increasingly attractive domicile for multinational companies in which to form a captive. One year 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.
Naturally the ability to ‘passport’ insurance to all territories within the European Economic Area (EEA) and the double tax agreement held with 42 countries are clear examples of Malta’s growing appeal.
In the light of the positive results obtained in to date, the future promises to be equally thriving. With several international conferences ahead, Malta is sure to be promoted as a prime Captive Insurance destination.