George M. Mangion | Wednesday, 11 November 2009

A budget stimulus

A bold message was delivered by the Finance Minister last Monday when apart from other things, he exhorted us to be courageous and to be prepared for the new dawn of post recession bliss. Yes, small business was targeted in particular for financial aid with initiatives like micro-financing and this has long been the siren call of GRTU.
One certainly hopes that the red tape becomes simplified and this leads us to aspire for a brighter future. This was very much the cornerstone of Tonio Fenech’s budget speech, given at a time of the biting recession winds that are buffering our economy. It is certainly a bold and courageous blueprint which one hopes is taken seriously by those who administer, and please this time do deliver!.
The finance minister announced the plan that Malta Enterprise will be strengthened and be better financed so as to attract new investment. The €20 million investment proposed in a Bio-Technology Park is long awaited and let us hope this is brought into stream as soon as possible. New investment is rumoured to be currently under negotiation and this should translate into hundreds of new jobs.
This augurs well amid the job seekers who are only seeing and hearing of gloom from certain quarters of the press.
More good news arrives in the financial services sector. PKF Risk management has organised its fourth consecutive seminar in Dublin to showcase the island’s potential. The theme “grass shoots” involves captives (termed affiliates) and hedge funds which are coming to Malta in larger numbers. Adding to the growing list of quality names we see that their arrival has been a favourite topic among local insurance practitioners seeking better horizons.
Certainly this is good news for the financial services industry and is the result of a number of professionals who have been active to promote the island as a competitive and well regulated centre.
One augurs that Finance Malta takes courage to actively nurture the grass shoots. Also positive is the approach by MFSA with an attractive legislation. This can be measured by the ease of re-domiciliation. This means that a body corporate-licensed in another jurisdiction to carry out any insurance business or to provide insurance management or broking services, may be authorised to continue as a company formed or registered in Malta. The same positive note involves the attractiveness of retail funds such as UCITS to be registered here.
In general, notwithstanding the recession, corporate insurance buyers and mid-sized business owners are seeing the advantages of captive ownership. They see the opportunities that captives in Malta can provide and have been expanding their usage in a number of different ways. But they are not the only people that see the opportunity in captive ownership. To start with premiums charged by commercial insurers include amounts to cover the insurer’s profit margin and overheads.
Other benefits include concessions that captive management services are zero rated for VAT purposes. A company carrying on affiliated insurance, is taxable at the normal company rate of which currently stands is 35 per cent.
However, if such a company underwrites risks situated outside Malta, it is able to benefit from the refund of tax on distributions from this account bringing the effective tax rate to 5 per cent.
It is not surprising that the market leaders in risk management are steadily focusing on the opportunities in the sector available in the island. But what has made captives and hedge funds the flavour of the month?
One may say that traditionally, captives were in the domain of established centres such as Bermuda, Cayman Islands, Ireland, Luxembourg, Isle of Man, Hong Kong,BVI, and some States in the US.
For the casual reader it is relevant to explain what is a captive insurance company. A captive insurance company is, in its purest form, a subsidiary company formed to insure or reinsure the risks of its parent and or associated group companies. Captives are usually formed to provide alternative risk management solutions to that of the conventional insurance market. The administration of a captive is usually, though not always, outsourced to a specialised captive manager. There are a number of reasons why captives may provide a better means of risk management than the conventional market. The main points are factors such as costs, flexibility and improved claims management.
With captives one tends to save on such overheads. As these can be significant in case of larger corporate structures it goes to show why captives are considered to be more cost effective. Captives can also be flexible in their operation. To quote an example we can say that when the market is soft, the captive can take advantage of the low rates by reinsuring a relatively large proportion of its risks. The low cost of reinsurance allows the captive to build its reserve base. Conversely the market hardens, the captive is able to retain a larger proportion of its risks, and can maintain cover for its parent even when commercial insurance is unavailable or prohibitively expensive.
The secret for attracting both captives, and to a larger extent also hedge funds, is not hard to comprehend. One notes how over the past decades corporate insurance buyers have acknowledged the significance of captives and once they have found ways to exploit their numerous advantages, they rarely return to the conventional insurance market.
They are proven to be the right and cost effective solution for organised utilise them in developing strategic risk financing programs. In spite of the slowdown, there is still a very competitive market among financial centres to attract captive insurance companies. Critical insurance services such as administration/management, actuarial, legal, accounting, claims and loss control were all centralised under one roof with resultant economies of scale. Why some may criticise captives as being impersonal when handling claims one cannot underrate their efficiency. This is manifested where the insurer is a captive, the claims handling procedures can be dictated by management, cutting down on the delays and bureaucracy that are often a necessary part of the claims handling procedures of commercial insurers. This is because of the clever way that captives generally retain a portion of the overall risk and reinsure the balance. Some may well ask how can the same facilities of a captive be obtained by forming a protected cell company and how can it be used to exploit its unique features in Malta?
Yes it is now possible to register a PCC. The is a unique offer within the 27 E.U members. Malta is the first to offer this. This can be described as a standard limited company that has been separated into legally distinct portions or cells. The revenue streams, assets and liabilities of each cell are kept separate from all other cells. Each cell has its own separate portion of the PCC’s overall share capital, allowing shareholders to maintain sole ownership of an entire cell while owning only a small proportion of the PCC as a whole. A cell is not bestowed with separate legal personality. Due to its inbuilt flexibility a PCC can provide a means of entry into captive insurance market to entities for which it was previously uneconomic.
To conclude the budget for 2010 is a bold attempt to put a brave face amidst the turbulence that has besotted our faith this year. It is encouraging that the government has taken the cue from the stakeholders to rope in maximum resources to go forth and venture. Malta’s coming of age in the financial services market is being crowned by the attention is enjoying in the captives , PCC‘s and hedge funds sector. For such growing sector, the Island has the necessary local expertise to ensure that the formation and running of a successful investment. Five years since joining the EU we have taken bold steps towards implementing a robust regulatory regime which is in line with the European Union Directives. The ability to ‘passport’ insurance to all territories within the European Economic Area (EEA) and the double tax agreement held with 54 countries are clear examples of Malta’s growing appeal. With the tide in our favour we can go all-out to become the top financial centre in the Mediterranean.

George Mangion
Partner at PKF – an audit and business advisory firm



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11 November 2009


Malta Today


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