Captives – lowering the barriers to growth

So far with its respectable number of 68 insurance companies, Malta is pushing ahead to attract quality not quantity but of course the numbers are important

Delegates from PKF shall shortly be attending the opening of a two-day European Captive Forum conference. It is planned for next month and is taking place from on 11-12th November at the Luxembourg Congres, Luxembourg.

This brings together Europe’s prime captive insurance and risk management professionals for two days of world-class networking and industry. Undoubtedly it is Luxembourg’s leading insurance event and is attended by leading risk managers offering a number of jurisdictions an opportunity to showcase their domicile, hoping to attract captive owners by giving presentations, case studies and unique selling points expertly discussed in various panels.

Delegates will this year hear the latest on a hot topic – the challenges facing captive insurance managers with the arrival of Solvency 11 regulation expected to start by January 1, 2016. One may well ask with so much competition what can Malta offer in this sector which sets it apart from other offshore centres such as the Isle of Man, Channel Islands, Gibraltar and of course Caribbean stalwarts such as Bermuda, Barbados and Cayman Islands?

So far with its respectable number of 68 insurance companies, Malta is pushing ahead to attract quality not quantity but of course the numbers are important and no effort is to be spared to expand the internal market.

Why are the numbers so modest and what can be done to overcome the challenge to attract more investors. The answer is not easy when considering how FinanceMalta, as the organization geared to promote the sector, faces tough competition fielded by established jurisdictions, more so when attempting to attract international companies seeking an alternative EU jurisdiction traditionally offered by tried and tested places such as Dublin and Guernsey.

Some may reflect how in Malta we have wisely tailored our legislation to be close to that of Guernsey, which itself is proud to say that it is the largest European captive domicile with 344 captives in 2103. Next comes Luxembourg which has 225 captives, followed closely by the Isle of Man with 125 captives. Practitioners ought not to be discouraged with the numbers above, as typically Malta has its own unique selling points – such as being the only EU state to offer comprehensive legislation on both PCC and ICC and lately RICC vehicles.

It is true that Gibraltar is a close second with its citizens enjoying the hybrid status of EU citizens, via a special “UK status”, and it also offers Protected Cell companies legislation. Nevertheless Malta has gradually and steadily developed into a premier financial centre hosting reputable insurance companies, banks and fund /pension administrations. All this is evidenced by a number of Fortune 100 companies which have captives in Malta with numerous companies from across the world and in numerous sectors being looked after by the country’s insurance managers.

The global names of Aon, Marsh, Willis, Heritage, JLT and Heath Lambert can be found in competitive convoy co-existing with the indigenous insurance management companies.

Readers may ask why are captives so popular and what is the secret of their success? Really and truly captives act as an attractive alternative to self-insurance, and these have long been used by companies to manage their insurance risks. While the captive concept has existed for a long time, it became even more popular in the last few decades.

Nowadays, the captive market is as active as it has ever been, with its benefits now attracting worldwide attention. While Bermuda, Barbados and Guernsey have historically been the leading domiciles for captive formations, many of the captives are experimenting to relocate to other jurisdictions.

Let us define a captive. The International Association of Insurance Commissioners defines a captive as “an insurance or reinsurance entity created and owned, directly or indirectly, by one or more industrial, commercial or financial entities, other than an insurance or reinsurance group entity, the purpose of which is to provide insurance or reinsurance cover for risks of the entity or entities to which it belongs, or for entities connected to those entities, and only a small part if any of its risk exposure is related to providing insurance or reinsurance to other parties.”

So in summary one can say, a captive in its simplest form is a majority owned subsidiary created to provide insurance to its non-insurance parent company. Going down memory lane one recalls the history of the captives – itself being quite old.

In the early 1500s, ship owners met in the London coffeehouses where they retained, shared and transferred the cost of risk associated with their ships, akin to today’s captives. Later, during the 1700s and 1800s, there were instances of mutual insurance companies being formed by members of a particular industry to provide insurance coverage.

Even so the captive concept took a while to catch on. It gained momentum in the 1980s during the hard commercial insurance market, when liability coverage was either unavailable or unaffordable for many buyers. Over the past three decades, there has been significant growth in the captive market. Today, there are more than 6,000 captives that trade around the world, compared to about 1,000 in 1980. Almost 3,000 captives are domiciled in the Caribbean; 1,200 captives are domiciled in Europe and Asia; and more than 2,000 captives are domiciled in the United States of America.

The most common types of captive structures are the Single-Parent Captive which is a company writing only the risks of its parent, which in Malta is known as affiliated company. Captives can be found in a number of domiciles, both onshore and offshore.

Initially they were formed in offshore tax haven jurisdictions such as Bermuda or the Cayman Islands. Over the years, however, these offshore domiciles have been relocated onshore, such as at Vermont and elsewhere in US states, as well as places like Malta, Gibraltar, Dublin, Singapore, Luxembourg and Canada.

To give an example, in Bermuda one finds that most of its money comes from being an international business centre or offshore jurisdiction as it provides a relatively attractive tax environment for insurers – put simply it levies no income tax. Bermuda is also politically stable and has a sound economy and one of the highest ratios of GDP to population in the world.

It also has an excellent judiciary framework, good telecommunications system, a world-class legal and banking systems and the added benefit of an educated work-force. The island also benefits from “economies of agglomeration” in insurance and reinsurance not only because of the concentration of captive insurers, non-captive insurers, and reinsurers but also because of the professional infrastructure including world class bankers, lawyers, accountants, actuaries, and risk management professionals.

Bermuda’s proximity to the New York capital markets and its historical ties with the United Kingdom also provide key advantages to insurers and reinsurers. Suffice it to state that Bermuda hosted most captives worldwide in 2013 (832), followed by the Cayman Islands (759), Vermont (588), Guernsey (344) and Utah (342).

Another important European country is Ireland, where the government’s smart decision to provide quality financial services to overseas businesses led to the creation of the International Financial Services Centre (IFSC) at Dublin’s Custom House Docks (when Ireland was then nicknamed the Celtic Tiger).

How did Dublin become the favorite European domicile for reinsurance and direct writing captives? This occurred because Ireland is well known as a professional centre and has a common law jurisdiction with full EU and Organization for Economic Cooperation and Development membership. Dublin has traditionally been viewed by overseas businesses as an ideal domicile because a Dublin captive (like its counterpart in Malta) can avoid a traditional insurance carrier’s fronting fees in Europe.

This is possible because the captive can outsource its underwriting, claims handling and loss adjusting services, giving it more control over expenses and cash flow. With almost 400 international institutions directly operating from Dublin’s IFSC, with a further 350 managed entities, the IFSC ranks as one of the leading worldwide locations for investment funds, corporate treasury, international banking and insurance activities.

Some of the largest insurance companies in the world are located in the jurisdiction, which is being increasingly used as a centre from which to write business throughout the EU. Dublin can serve as a success story for Malta to emulate. It supports many important services for captives, like a full range of captive managers and international banking facilities, a world class professional services provider and a strong yet accessible regulatory process. The number of captives in Dublin is constantly growing. In 2010 it reached 82, but only last year this cohort increased to 142 captives.

To conclude one hopes that no effort is spared in Malta to catch up in its quest to attract more captives, knowing that local legislation is right, the quality of its banks is beyond reproach and its professionals are fully geared to service potential insurance patrons. Let us all meet in Luxembourg Captive Forum next month.

Readers wishing to receive a free copy of a recent study of seven competing insurance domiciles can write to [email protected]

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