Intense competition among domestic insurers versus record-growth in the provision of international insurance services continues to characterise Malta’s insurance sector. Although the local market has seen some form of consolidation in the past two years, insurers claim that market rates need to improve for the industry to remain profitable. Meanwhile, Malta has established a foothold in the European insurance market, and is poised to take market share from its on- and offshore rivals. The country’s proven and tested cell company legislation offers struggling small and medium insurers, reinsurers and captives a strategy for survival in the post-Solvency II regulatory landscape, while new business is also expected to be driven by insurance-linked securities. US and Asian market players, keen to sell insurance to European clients, have shown increased interest in what the country has to offer and are set to join the list of international companies and ‘blue-chip’ corporations that have already turned to Malta to insure traditional, but also emerging risks such as cyber, environmental and employee benefit risks.
Insurance Market Growth
Malta’s insurance sector has long been open to foreign investment. Private and commercial insurance was first developed between the two World Wars when a number of underwriting agencies representing British insurance companies set up on the island. Following major consolidation in the UK market during the 1990s, many of the British insurers exited Malta’s small market, creating the opportunity for local agencies to convert into independent insurance companies. But it was Malta’s entry into the EU in 2004 that truly transformed the insurance landscape, with EU regulations enabling foreign companies to insure assets and risks anywhere within the Union. This attracted insurers seeking a more cost-effective jurisdiction, as well as non-EU insurance companies or intermediaries seeking to tap into the EU insurance market. They are allowed to write directly into Europe, thus avoiding the need to engage additional, and often expensive, fronting insurers.
"Malta’s cost base is increasing and the supply of top flight human resources is not keeping up with the growing demand. This inevitably has an inflationary effect as well as being a limitation to growth. However, as an economy the fundamentals are sound, and there is real productivity and growth. This said, I feel it is important that we keep our eye on the ball and avoid a situation where things can overheat and thus require a correction."
Julian J Mamo, Managing Director of GasanMamo Insurance Ltd
A Diverse Industry
Today, Malta’s insurance sector boasts a workforce of more than 1,200 people, and at the end of 2016, 60 insurance companies were based in the finance centre. These were made up of 45 licensed non-life insurance companies, seven life insurance firms, two composite and six reinsurance enterprises. Most of these companies sell insurance to clients outside of Malta. The insurance management community, consisting of 11 insurance managers, has greatly helped the sector to grow and develop. Global corporations such as BMW, Peugeot, Citroen, Nissan, Liberty Global, Volkswagen, Vodafone and RWE have set up insurance companies or captives in Malta, while reinsurance providers Munich Re, Axeria Re and Argo Global, as well as international insurance managers such as AON, Marsh, Willis, JLT, Artex Risk Solutions and USA Risk Group have established operations on the island. In fact, corporations from across the world are being serviced from Malta, including businesses from other sectors that are using Malta’s protected cell company legislation to offer insurance to third parties to cover risks in areas such as travel and property. Companies that are primarily active on the local market include Mapfre Middlesea Insurance, Atlas Insurance, GasanMamo Insurance, Citadel Insurance, Elmo Insurance and HSBC Life Assurance. These companies service some 85% of the local personal and commercial market, while the two major life insurance companies, Mapfre MSV Life and HSBC, handle some 90% of the life market.
Growth in Written Premiums
The combination of a local and an international market has led to record growth. In 2015, companies wrote €3.84 billion in gross premiums, up from €2.83 billion in 2014 and €2.58 billion in 2013. Premiums relating to risks or commitments based outside Malta rocketed from €1.2 billion in 2010 to close to €3.4 billion by the end of 2015. International insurance business now accounts for some 90% of the total gross written premium. Local premiums also increased, albeit on a smaller scale. In the general business sector, gross written premiums in relation to risks situated in Malta reached €0.12 billion in 2015. In the long-term insurance sector, gross written premiums reached €0.3 billion in 2015. Malta’s insurance penetration rate stands at 5%, below the EU average of 7.6%, with spending significantly lower than the EU average.
Regulatory Efficiency & Cost Effectiveness
Insurance business is licensed and regulated by the Malta Financial Services Authority (MFSA). The MFSA stresses that it is committed to prudent regulatory oversight but also to innovation, efficiency and cost effectiveness that allows companies to flourish and meet changing consumer needs. The country has enacted legislation that allows the set-up of captives, while Malta has also championed the introduction of Protected Cell Companies (PCC) and Incorporated Cell Companies (ICC) in the European Union. Both structures allow firms to write risks through cells within a core company and provide businesses with a cost-effective alternative to setting up a stand-alone insurance company.
Malta has also recognised the growing importance of insurance-linked securities (ILS) and catastrophe bonds, as well as the convergence of reinsurance and capital markets. The island has enacted legislation allowing for the formation of reinsurance special purpose vehicles (RSPVs) and securitisation cell companies (SCCs). These new regulations will strengthen Malta’s role as an alternative risk transfer domicile as they link the insurance industry with the capital markets. They also allow Malta to attract reinsurance sidecars and hedge funds interested in entering the reinsurance business.
"Now that Solvency II has gone live, we are seeing increased enquiries from leading insurance management companies and various entities seeking cost and capital savings, preferring the more efficient cellular route to underwrite insurance. While in the early days most enquiries used to be from UK parent companies, most recent enquiries and cell formations emanate from continental Europe."
