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12 January 2017Analysis

Fortress Malta looks beyond its defences

Malta is an island that is used to adversity. It’s often been besieged but always fought its way out of trouble. With the rest of Europe now facing a widespread variety of troubles, the island is looking to go on the offensive by highlighting its attractions as a domicile for captives.

The ongoing debate over the course of the UK’s departure from the EU is one area under dispute, while the issue of countries such as Greece remaining in the eurozone is another. Many countries are also seeing economic growth that can be described as anaemic at best.

Then there is the issue of Solvency II compliance. After a long gestation period the new compliance regime is finally upon us all—and it has made life quite complicated for a large number of people, due to the costs and organisational burdens that it has brought.

“With Solvency II settled, a number of companies have applied to form a captive in Malta, or are showing interest in applying, which is above normal for the island,” says Joe Bannister, chairman of the Malta Financial Services Authority (MFSA). “We’re getting more than the normal level of interest after what has appeared to be a slow period that has been attributed to Solvency II.

“In the run-up to Solvency II I think that companies were weighing up their positions about whether to have the internal capital model, or the standard model, so it took a bit of time for them to make a decision. In fact during that time we saw more cells coming in than actual companies. Even in some big companies no-one was taking the risk and preferred to set up a cell within a protected cell company (PCC).”

However, according to Bannister, over the May-June period things suddenly took a different turn as the situation, in his words, ‘settled down’ and Malta is seeing a number of companies apply instead of cells. Bannister says that some have already been licensed, others are waiting in the pipeline to be licensed and that the MFSA knows that for next year companies are also preparing plans, because they are in contact with it, already having had the decision to come to Malta.

There is a wide variety of different types of captives on the island these days. According to Malta’s Ministry of Finance, protected cell legislation has led to the authorisation of 11 PCCs and the approval of 29 protected cells since 2004,

“What defines these captives here in Malta?” asks Bannister. “They are the ones doing business solely within the group, not doing any third party business at all. The companies we get here in Malta are generally insurance companies that can’t do third party business. However, we do see some more captives as well—one captive is about to get its licence here and from what I see of the companies in the pipeline we see a number that are really captives.

“The attraction for these companies to Malta seems to be the PCC. They can form a cell instead of forming a full-blown insurance company. The PCC is seen as solvent as a whole, so the company—in terms of Solvency II—has to show that the cell is solvent but does not have excess capital which would be in the core.

“Cells are coming to Malta at the right time. The PCC structures of these companies vary. Some are big companies, some are small, but some of them—particularly the big ones as we’ve seen—may set up a cell and grow their business in Malta, before moving to become a standalone insurance company.”

“In terms of Brexit I have to say there will be an effect, but everyone is waiting for things to mature a bit more in terms of information."

The government of Malta has created an organisation, FinanceMalta, which it is using to grow the market, although most of the marketing is done by the insurance managers and broking companies themselves. All the major insurance managers are on the island and they do a lot of the marketing.

FinanceMalta has also organised a seminar in London in November 2016 on Malta as a place to do insurance business. Bannister adds that Malta follows the same model as the UK, whereby there’s no distinction between a captive and an insurance company in terms of the operation, so it’s treated like an insurance company. As a result it’s a question of whether a captive does business on its own or within the group.

The arrival of Solvency II and other issues were overshadowed in 2016 by the Brexit vote. The victory of the ‘leave’ camp has led to a great deal of uncertainty in terms of what the impact will be, not just for the UK but also for Europe—and for the creation of captives.

“In terms of Brexit I have to say there will be an effect, but everyone is waiting for things to mature a bit more in terms of information about just what is happening and when,” says Bannister.

“There have been applications for companies to set up in Malta, but whether these were because of Brexit, or they needed a base in Europe, or to coordinate their European operations from Malta, it all depends on the companies.

“The impact of Brexit so far has been in terms of an increase in enquiries and discussions, but I think we’ll measure the effect most in the first quarter of 2017. Everyone’s making plans, but so far no-one is making a move. Insurance seems still to be the largest sector in financial services that has made contact with us.

“We are at a stage where we need more information. Companies need to know what would happen if they took one of the various options that presumably will be available, what the tax impact will be, how to deal with management, and so on. It’s all going to depend on what happens and how those companies make their decisions.”

Solvency II, Brexit, economic difficulties … Europe is going through a torrid time. For Malta however, it’s possible that current events might offer an opportunity for the island to shine.