The insurance industry and Brexit.
For the last decade, Malta has worked to establish itself as a stable place for captive and insurance business. This is particularly true for UK insurance-related commerce, despite the uncertainty that Brexit brought to the European market.
Up to the January 1st, 2021 deadline, both Europe and the UK contended with completely unchartered waters of Brexit because right up until the last minute, no one knew what type of Brexit deal would be in place. On top of that was the added burden of COVID-19, which immediately impacted worldwide commerce, investment, and market stability. Given that we are still mid-pandemic, and it may be a while before things return to normal if they ever do, COVID-19 remains the wild card for the industry.
It is an extraordinary set of challenges. But the bottom line is that predictions about Malta as an attractive post-Brexit destination for the UK insurance industry were correct. But in order to understand how this came to be, it’s important to examine these changes (both Brexit-related and otherwise) a little more closely.
1. Two Operating Systems
Pre-Brexit, the European Union provided a streamlined operating system, enabling ease between British and Maltese transactions. But now there are different sets of regulations (UK and EU) and two operating systems for the same transaction. Unfortunately, this requires more time and more resources to harmonise because though compliance differs in both places, harmony between both is still required. And this need for a new type of complicated compliance doesn’t just flow one way. As the Maltese Financial Services Authority adds that it flows the other way as well-
‘Maltese license holders wishing to continue providing financial services in the UK should do so in line with the guidance provided by the relevant UK financial services regulator (FCA, PRA/BoE)...’
This perception of additional work and resources has been viewed as problematic by some companies and captives, who have taken action like those who moved to Gibraltar. But for those many captives who want to stay put in an EU full-member country, Malta offers an attractive solution to this two-system problem because of its understanding of new UK directives, and because of the clarity of its legislation.
2. Suggested changes to Solvency II directives bring challenges and potential advantages
The UK is considering and will most likely adopt changes to Solvency II risk management requirements. The HM Treasury Report from October 2020 on Solvency II explains this is because of the ways in which the UK sector is different. It is the fourth largest in the world, worth about 1.9 trillion in invested assets. Its priorities for investment are changing - for instance, the UK was the first major economy to legislate to reach net-zero emissions by 2050, which requires specific investments. There’s also interest in opening the approach to regulation, moving from rules-only to rules and judgment. Specifically, the Report has called for insurance companies,
‘to provide long-term capital to underpin growth includes "investment in infrastructure, venture capital and growth equity, and other long-term productive assets, as well as investment consistent with the government’s climate change objectives.’
They take the position that the way things were before Brexit favoured corporate debt/sovereign bonds while hurting investments in green and other forward-looking technologies. But the increasingly positive attitude toward risk demonstrated by the Malta Financial Services Authority complements the push toward these investments in the future of the UK.
3. The COVID-19 Wild Card
One of the most important influences on global commerce and individual businesses has been the Covid-19 pandemic. It has completely revolutionised how businesses operate both with their customers and with one another. The biggest downsides have been the increase in liquid funds (impacting credit terms), divestment due to uncertainty, and changes on policy wordings and coverage.
It's difficult to say when and if the industry returns to some type of post-COVID normalcy. But most captives and investors are looking for stability and consistency in a long-term investment base. Malta’s strategic location and cutting-edge economic placement not only provides the best base possible under the current situation but will provide an even more excellent base when COVID-19 loses its impact.
Why Malta is still an excellent place for Captives
Despite these enormous challenges, Malta remains an excellent place for captives and insurance, for several reasons. First, it’s a leader in the insurance industry and innovation. An article in Law Reviews explains the growth of the insurance industry in Malta:
‘It has gradually evolved from a small number of local set-ups to approximately 79 insurance and reinsurance undertakings, of which 63 underwrite risks situated outside Malta. Another 455 foreign insurers based in the European Union are underwriting direct risks in Malta, making use of their 'passporting' rights on a services or establishment basis.’
Not only has Malta become known as a good place for insurance-related investment, but it also leads in innovation. From a practical point of view, Malta is the only EU full-member state that has PCC legislation. Yusra Barmaz at Zedra explains that Protected Cell Companies allow ‘any assets and liabilities of a company can be effectively ‘ring-fenced’ within individual cells, which adds a degree of protection. If a particular cell enters into a transaction, only that cell can be held liable for any claim arising from the transaction…’
This ring-fencing gives Malta a distinct advantage. European Captive Winner the Atlas Group explains that PCC legislation reduces costs because of ‘shared governance, risk management and reporting besides also potentially reduced own funds capital requirements.’ Malta's gone out of its way to create a good destination with a PCC structure and then take it one step further by forming ICC for insurance securities, making MFSA a "global fintech hub" and increasing risk tolerance.
This combination has achieved the result of making Malta theoretically a very attractive place for captives. It has provided an established ‘active insurance platform’, cost burden sharing, and a speedy transaction entrance/exit.
Confidence, stability, and savings are key to the insurance industry, or any investment industry. It is no wonder Malta is the jewel of the Mediterranean for captive and insurance and will continue to grow with the post-Brexit and post-COVID world.
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