Since joining the European Union in 2004 proactive regulators have worked around the clock to make a success of Malta's evolution from offshore tax haven into onshore financial centre. Helen Yates takes a virtual tour.
Even before Malta became a member of the EU on 1 May 2004 it had made significant strides as a captive centre. But since its ascension the transition into an onshore financial centre has brought new opportunities without necessarily doing away with all the previous advantages. "The advent of the EU membership brought it along," explains Professor Joe Bannister, chairman of the Malta Financial Services Authority (MFSA). "That gave Malta the visibility and also the perception of being a good place to do business - you are in the EU and English speaking but costs are about a third of what they are in the UK."
EU membership raised Malta's profile in the eyes of the international business community and brought new credence to its regulatory system. Professor Bannister has been credited with much of the effort behind transposing EU legislation into the local regulatory system ahead of the ascension, with some of the unique advantages built into the new framework along the way. "We looked at all the legislation and were careful to remove all the gold plating. We took certain initiatives that do not infringe the directives," he explains.
One immediate advantage of joining the EU is it gave resident captives and insurers "passporting" rights, which means business can be written anywhere in the EU from Malta without using a fronting company, as had been the case in the past. It also means there are no barriers to entry for European insurers or captives wishing to set up shop in Malta. "If a company from the EU wants to set up an operation and passport into the EU, this is not a problem," says Bannister. "There are absolutely no barriers to entry provided they follow the EU rules." All companies are subject to the EU's Solvency I Directive in terms of capital requirements and solvency margin. But Bannister believes capital requirements are likely to go down upon Malta's adoption of the EU Reinsurance Directive in the first quarter of 2007.
While insurance is regulated under the Insurance Business Act 1998, one initiative introduced by Bannister and his team at the MFSA is the introduction of dedicated captive legislation. The legislation is tailor-made and unique to Malta. It classifies captives and protected cell companies as affiliated insurance companies and means, for instance, these entities do not have to adhere to the same levels of corporate governance as third party insurers.
Another initiative was to introduce redomiciliation regulations, also fairly unique to Malta as within the EU only Gibraltar offers the option for multi-nationals to redomicile their captives from one approved locale to another without the usual rigmarole of shutting down one business and opening another from scratch. "If a captive is based in one country and wishes to relocate to Malta it can do so without the parent going through the formation of a new company," explains Praveen Sharma, associate director of IRMG, an Aon company. "Recently, for commercial reasons, a few in the non-EU domiciles have relocated to Malta." Such moves can only happen between jurisdictions that have redomiciliaton regulations.
Table 1 illustrates the growth of captives, insurers and insurance managers (including Aon, Marsh and Heath Lambert) in just ten months. Particularly notable is the growth of third party insurers. According to Bannister, a number of captives have now extended their service offers to provide third party cover and of the eight new licenses issued in 2005 exactly half were for third party insurance. There has also been growth in the number of insurance agents and brokers servicing the Maltese market.
Bannister believes the number of reinsurance companies will go up over the next couple of years. Last year saw Bavaria Reinsurance Malta Limited authorised to carry out reinsurance for long-term and general business, while Multi Risk Indemnity Company was granted a license to write business in 11 classes of general insurance and nine classes of reinsurance business. "With the advent of the (Reinsurance) Directive I would expect there will be more reinsurance companies coming here," says Bannister. "We're taking care of that by ensuring there is sufficient training of underwriters, risk managers etc."
Speed to market
Recognising the attractiveness of a speedy set-up, the MFSA has mandated that it will take just three months or less to issue a captive license and six months or less for an insurer or reinsurer. "The regulator's approach to licensing is visible, transparent, and fair," insists Sharma, "so a company can start planning before it even submits its formal business plan." A hands-on, flexible approach is taken to any application for a license, with the regulator meeting frequently with interested parties throughout the process. "This leads to a seamless approach once we're in the formal process of granting a license," explains Bannister.
It is not unusual for a captive license to be issued in a matter of three or four weeks. "We try to be as helpful as possible but obviously the company has to respond," says Bannister. The more organised and prepared a company is, the faster it will receive its license. "It doesn't mean we're some kind of soft touch or that everything will pass through our system without complete and detailed quality assurance," he's quick to add.
It could be construed that in its bid to welcome insurance with open arms the Maltese regulator could be less than discerning about the volume or quality of business it attracts. Bannister admits there is concern over the "herd instinct" - or in other words where one insurer goes, many others follow - but insists, "We're not going to flood the country with a huge insurance population" and that MFSA is being careful to ensure "a proper balance between quality and quantity". Asked if Malta had any aspirations of becoming another Bermuda the response was clear: "No - definitely not."
Icing on the cake
With a legal system based on UK law (with all legislation provided in both English and Maltese - now a recognised EU language), international accounting standards (IFRS) and a favourable tax regime, Malta has also focused on the other main attractions of a competitive financial centre. From a tax perspective the jurisdiction follows an imputation system, a structure the EU has ratified. This means that while captives and insurance companies in Malta are subject to the standard rate of income tax of 35%, shareholders are then able to claim a refund upon payment of a dividend. This effectively reduces the tax rate for shareholders to 4.17%.
But tax is no longer the key driver of domiciliation decisions for captives, argues Sharma. "Tax has become the icing on the commercial cake if you can have it but it's no longer the main driver." What is now likely to be more influential than tax are the operational costs of doing business - a topical issue given the recent decisions by Lloyd's syndicates Hiscox, Omega and likely Wellington to move their headquarters from London to Bermuda. "Regulators' fees, lawyers' fees and professional fees are quite competitive and are generally a fraction of those charged in other domiciles," emphasises Sharma.
But lower costs do not for an attractive insurance centre make in isolation. Other strings to Malta's bow are its accessibility to Europe, a highly skilled workforce and a growing number of service providers. It seems incongruous that an island with a population of just over 400,000 should have such a large professional workforce - boasting a high number of lawyers, accountants and economists - but investment in education has been high on the agenda for some time. The University of Malta, with its population of 10,000, is set to feed the country's burgeoning insurance sector as it grows.
And if Bermuda is anything to go by, insurance professionals don't seem too averse to sunny climes, which Malta offers in spades. Having long been a favourite tourist destination with 300 days of sunshine a year, good schools and affordable housing (although house prices have soared in recent years) it offers plenty of "softer" attractions too.
- Helen Yates is editor of Global Reinsurance.