Matthew Bianchi, deputy chairman at FinanceMalta, talks to Captive Review about the advantages of Malta as a location for cell captives

Small but mighty, Malta is leading the way in the context of cell companies.

Despite its location away from the central hub of the European continent, Malta’s inclination towards innovation allowed it to become the home of a great number of quality insurance companies, including reinsurers, captive insurers, protected cell companies and insurance managers.

Protected cell companies

Almost 20 years ago, Malta introduced protected cell company (PCC) legislation as part of its company law. These two decades of experience have helped Malta to develop an advantageous position in this highly competitive market. The setup of a PCC offers substantial benefits.

It allows for the ongoing regulatory burden of an insurance company to be spread throughout the owners of the various cells and the core of the company without putting any individual cell’s assets at risk from liabilities of the other cells.

Despite each cell having its own distinct patrimony, the core is considered as a single legal person. The capital requirements of a PCC are covered by the core and cell as a whole, and this is minimised to the notional capital requirements applying at cell level.

This means that the cell often needs to satisfy a much lesser capital requirement than that expected of a standalone insurer or intermediary. PCCs also give rise to attractive benefits in relation to governance requirements, system of governance and regulatory reporting.

The structure of a PCC offers economies of scale and significant cost burden sharing as it grants cells access to a common pool of knowledge and expertise within the common management system at the core of the cell company.

Additionally, it provides flexibility as it can be set up using a combination of the three types of available cells, which are:

• Captive cell: they cater towards commercial groups looking for a captive risk financing vehicle.
• Fronting cell: used by captive owners wishing to reduce EEA fronting costs.
• Third-party writing cell: employed by any business planning to sell insurance to third parties.

Due to the increasing challenges in the context of directors’ and officers’ liability insurance cover, PCCs have been resorted to as an alternative model for captive insurance arrangements. The reasons for this are the following:

• The cell may be seen to be under the control of a third party considering how the cell does not have separate legal personality, the cell owner does not have any voting rights and the directors of the PCC are not appointed by the cell owner but by the PCC’s third-party owners.
• The PCC offers independence and objectivity in the management of the cell business, including in relation to claims in particular.
• Orphaned trust or similar structures may be used to distance and divorce the ownership of the particular cell from the ownership of the company of the directors and officers in question – this provides comfort to the circularity of funding and ring fencing of assets.

While the PCC model was originally seen as an ideal vehicle for captives and fronting arrangements, the scope for the use of the PCC has continued to evolve and now extends to insurance-linked security models, direct insurance business, as well as to insurance intermediaries.

Notably, Malta’s cell legislation allows for cells for direct and captive insurance, reinsurance, brokers and managers.

Incorporated cell companies

The establishment of an incorporated cell company (ICC) structure is limited to the carrying out of business of insurance or captive insurance.

In an ICC, an incorporated cell is a limited liability company with separate legal personality. The cellular concept provides for the establishment of a cluster of incorporated cells grouped under an incorporated cell company structure.

Assets and liabilities are attributed either to the incorporated cell company itself or to a particular separate cell of the cell company.

An incorporated cell is not a subsidiary of its ICC. ICCs therefore provide two main benefits: the separation of assets and liabilities of the cells, as well as the separate legal personality of each separate cell.

The directors of an incorporated cell company and the directors of each incorporated cell are duty-bound to keep the assets and liabilities of the incorporated cell company separate and separately identifiable from the assets and liabilities of its incorporated cells.

The assets and liabilities of each incorporated cell must also be kept separate from each other. Due to the separate legal personality of each individual cell, an incorporated cell company shall have no power to enter into transactions on behalf of any of its incorporated cells, and vice versa.

Reinsurance special purpose vehicles

A reinsurance special purpose vehicle (RSPV) is defined as an undertaking, other than an existing insurance or reinsurance one.

It assumes risks from a ceding undertaking and fully funds its exposure to such risks through the proceeds of a debt issuance or any other financing mechanism where the repayment right of the providers of the particular debt or financing mechanism are subordinated to the reinsurance obligations of the RSPV.

RSPVs complement traditional reinsurance arrangements and are a cost-effective way to provide an additional pool of capital to reinsurers while contributing to premium price competitiveness against adverse insurance market cycles.

European member states are provided with a regulatory framework which enables insurance or reinsurance undertakings to transfer risks to RSPVs.

Sponsors and arrangers of financial instruments and debt are therefore able to look to Malta as a potential domicile for the formation of an RSPV and reinsurers can use the RSPV to transfer their risks to the capital markets in a cost-efficient way.

Securitisation cell companies

The securitisation cell companies (SCC) are regulations drawn upon the PCC concept by introducing a new cell company structure to operate as a securitisation vehicle.

The SCC framework builds upon the successful features of Malta’s various pieces of cell legislation in these sectors, but also introduces some important innovations that provide securitisation structures with the flexibility and utility of cell entities.

The structure of an SCC is based on the principle of a single legal entity with multiple patrimonies and that of segregation of patrimonies with no cross-contamination.

Like a PCC, each cell does not have separate legal personality and each cell’s patrimony is separate from the assets and liabilities of each other cell and of the SCC itself.

Every individual cell established by the SCC may enter into one or more insurance-linked securitisation transactions, provided the insurance risks assumed always originate from the same insurance undertakings or same insurance group.

Nevertheless, different cells may enter into transactions with different originators, thus enabling SCCs to be used as platform structures.

In conclusion, the Maltese legislative framework provides an array of cell vehicles increasing potential for the global financial services industry.