CAPTIVE
INSURANCE BUSINESS
The
international environment for captives has changed. Corporate insurance
buyers are facing higher primary premiums and related taxes, higher
reinsurance prices, lower policy limits and less cover. In the captive
sector, major corporations are also finding problems to make fronting
arrangements with insurance companies as a result of which they are forced
to make strategic choices. There is a need for captives to be financially
stronger and to be able to take more risk. There are options such as
direct underwriting and cost reduction to be considered. It is time new
business models are explored and new locations studied.
Over
recent years Malta has established itself as a model jurisdiction in
financial services regulation. As in other successful economic sectors the
regulatory framework combines well with other advantages that Malta can
provide in terms of low cost, ED membership, strategic access to southern
Mediterranean markets and a good working environment.
Malta
provides the opportunity for companies to locate their captive insurance
business and insurance management activity within an OECD-recognised tax
environment that combines tax efficiency with controlled foreign company
tax legislation requirements.
Malta's
insurance legislation is based on research carried out among Maltese and
international insurance operators and provides opportunities for captive
insurance business and related activities, including cell companies,
insurance management companies and regional operations for insurers, re-insurers
and brokers.
Captive
insurance business is regulated under a set of tailor made rules that take
into consideration the current state of the market and possible future
developments. These rules provide for the registration and operation of
captive insurance companies which within the Maltese insurance legislation
are termed "Affiliated Insurance Companies" ("AICs").
"Affiliated
Insurance" is defined as "the business of an insurance company
which is registered in Malta and whose business of insurance is restricted
to risks originating with shareholders or connected undertakings or
entities".
AICs
may insure risks originating from a wide range of persons including:
§
parent companies;
§
associated or group companies;
§
individuals or other entities having a
majority ownership or controlling interest in the AIC, and
§
members of trade, industry or profession
associations insuring risks related to the particular trade, industry or
profession.
Companies
carrying on affiliated insurance are required to possess own funds,
whether in Maltese liri or in other currencies acceptable to the Authority
amounting to not less than the applicable minimum guarantee fund as
determined in the Fourth Schedule to the Insurance Business (Insurers'
Assets and Liabilities) Regulations, 2004. Such funds are to be
unencumbered at all times.
The
components making up the own funds are to consist of:
·
Paid up share capital which must not be
less than 50% of the value of the own funds requirement
·
a mixture of issued and unpaid share
capital, preferential share capital and subordinated loans, retained
profits and reserves
AICs
carrying on general business of a prescribed nature are required to
maintain an equalisation reserve. Companies are exempted from this
obligation if:
·
the net premiums written in a financial
year in respect of that financial year are less than Lm500,000 (approx.
Eurol,250,000); or
·
the net premiums written in a financial
year in respect of that business are less than 4% of net premiums written
in the financial year in respect of all its general business are less than
Lml million Maltese liri (approx. Eur02,500,000), and company has no
equalisation reserve to bring forward from previous financial year.
Notwithstanding
the above, since technical provisions and equalisation reserves are
allowed as a deduction in the computation of taxable income, an affiliated
company carrying on reinsurance business may still elect to hold an
equalisation reserve if its business is less than the aforementioned
thresholds.
AICs
are required to maintain at all times a margin of solvency in accordance
with regulations which are modelled on the European Union Directives.
Companies carrying on affiliated insurance are required to establish and
maintain adequate technical provisions.
An
insurance company, including an affiliated insurance company, is required
to cover its technical assets and margins of solvency requirements by
admissible assets. Moreover to ensure the safety, yield and marketability
of the assets must be diverse and spread.
There are no investment restrictions with
respect to that portion of assets that is not required to cover technical
provisions and margins of solvency.
The
Companies Act (Cell Companies Carrying on Business of Insurance)
Regulations, 2004 allow a licensed AIC to be registered as or convert to a
protected cell company. These Regulations
provide for:
·
segregation
and protection of cellular assets from other assets of the company,
·
creation and issue of cell shares,
·
transfer of cellular assets to other
persons, and extension of protected cell assets concept to the transferee,
·
provisions requiring assets attributable
to different cells to be kept separate and separately identifiable;
·
provisions requiring cellular and
non-cellular assets to be kept separate and separately identifiable;
·
use of non-cellular assets as a secondary
asset base where cellular assets are exhausted, and
·
other related matters.
HOW
LONG DOES AN APPLICATION TO SET UP AN AIC TAKE?
An
application for authorisation by an affiliated company is processed within
a statutory period of three months.
Approval is granted after the MFSA is satisfied
that:
·
an application is filed in writing on the
prescribed form;
·
the company has the appropriate own funds
for the type of business to be carried on or being carried on by the
company;
·
the company's objects are limited to
business of affiliated insurance and operations arising directly therefrom
to the exclusion of other commercial business;
·
sufficient information is made available
on persons having any proprietary, financial or other interest in, or in
connection with, the company;
·
all qualifying shareholders, controllers,
and all persons who will effectively direct the business of insurance are
fit and proper to ensure the company's sound and prudent management;
·
a scheme of operations has been submitted
in accordance with the relevant Directive.
WHAT
ARE THE LICENCE FEES APPLICABLE TO AIC's?
Licence
fees for AICs, unlike those of companies
carrying on direct and reinsurance business do not vary according to the
amount of business the company underwrites in the previous financial year.
|
Fees
|
Lm
|
Indicative
in Euros
|
|
|
|
|
|
Affiliated
Insurance companies
|
|
|
|
|
|
|
|
Application
for authorization
|
500
|
1,250
|
|
Acceptance
of application
|
500
|
1,250
|
|
Continuance
of authorisation
|
1000
annually
|
2,500
annually
|
|
|
|
|
TAXATION
A
company carrying on affiliated insurance, is taxable at the normal company
rate of tax which currently is 35%. However, if such a company underwrites
risks situated outside Malta, it is able to operate the foreign income
account bringing the effective tax rate down to 5%.
Supporting
the tax regime are many attractive and wholly compatible double tax
treaties as well as other methods for relieving double taxation on
cross border transactions (such as the flat-rate foreign tax credit).
We
would like to advise persons contacting us in this regard that we do not
offer a free information service and prior to providing detailed advice we
would require a retainer agreement to be signed.
Page last updated on
Copyright 2000: Griscti & Chetcuti, Advocates
Residence