Captive insurance companies' decision to set up in Malta : a study of the contributing factors

Abstract

The Maltese insurance industry has experienced substantial growth over the last 10 years. 10 years ago, the Maltese insurance industry was only made up of local insurance companies. However, over the years Malta has managed to attract a number of insurance vehicles from different countries. The main reason for this growth was Malta becoming a member of the European Union in 2004. Out of the 57 insurance vehicles, 11 are captive insurance companies. A captive insurance company, also referred to as an ''Affiliated Insurance Company'' (AIC) is a company which is set up by its parent to insure its risks, rather than insuring them with other third party insurance companies. It is important to note that the insurance managers located in Malta have had an important role in the captive insurance industry's growth. All the captive insurance companies taking part in this study are managed by insurance managers licensed in Malta. Malta went from having no captive insurance companies 10 years ago, to now having 11 licensed captive insurance companies, some of which include Orlen Insurance Ltd, Falcon Insurance Ltd and Rhenas Insurance Ltd. This study evaluates the captive insurance industry in Malta. Firstly, some possible reasons for parent companies to create their captive insurance company were determined. Furthermore, the researcher identified the incentives which Malta possesses that attract parent companies into setting up their captive insurance company in Malta. iv In order to obtain the captive insurance companies' views, a number of interviews were conducted with captive insurance companies. It is important to note that all the captives which took part in this study are managed by insurance managers licensed in Malta. Some of the risks which parent companies have to manage can be quite complex. It was concluded that by creating a captive, the parent company is able to insure these complex risks which would either be uninsured in the traditional market or insured at a high cost. In addition, when there is no claim by the parent company, the premium paid to the captive insurance company would not be lost, as it remains within the company. If the parent company had to insure its risks through a third party, the premium would be lost. This was also considered as an important reason for parent companies to create their captive insurance company. All the insurance managers interviewed strongly agreed that EU membership is an important incentive in the creation of a captive insurance company. Through EU membership, Malta gained access to the European market and is now able to compete with other countries. Furthermore, the unique Protected Cell Company (PCC) legislation which Malta possesses is also considered by the insurance managers as another important incentive. As explained in the Chapter two, a PCC is made up of a core and a number of cells. The PCC legislation allows a parent company to set up its captive insurance company as one of the cells within the PCC. One advantage for a cell captive is that it is not required to maintain the capital requirements. The insurance managers interviewed said that Malta's captive insurance industry has the potential of growing; however, more emphasis must be done on promoting the captive insurance industry. Malta has a good reputation, an approachable and motivated regulator and a strong financial sector. These positive factors can further help Malta in becoming a well-established captive insurance domicile.