New Frontier for Insurance in Malta’s...

Malta’s regulator, the MFSA, has been proactive in introducing innovate structures, particularly in the field of insurance. Special Purpose Vehicles (SPVs) have long been a solid feature of the global insurance industry, and with its strong track record as a finance centre Malta has a lot to offer.

The current challenging environment across Europe has increased the need to maximise returns and has stimulated new ways of transferring risk and financing reinsurance. Malta is targeting the insurance-linked securities (ILS), catastrophe bond and reinsurance convergence sector by providing the use of Reinsurance Special Purpose Vehicles (RSPVs). The regulation allows for RSPVs to be authorised, formed and regulated in Malta, and is a move that is expected to attract ILS issuers to the domicile – particularly European based transactions. Malta has also broken new ground with the launch of a unique new structure called the Securitisation Cell Company (SCC), the legislation of which came into force in November 2014.

Securitisation Cell Company (SCC)

Malta was the first EU member state to introduce Securitisation Cell Companies (SCCs), which are companies, empowered to establish within themselves one or more cells for the purpose of securitisation transactions. Each cell is a separate patrimony of the cell company, although it does not have a separate legal personality. No prior regulatory approval is required for the establishment of SCCs or cells in SCCs, unless the company issues financial instruments to the public on a continuous basis or accepts insurance risks as part of an insurance securitisation transaction.

Reinsurance Special Purpose Vehicle (RSPV)

In a typical transaction, an insurance or reinsurance undertaking uses an RSPV to cede risks through a reinsurance contract or similar arrangement. The RSPV funds its potential liabilities under that contract through the issuance of financial instruments such as debt instruments to the capital markets.

Structure: The definition of an RSPV found in the Regulations makes use of the term ‘undertaking’ as it is largely modelled on the definition provided in Article 2(1)(p) of the EU Reinsurance Directive. The regulations however only allow limited liability companies formed in Malta to apply for RSPV authorisation, as the corporate structure is well established in Malta and provides legal certainty.

Activities: The object of the limited liability company must be restricted to operating as an RSPV, and the company is restricted from engaging in any other activities. An RSPV may only assume risks from a ceding undertaking through reinsurance contracts or assume insurance risks through similar arrangements. Therefore the link with insurance risk is always required, and other types of risk cannot be transferred through RSPVs. The RSPV enters into a risk transfer arrangement with a ceding undertaking, which takes the form of either a reinsurance contract or a similar arrangement for the transfer of insurance or reinsurance risks, such as a derivative contract. As the definition of an RSPV provides, the RSPV then fully funds its exposure to the risks assumed through the proceeds of a debt issuance or other financing mechanism approved by the MFSA. These proceeds are then invested for greater profitability. RSPVs offer management solutions that enable insurance and reinsurance undertakings to better align their risk profile with their risk tolerance. These vehicles can therefore play a major role in facilitating alternative risk transfer, and may provide additional reinsurance capacity at times in which cover through more traditional channels such as reinsurance companies is limited.

Authorisation Process: Procedures for the authorisation of an RSPV for specific use includes Mandatory Conditions required for all Contractual Arrangements to ensure that claims of the providers of capital to the RSPV are at all times subordinated to the reinsurance obligations of the RSPV to the insurance or reinsurance company.

Governance Requirements: Qualifying shareholders and key functionaries must be fit and proper persons and the RSPV’s system of governance needs to be appropriate to the nature, scale and complexity of the risk that the RSPV assumes.

Solvency Requirements: RSPVs must be fully funded at all times, the value of its assets must be equal to or exceed the aggregate maximum risk exposure, so that the RSPV is able to pay the amounts it is liable for as they fall due.

Supervisory Reporting: The RSPV is required to report to the MFSA on the value of its assets, its aggregate maximum exposure, any conflicts of interest, as well as any significant transactions entered into within a reporting period.

Insurance-linked securities

Insurance risk securitisations belong to a broader category of alternative insurance risk transfer often referred to as ART. Insurance securitisation in particular, and ART in general, add to the realm of opportunities that insurers and reinsurers have at their disposal to obtain access to capital resources, in a broader sense, than their own shareholders’ funds. Insurance-Linked Securities (ILS) is a type of financial
instrument used for ART. They are broadly defined as financial instruments whose values are driven by insurance loss events. Typical ILS instruments are those linked to property losses due to natural catastrophes. For investors these represent a unique asset class, the return from which is uncorrelated with that of the general financial market.

One type of insurance-linked security is the catastrophe bond, often referred to as a CAT bond. These bonds provide cover for natural disasters and other uncontrollable events. As of February 2012, securitisation vehicles have had the option to have their securities listed on the European Wholesale Securities Market (EWSM), a European regulated market based in Malta. Listing on the EWSM is advantageous to the issuer as it enhances the publicity and credibility of the securities offering.