Michael Gatt, Managing Director of Atlas Insurance PCC
Expansion remains a major challenge for domestic insurance companies, especially in the non-life segment. Competition is forcing insurers to cut underwriting rates, while claims are reported to be rising, putting insurers’ margins under pressure. This challenging environment has already resulted in a few overseas insurers withdrawing from the motor market during 2015, while Mapfre Middleasea has acquired the business of Allcare Insurance after the company got into financial difficulties. Insurers claim that rates need to be adjusted upwards for the sector to grow in a profitable and sustainable way. Meanwhile, insurers are looking at two avenues for growth. The first is bringing in new insurance products, such as pet insurance and products for bicycles. Insurers can also grow their businesses by tapping into the expanding economy and offering innovative and creative policies addressing other niche-market demands. There are some sectors, too, which have yet to be fully exploited by insurance firms, including oil and gas. The other is growth outside of Malta, with some companies having entered foreign markets by offering specialised products. There is also room for growth in the life insurance segment as coverage in Malta is currently around 38% of the EU average. However, companies report that the sector is picking up on the back of low interest rates. Insurance products are considered as low-risk investment and saving products offered by insurers are becoming more popular with the Maltese population.
Onshore Cell Success
Malta’s international insurance sector is set for a period of growth – Solvency II has finally been implemented and the uncertainty surrounding its introduction has vanished. In this new reality, Malta’s insurance professionals agree that Malta’s legal framework – and specifically the PCC structure – is the island’s main selling point. Malta already hosts 12 insurance PCCs with more than 30 cells, which are owned by companies such as Swarovski, Amplifon, Travelodge, Ocado and TUI. The PCC regime is well placed to provide insurers with a cost-effective way to manage the higher capital and compliance requirements under Solvency II. The structure offers economies of scale, cost burden sharing and provides the cell with access to knowledge and management expertise pooled within the core of the PCC. It is seen as the ideal structure for start-ups, which otherwise might struggle to comply with the new requirements. Insurance Managers and Brokers can also benefit from this structure. For instance, foreign consultants, brokers or managers could create their own cells in local insurance broker or management PCCs, through which they can service their clients across the EU, with less capital and cost than setting up stand-alone licensed companies.
Future growth is also expected to be driven by securitisation, either through the use of RSPVs or SCCs. An SCC is a single legal entity that can establish one or more segregated cells for the purpose of entering into securitisation transactions, including insurance-linked securities transactions such as catastrophe bond issuances, longevity risk transfer transactions, collateralised reinsurance transactions and cell sidecars. The main benefit of SCCs lies in their application as programme or platform structures, for instance if repeat transactions are envisaged, offering lower costs and quicker set-up time for each transaction. Exchange Re has become the EU’s first securitisation cell company platform for cell-based insurance linked-securities (ILS) and collateralised reinsurance transactions after having been granted approval by the MFSA.
A Competitive Domicile
Foreign companies often chose Malta because it is an EU member state with dedicated cell legislation; however, they soon realise that there are several other advantages such as highly qualified insurance professionals and a business-friendly environment. This makes the country an attractive outsourcing destination for foreign insurance companies, managers, brokers and other intermediaries. Functions such as claims administration, analytics, customer care, policy administration, sales and distribution can be outsourced to Malta with a view to reducing costs. With its innovative legislation and operational advantages, Malta is possibly top of the list for companies that seek to relocate to another jurisdiction and require vehicles for specific needs, such as third-party business, solutions to reinsurance issues or want to tap into capital markets. Malta’s re-domiciliation legislation allows for a seamless transfer of structures in and out of the island, without the need to wind up operations. In addition, insurance companies are exempt from paying duty on documents on the insurance of risks situated outside Malta and from paying contributions to the Protection and Compensation Fund with respect to the same risks.
Insurance companies in Malta can rely on a wide support network, including three associations: the Malta Insurance Association (MIA), the Malta Insurance Management Association (MIMA), the Association of Insurance Brokers (AIB) as well as the newly setup Malta Association of Risk Management (MARM). The sector is also backed by a large number of legal firms, as well as accounting and auditing practitioners that range from local practices to the global ‘Big Four’. Furthermore, over the past years, Malta’s lawyers and accountants also acquired the specialist insurance knowledge needed for more complex services, like the re-domiciliation of captives from another jurisdiction to Malta.
"Being based in Malta has many advantages including; a professional and well-established insurance sector, an accessible and experienced regulator, the ability to passport into all EEA countries on a freedom of services basis and a strong presence of industry professionals."
Karl DeGiovanni, Managing Director at Aon Risk Solutions
While the low interest environment will continue to pose a challenge to the sector as it affects the way insurance companies reserve and invest their funds, product innovation is seen as one measure to cope with this environment. Sector professionals highlight that Malta’s domestic insurance sector is on the right track when developing new policies and services.
On the international front, Malta has become an important player in the insurance market, and the fact that the island has opened up to the insurance-linked securities market bodes well for the future. There is widespread agreement that other European domiciles considering introducing similar concepts are not a threat to Malta, but rather will help promote the PCC concept across Continental Europe. By offering EU passporting rights, a fiscally beneficial environment and competitive operating costs, the island is expected to remain a hotspot for EU and non-EU direct insurers seeking a cost-effective location. It will be a magnet, too, for multinationals looking for reinsurance solutions and service providers with an international client base eager to enter the EU insurance market. To exploit its full growth potential, Malta only needs to ensure that it continues to offer innovative solutions, sustains a low cost base and maintains an efficient operating environment.