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Network News - 01/03/2014

Insurance Gems – Look Out For SPV’s In Malta

Author: Dr Marilyn Mifsud
Published on Acquisition International Magazine, March 2014

insuranceIn a sea of uncertainty one cannot but thank heavens for the use of SPVs in the insurance sector. This novelty has blazoned the trail for new legislation whereby risk transferring through reinsurance contracts has been widely recognised as an advantageous way forward. The payment of a premium for this valuable benefit is deemed an idyllic solution to eliminating unwanted risks. The SPV in turn issues bonds or notes to the capital market to fund itself thereby benefiting the insurance industry significantly and squaring the circle. Welcome at this junction the birth of reinsurance special purpose vehicles which come shrink wrapped in regulations that only entered into force late last year – 27 December 2013. This is a milestone development in Malta – a jurisdiction geared up to meet the ever complex requirements of modern age insurance risks.[1]

Malta Financial Services Authority (MFSA) issued the regulations which signify a tangible totem pole for Malta to the Solvency II compliance regime. These regulations were envisioned to act as a foundation stone for growing erudition in the industries of catastrophe bonds, longevity risk transfer, insurance sidecars, collateralised reinsurance and other insurance risk securitisation transactions in Malta.

All this mirrors the Reinsurance Directive and the Solvency II Directive where under both one meets with the implementation of a working regulatory framework for SPV in insurance. This is advocated under the former and actually required under the latter.[2] Having these regulations means that once again as was the case with legislation on PCC and ICC that Malta has succeeded in beating the constraints of time and succeed in overcoming the legislative compliance pressures to adopt PSVP regulations that came into force ahead of the Solvency II regime. Simply put an SPRV is set up as a company incorporated in Malta and as all others is subject to corporation tax in respect of its worldwide profits at the standard tax rate of 35%. However, upon distribution of such profits, the shareholders of the SPRV should be entitled to a refund of part of the Maltese tax suffered on such distributed profits.

The standard tax refund (payable within two weeks of application) amounts to six-sevenths of the Maltese tax suffered on the distributed profits resulting in an effective minimum Maltese tax burden of around 5%, post-distribution of profits and post-tax refund. An SPRV is to be fully funded at all times to the maximum aggregate exposure under the risk transfer contract. In this regard, claims of debt holders and investors providing financing to the SPRV are to be subordinated to the claims of the ceding undertaking in terms of the risk transfer contract.

The assets of an SPRV are to be valued in accordance with generally accepted accounting principles and practice while the proceeds of the debt issuance by the SPRV are to be fully paid-up. Back to the SPRV legislation in Malta, this will offer a leading edge as compared to other member states through the implementation of SPRV legislation that already harmonizes with Solvency II measures. Once in place, the legislation will add to an innovative list of legislative and tax instruments, including legislation for PCCs, ICCs and re-domiciliation, aimed at attracting insurance business to Malta. SPRV legislation will further consolidate Malta’s strong proposition as a domicile of choice for insurers and reinsurers worldwide.[3] The authorisation process commences with the submission of a scheme of operations outlining the proposed structure and activities of the vehicles. Additional documentation is to be submitted in conjunction with the scheme of operations includes:-

  • a copy of the risk transfer contract (eg reinsurance or retrocession agreement or treaty) or a statement containing a description of the contract which shall include any triggering event and the maximum aggregate exposure limits of the SPRV to the ceding undertaking;
  • a copy of the constitutional documents of the SPRV;
  • information on any directors, controllers and all persons who will effectively direct and manage the SPRV including a Personal Questionnaire, where applicable;
  • information on any trustee holding the assets or shares of the SPRV;

The proceeds of any debt raised by the SPRV to finance its contingent liability under the risk transfer contract are to be invested in accordance with the prudent person principle. The draft SPRV Regulations require authorised vehicles to sufficiently diversify investments taking into account the nature and duration of the vehicles’ contingent liabilities. Assets are to be invested in a manner so as to ensure the security, quality, liquidity and profitability of the portfolio as a whole.[4]

In conclusion one appreciates the dynamism of MFSA which is always on the lookout to introduce new and effective legislation not only to keep abreast of competition but to offer unique opportunities for insurance companies that already grace our shores.

As it stated in the title to this short article one can proudly exclaim that by introducing useful insurance vehicles such as SPRV this continues to enhance Malta as an respectable insurance domicile. Many will agree that MFSA as the regulator is bequeathing another precious gem to the Maltese domicile crowning the same as a growing hub for on-looking investors.

Author: Dr Marilyn Mifsud
Published on Acquisition International Magazine, March 2014
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