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London…Promoting Malta as a Captive jurisdiction.
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Source: Malta Today
by Donna Greaves Bonello
Article published on 8th February 2012

PKF has been promoting Malta as a centre for captives over the past five years.

This year one of the partners Ms Greaves Bonello attended a two day presentation in London organized by Pageant Media. Ms Greaves Bonello tries to keep abreast of what’ competitors domiciles are offering to expanding international captive industry, and actively participated in the 3rd Captive Live UK conference which took place on Tuesday 31 January - Wednesday 1 February 2012 at an esteemed venue in London's called The Brewery. It is welcoming to note that this activity was partly sponsored by Finance Malta. The event attracted over 600 delegates, including 150 captive owners and prospective owners from different countries.

This prestigious event introduced the new focus on global risk management which gave an opportunity to attendees to update their knowledge and debate the big issues affecting not only the UK captive insurance market but also on a global scale, focusing on global legislation and tax issues, trends and best practice.

It was a perfect networking opportunity to meet executives, investors, suppliers, professionals, affiliates, and regulators leading suppliers and superb networking forums. It is highly recommended that more practitioners attend such events and promote the island particularly in a time when the euro crisis has exacerbated the need for captives to relocate in countries where they could reap a competitive advantage and lower their costs.

This year the conference was split into two themes whereby the first day focused on Captive Programmes, complete with panel debates and case studies led by captive owners and experts.

There were 6 sessions in Day 1, up to 4 different areas in each session.  While, there were 4 sessions in Day 2, examining the Global Programmes, covering all the key regulations and emerging trends. At the end of each session, one could opt to move to another session under four different streams.

The event was opened by Mr. David Lewis, Director of Sales, Willis Global Captive Practice who gave an introduction to the basics of captives and Solvency II for anyone new to the industry.

Among the speakers, Alan Fleming, Vice President, AIRMIC delivered a speech focusing on developing your captive as a profit centre. There are various potential advantages to form a captive insurance company. Captive insurance companies are formed for both economic and risk management purposes.

He highlighted the advantages of forming a captive insurance company resulting in a business can lowering its insurance costs in comparison with conventional insurance where higher premiums are paid to cover any areas including property and casualty insurance.

By establishing one’s own insurance policies, this may result in considerable savings in the form of underwriting profits, which can be retained by the owner of the captive company.

Additionally, a captive insurance company can provide protection against risks which prove to be too expensive in commercial markets or may be usually unavailable. The inability to obtain specialised types of coverage from commercial third party insurers is another reason why clients may choose to establish a captive insurance company.

With a captive insurance company, a business owner can address their self-insured risks by paying tax deductible premium payments to their captive insurance company.

To the extent the captive generates profits these naturally remain within the family. But at the conference there were many domiciles which competed with Malta to attract such captives.

The typical question one may ask is what makes Malta so special and is there any unique selling points. The answer is that Malta is among the ideal domicile to set up a captive business.

Most significantly, Malta, which is a European Union (EU) Member State, can boast to be a model jurisdiction in financial services regulation and still is a comparatively low cost jurisdiction .  One can note that Captive Insurance is referred to as “affiliated insurance companies” (AICs) in Maltese law.

Apart from lower costs, one will also benefit from the added advantage of operating within a recognised OECD (Organisation for Economic Co-operation and Development) tax environment.

Moreover, our tax regimes are attractive; companies pay tax at the rate of 35% and upon declaration of dividend, shareholders can opt to claim a refund of up to 6/7ths of the tax paid, reducing the effective tax rate of the group to 5%. Linking this to Malta’s extensive double tax treaties (including USA) as well as other methods of relieving double taxation on cross border transactions makes us a unique jurisdiction.

The speakers highlighted the advantages of their respective domiciles but Malta still has unique selling points which in my opinion need to be adequately marketed in professional circles.

By comparison, Malta is the only country in EU which operates the Protected Cell Company (PCC) legislation. A PCC permits a greater level of management control and reduced operational costs. PCC legislation provides companies an attractive cost effective alternative to setting up a standalone insurance company.

The main benefit of a PCC is that a Cell can use the Core capital and therefore does not need to have its own Minimum Guarantee Fund. Each cell in a PCC is treated as separate from other cells for income tax purposes.

