Captive Development Underlines Malta’s Journey from Offshore to International Center

The entry of Malta into the European Union in 2004 gave impetus to the island nation's ambition to transform itself from a fringe offshore jurisdiction to a full-fledged international financial center.

Today Malta claims a vibrant captives industry serving multinational corporations. For a small country that started well behind other jurisdictions, Malta is moving "extremely well" on captives, said Joe Bannister, chairman of the Malta Financial Services Authority.

"We see quite a number of companies that are established here," Bannister told BestWeek Europe.

The MFSA allows wide leeway to captive managers and draws little distinction between a captive and an insurance company, Bannister said. This policy has led to the creation of about 50 companies that may provide third-party business and be treated by their owners as "extended captives," Bannister said. By contrast, there are only about eight of what might be referred to as pure captives.

All of the big captive managers are in Malta, such as Marsh, Willis, Jardine Lloyd Thompson and Heritage.

"We like doing business down there," said Malcolm Cutts-Watson, London-based chairman of Willis's international captive practice.

"After a quiet 2009, we are optimistic that 2010 will be a very busy year for Malta," Cutts-Watson said after returning to London from a week in Malta. Malta has excellent hotel and meeting facilities and a well-educated work force, he added.

Steven Convery, general manager of Aon Insurance Managers in Malta, said the island nation is doing a lot of work "to raise the profile" of its captive industry. These efforts are led by the Malta Financial Services Authority and Finance Malta, which describes itself as a "public-private initiative set up to promote Malta's International Financial Center."

Malta has shown a tendency to bypass an established pattern that has seen companies start as captives and then become self-managed, said Convery. Instead, "a number of companies have just set up as insurance companies from day one."

As a jurisdiction, Malta "offers an approachable regulator," said Convery. "There is an established skills base. You will find the Big Four accountancy firms here. There are law firms here who understand the captive market. You will also find the main captive managers represented here. The Maltese regulations in themselves are based on the EU model."

Corporate Flexibility

Malta allows a captive to write both insurance and reinsurance. "It doesn't force you down the route of having two separate captives," Convery said.

Since joining the EU, Malta has attracted both "pure captives and also a number of general insurance companies that are in effect captives because they only write the business of their parents but actually employ their own staff," he said.

Bannister said Malta allows for protected cell companies, along regulatory lines developed in Guernsey. Recent legislation permits the creation of an incorporated cell company, which has a "legal personality," he said.

In addition to the advantages derived from EU membership and an approachable and commercially oriented regulator, Malta has a range of double taxation treaties, according to Cutts-Watson. English is the language of business, and there are good air links, he said.

While the cost of doing business has risen as Malta has become more international, "it's still comparatively cheap," said Cutts-Watson. "And the fiscal regime is benign, with an effective net 5% tax rate."

Malta competes most strongly for captives business with Ireland and Gibraltar and, to a lesser degree, Scandinavia. Luxembourg, which has similarities, has more of a focus on reinsurance, Cutts-Watson said.

Relations between the public and private sectors are good in Malta. "They've managed to turn themselves from being what I would classify as an inward-looking community, probably when they first joined the EU, to be a much more outward-looking community," Cutts-Watson said. "And they're starting to see now the investment in the island because of that."

Cutts-Watson compares Malta's efforts to attract business to those of Ireland in the financial services arena in the early 1990s. "I see that same enthusiasm in Malta," he said.

In Cutts-Watson's view, Malta has the capacity to absorb a great deal of new captives business. He identifies two sources: traditional corporate captives interested in an EU direct writing outlet, and insurance entities that want to write risk from Malta into the rest of the EU.

International Competition

Willis itself entered Malta in the early 1990s, when the country was still an offshore location, Cutts-Watson said. At the time, Malta was unable to compete with such established jurisdictions as Guernsey, the Isle of Man and Bermuda.

As a result of the international focus that came with EU membership, Willis "realigned ourselves with the island and have been actively promoting it," said Cutts-Watson.

The initial growth of Malta's captive sector was based on German companies, Convery said. "At the moment we're seeing interest from Spain, France and Sweden," he added.

Aon's main captive client in Malta is White Rock Insurance, which is also owned by Aon. "It's a protected-cell company, which has eight active cells," Convery said. "It's also just been licensed for a ninth cell."

Aon has applications in for two captives in Malta, for which it hopes to obtain licenses in the first quarter of 2010.

Malta's captive sector is affected by the global economy rather than by the Maltese economy, Convery said. A difficult economic climate in which companies have less money to spend can reduce captives business, he said.

"If you as an entity have less in your budget, it's much more difficult for you to justify spending part of that on setting up a captive," Convery said.

He added the overall outlook for captives is improving.

"We're seeing the signs of recovery in Europe, the U.K. and the U.S., and I think that can only be positive for captives," said Convery, who expects the captives sector in Malta to at least double in size in five years.

Convery does not see a change in the essential structure of captives in Malta.

"There are those companies for whom a captive will always be a captive," Convery said. "It will be something that's financing large corporate risks within the organization. And they don't want to have to run their own company."

While mergers and acquisitions among captive owners could be expected to have their effects on the control of captives, Convery does not predict strong competition among jurisdictions for business. While there is some rivalry among, say, Malta, Gibraltar and Dublin for captives business, these jurisdictions "are complementary rather than necessarily purely competitive," he said.

(By Robert O'Connor, London editor: [email protected])