It was a cold wintry day when I stepped out of Moorgate tube station in the heart of London’s financial district to attend a conference on captives. The conference was organised by Pageant Media in collaboration with a number of leading City firms that also included a sponsorship from Finance Malta. Called Captive Live UK, it was a full two-day event held in a converted brewery that hosted over 150 delegates from the various sectors of the insurance market. It certainly provided an excellent forum for networking apart from the number of topics that were dealt with in the sessions. Attendees included international players in the UK captive industry. This event was complemented by a number of exhibitors that promoted their firms/countries and offered advice on where to locate your captive.
Exhibitors were too numerous to recall but I can still remember Barclays Wealth, Qatar Financial Centre, Guernsey IFC, Isle of Man Captive, J.P Morgan Asset Management, Dublin International Insurance and Management Association (Dima), Labuan IBFC, and the Government of Gibraltar. As stated earlier, Malta was represented by Finance Malta as an exhibitor, and by officers speaking on behalf of The Malta Insurance Managers Association in the sessions. The dominant topic was the influential new regulation Solvency 11 and how this will pan out on captives in the coming two years. This is a EU directive that lays down strict requirements on capital adequacy ratios and aims to influence investment behaviour by imposing varying capital charges on assets. It was decided that all insurance companies in the EU would be regulated under the new Solvency II, its main objective being to tighten management of systemic and insurance group risk. Last year, various lobby groups tried to carve out an exemption for captives saying that they aren’t part of the insurance system and they’re not part of insurance groups. But the die has been cast, and except for SMEs with risks falling under €5 million, all captives have to face the music come January 2013. As can be expected, a number of competing financial centres vied to attract the attention of prospective captive owners during the conference. Each of the seven jurisdictions tried its best to explain the unique advantages it offers to manage insurance risks. The advantages of using Malta were explained by John Tortell, representing the Malta Insurance Managers Association. I was impressed by the eloquent way he described the island’s attributes. He said that Malta provides an opportunity for companies to locate their captive insurance business and insurance management activity within an OECD-recognised tax environment that combines tax efficiency with controlled foreign company tax legislation requirements.
Its insurance legislation provides opportunities for captive insurance business and related activities, including cell companies, insurance management companies and regional operations for insurers, re-insurers and brokers. The advantage of being a full EU member state allows for pass porting rights in respect of any risks across the 27 states. Another plus is the ease of re-domiciliation of a captive... instead of tedious run-off and a re-start in the new domicile there is now a seamless transition. Captives which do not insure third party risks are defined as “Affiliated Insurance”, which can also be converted into a cell under certain conditions. The Companies Act (Cell Companies Carrying on Business of Insurance) Regulations, 2004 allow a licensed AIC to be registered as a company or convert to a protected cell company. Another novelty is the attractive tax regime. In the case of profits derived from overseas business and distributed by way of dividend, shareholders are upon election entitled to a refund of six-sevenths of the tax paid by the AIC, which at the moment is 35 per cent. Netting off the refund from the main tax results in a net tax leakage of five per cent. So far, Malta has attracted a fair number of quality captives and continues to improve its attributes to compete with other established centres such as the Channel Islands, Gibraltar, Dublin and Luxembourg. Moving on I still remember the positive way James Tipping from the ministry of finance in Gibraltar updated the audience on the latest regulatory developments.
As from 1 January, the jurisdiction he represents announced a new tax regime with a reduced corporate tax rate of 10 per cent; Gibraltar is not fully EU regulated and is exempt from indirect taxes such as VAT. In addition, interest, royalties and capital gains are not taxed. Although Gibraltar is technically part of the EU, it is exempt from certain obligations. It has now signed 18 TIEAs, including ones with the US, UK, France, and Germany, and there is prospect over a tax information agreement with Spain which would effectively remove any obstacles to Spanish captive owners locating their captive in Gibraltar.
Mr Tipping remarked that Gibraltar has benefited from a stable government and has registered yearly budget surpluses, which in turn are re-invested to improve its legislative infrastructure. All this has permitted a gradual lowering of both personal and corporate taxes. Gibraltar’s GDP is estimated to have increased by five per cent in the fiscal year ended 31 March 2010, while the labour force is in near full employment despite the global economic crisis. Other centres of influence represented were Qatar, Guernsey, Isle of Man and Dublin. Respective speakers from each jurisdiction spoke about the merits of latest regulatory developments in their countries. Listening to the wealth of information makes the decision where to locate less easy. It became clearly evident that investors are somewhat spoiled for choice.
Although delegates were given detailed information on the advantages offered by each jurisdiction, the task of finding a perfect match remains. In fact, it is no longer an easy matter to decide the best jurisdiction to cover a particular financial risk now falling under Solvency 11.
A lot depends on the individual needs of the captive, whether it is rent-a-captive, a hybrid or a pure one. For example, the complexity of insurance risks that have been managed by captives over the past decades has given established places such as Luxembourg, Dublin and Guernsey a head start. Other domiciles such as Malta that are making rapid progress hope to remain competitive before and during the implementation of Solvency II.
To conclude, such conferences are highly valued by insurance practitioners as they enlighten them on the best way forward on how the industry can best face the new regulatory challenges of EU mandated regulation. From a captive owner’s perspective, it is still worth your while to meet with your peers in such a forum and be able to discuss what others are doing. Overall there is still an amount of uncertainty about how the smaller insurance companies will cope. Certainly all competing jurisdictions strive to fully resource their regulators to cope with the demanding changes which are expected in the coming two years. In the final remarks by Sarah Goddard representing DIMA she opines, “Solvency 11 is a powerful regulatory model and definitely serves a purpose, especially for those wanting to elevate the status of their captive in the global insurance business.”
Mr Mangion is a partner in PKFMALTA, an audit and business advisory firm.
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