3 February 2023Analysis

Proposed PCC changes threaten Malta PCCs

Potential changes to protected cell company (PCC) regulations in Malta could pose an “existential question” for some, according to one of the island’s leading businesses.

Ian-Edward Stafrace, chief strategy officer of Atlas Insurance PCC, was commenting on the circular issued by the Malta Financial Services Authority (MFSA) in December. This proposes to remove regulation 15 of the PCC Regulations, which provides for “non-recourse” to the PCC core business where a cell is carrying out the business of affiliated insurance or reinsurance: Effectively limiting creditors to calling on the cell’s assets.

“The proposed change in regulations will significantly impact the business landscape of protected cell companies,” warned Stafrace.

“Unlike Atlas, with its significant core business, many PCCs have inactive cores with capital just covering their entity’s absolute minimum capital requirements. Solvency II capital requirements by design still leave theoretical exposures for risks less than 1 in 200 years. Removing non-recourse protection for the core can be an existential question for PCCs with no appetite for residual risk, who will need to reconsider their appetite and operations.”

He added: “Whilst the assets of cell investors would remain protected by law in all scenarios, non-recourse provisions help preserve the core and the broader PCC structure. We feel the removal of non-recourse protection will unnecessarily increase the possibility of PCC failures, especially for PCCs with small inactive cores, to the detriment of all stakeholders.”

Were the changes to go ahead PCCs might need to narrow further the prospective cells they would consider. At the same time, risk gap fees could be charged due to the difference in the theoretical maximum risk exposures and the assets in the cell – potentially making the cells unviable.

At the same time as removing the non-recourse, the circular also suggests introducing a new obligation across all cells to be capitalised at the level of their notional Solvency Capital Requirement. The result hits PCCs from both sides.

“A cell would be restricted from using core surplus capital to meet its capital needs whilst being required to have recourse to the core should its assets be insufficient to meet its liabilities,” said Stafrace. While the company supports regulatory expectations of adequately capitalised PCCs, it calls for a “balanced approach”.

“We remain committed to working with the regulator and the market to find a solution that achieves this goal,” he concluded.

The warning comes as the MFSA publishes its Strategic Statement outlining its priorities, including embracing innovation. The insurance sector is among those sectors where it hopes to see new business models.

“The extensive legal infrastructure underpinning the insurance market, coupled with technology, and the increasing availability of local actuarial expertise and other specialisations could unlock further potential in this sector, providing increased scope for tailored insurance services and specialty products,” the report notes.