Malta’s international insurance industry has developed fast over the last two decades, often far ahead of the curve in bringing alternate and unique solutions to market. As new technologies and geo political realities cause changes to the insurance landscape’s contours, Malta is determined to keep itself relevant and find new ways to expand growth.
One major example is Brexit. The UK’s decision to exit the EU has prompted intense competition among other European financial centres vying for former UK-based businesses. Hopes in Malta are high that a number of brokers, insurers and captives will choose to open offices on the island, with its lower cost base and established international insurance sector being seen as key factors in its favour.
The island’s unique and tested cell company legislation could also prove a key attraction to insurers and tech companies seeking to utilise Insurtech, blockchain solutions and smart contracts. US and Asian market players, keen to sell insurance to European clients, have already 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.
While business is booming when it comes to the provision of international insurance services, Malta’s domestic insurance sector faces a number of challenges. The industry is extremely competitive and defined by price undercutting. Although the 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.
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.
Regulatory Efficiency & Cost Effectiveness
The industry regulator, the Malta Financial Services Authority (MFSA), has played its part in boosting the island’s attractiveness to the international insurance industry. With a stated commitment to prudent regulatory oversight accompanies by innovation, efficiency and cost effectiveness, the MFSA has created an industry environment that allows companies to flourish and meet changing consumer needs. The country has enacted legislation that allows the set-up of captive insurance companies, and has 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.
A Diverse Industry
Today, Malta’s insurance sector boasts a workforce of more than 1,200 people, and at the end of 2017, 63 insurance companies were based in the finance centre. These were made up of 46 licensed non-life insurance companies, eight life insurance firms, two composite and seven 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, Citröen, 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.
Corporations from across the world are now 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.
Many Insurance companies are located in Ta' Xbiex
Surpassing the €3.8 billion mark
The combination of a local and an international market has led to record growth in Malta’s insurance market. In 2016, companies wrote €3.82 billion in gross premiums. While this represents a marginal decline of 0.5% compared to 2015 (€3.84 billion), the sector’s recent growth is impressive. Gross premiums rose 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 €3.3 billion by the end of 2016. International insurance business now accounts for some 90% of the total gross written premium. Local premiums also increased throughout the years and reached €0.5 billion in 2016. Malta’s insurance penetration rate stands at 5.2%, below the EU average of 7.6%, with spending significantly lower than the EU average.
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. Some companies are also seeking growth outside of Malta, 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.
Onshore Cell Success
Malta’s international insurance sector is expected to continue performing strongly. Solvency II was finally 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 14 insurance PCCs with 34 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 Areas
The sector also points to emerging opportunities from block- chain technologies and the island’s ability to play host to disruptive players from different insurance verticals. Insurers offering or developing innovative solutions could use a cell in a PCC to test and deliver new applications, either by setting up their own PCC structure or by working with an established insurance company renting out cells. 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.
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'.
A Competitive (Post-Brexit) Domicile
Malta’s value proposition is also being viewed as making Malta attractive as a post-Brexit destination. The MFSA expects that a number of insurance companies will open offices on the island in the coming months. Foreign companies often choose 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 out- sourcing 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 wanting 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), and 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.
The MFSA expects that a number of insurance companies will open offices on the island in the coming months.
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. 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.