Moving on the subject of Solvency II was another hot topic which attracted most interest.

John English, Regional Managing Director EMEA, Aon Global Risk Consulting was one of the individuals involved in the sizzling debate on Solvency II: Governance under Pillar II. Solvency II is an EU legislative programme to be implemented in all 27 Member States, including Malta.

It introduces a new, harmonised EU-wide insurance regulatory regime. The legislation replaces 13 existing EU insurance directives. The key objectives of Solvency II are to  improve consumer protection and  to will ensure a standardised and improved level of protection to policyholders across the EU. Hence, a more vigorous system will give policyholders greater confidence in the products of insurers.

The “Supervisory Review Process” will shift supervisors’ focus from compliance monitoring and capital to evaluating insurers’ risk profiles and the quality of their risk management and governance systems. Through the harmonisation of supervisory regimes and finally Solvency II will increase international competitiveness of EU insurers.

Solvency II is not just about capital. It is a comprehensive programme of regulatory requirements for insurers, covering authorisation, corporate governance, supervisory reporting, public disclosure and risk assessment and management, as well as solvency and reserving. The Solvency II programme is divided into three areas, known as pillars. Another stirring topic was international accounting standards and compliance and this was introduced by Gui Iglesias, Manager FS Assurance Services KPMG and Michael Tagg, Director, Insurance Solutions, KPMG.

Both reminded the audience that in July 2010 the IAS Board issued the exposure draft (ED) Insurance Contracts with a four-month comment period, ending on 30 November 2010. The proposals in the ED are geared to eliminate inconsistencies and weaknesses in existing practices, by improving IFRS 4 Insurance Contracts.

Consistent with the IASB’s standard framework, the ED also provides guidance on the recognition, measurement, presentation and disclosure for those contracts that contain ‘significant’ insurance risk.

The accounting changes set forth in the ED will fundamentally change the presentation and measurement of insurance contracts. Captive administrators were cautioned about the future impact on business processes and systems which is expected to be significant, requiring careful consideration and comprehensive implementation programmes especially to implementing Phase two alongside Solvency II, IFRS 9 .

Such a monumental shift will in many instances trigger considerable transformation of financial controls and change in risk programmes.

Whilst the implementation date for the new IFRS for insurance contracts is not definitive, ED and Solvency II implementation projects are expected to run concurrently. Recently, the International Accounting Standards Board (IASB) and the US based Financial Accounting Standards Board (FASB) agreed to work together to seek to reduce differences in their respective classification and measurement models for financial instruments.

This month will see the IASB continue its discussion on insurance contracts (including the premium allocation approach) together with the FASB. To conclude, one of the advantages of such events is the networking facilities. In fact, delegates, speakers and exhibitors were invited to a complimentary drinks reception at the close of Day 1. It was the ideal occasion to meet new industry figures and exchange ideas on topics discussed on day one and plan ahead to select the preferred sessions covering particular topics to be presented the next day. Such cordial meetings help to promote cross-border business.

Typically, the importance of optimising international relationships between risk managers, brokers and insurers was led by Dan Brown, Partner, SNR Denton.

A concluding session was introduced by Andrew Reid, Managing Director, European Head of Pensions Origination, Deutsche Bank. He focused on the topic :- is insurance and capital market a growing relationship? In his opinion inter-linkages between the banking and insurance industries are increasing and as a consequence one reads about a heightened activity in  the merger of banks and of  life insurance companies to form bancassurance groups. Equally crucial for the efficiency and robustness of the international financial system are the linkages through the growing markets for risk transfer. Following the euro crisis, banks are shedding credit risk to insurance companies, amongst others; and life insurance companies are using capital markets and banks to hedge some of the significant market risks arising from their portfolios of retail savings products. Finally one may wish to thank the organisers and Finance Malta for making this event a huge success and of course it was an ideal platform to promote the island‘s as a growing captive jurisdiction. It is remarkable to comment that feedback from attendees was very encouraging given that they all confessed it was a useful event which helped them to meet, learn and exchange ideas with the leading players in the industry. Keep it up Finance Malta…we need more events such as these.