Insights

A natural consequence of the enhanced three pillar system is the increased costs and regulatory requirements which insurance undertakings are facing in their preparation for Solvency II implementation. While the majority of the ‘larger’ players in the market have the necessary financial and structural resources to comply with the Solvency II requirements, pure captives and the smaller insurance undertakings may find that the costs of complying with Solvency II are rather burdensome. Those pure captives and small insurers that do not have the financial, organisational or operational resources to conform to the Solvency II requirements may search and opt for alternative structures that better suit their needs.

The PCC has emerged as a structure offering smaller captives and smaller insurers with the opportunity to continue to write business while benefitting from the efficiencies of the PCC structure, and while sharing in the capital base of the PCC. Malta is the only full EU member state that has legislation in place regulating the PCC structure, which allows insurers to create separate and segregated cells within a PCC while allowing them to write business directly throughout the EU by means of the single passport, and allowing them to reap the benefits of their business as if they were a separate legal entity. The choice of utilising the PCC allows captives and insurers writing business through a cell to benefit from the decreased set-up and ongoing costs as well as shared capital requirements.

The advantages of the PCC structure become clearer once its legal nature is understood: a PCC is a single legal entity comprising within itself separate cells that are ring-fenced from each other. Creditors of a cell normally have a right of secondary recourse to the non-cellular assets (core) of the PCC, once all cellular assets of the cell to which the liability is attributable have been fully exhausted. On this basis, we are of the view that under Pillar I the PCC as a whole should meet the statutory Minimum Capital Requirement (‘MCR’), while each individual cell should meet the Solvency Capital Requirement, provided each cell has secondary recourse to the core assets of the PCC. This is already the case under current solvency legislation, and it would be counter-intuitive were the PCC to be required to meet an MCR more than once.

Pillar II seeks to introduce an enhanced system of governance and re/insurance undertakings have been asked to identify the ‘critical’ functions within the company and are required to carry out an ORSA. Notwithstanding that these requirements are essential for the carrying on of business insurance in a more prudent and sound manner, they will create a more burdensome regime for the smaller captives and smaller insurers.

The PCC structure offers economies of scale and significant cost burden sharing, and grants cells access to a common pool of knowledge and expertise within the common management system at the core of the PCC. Even though corporate procedures relating to each cell may not necessarily be identical, a common approach may be adopted by the board of the PCC which permeates the structure as a whole. Furthermore, all transparency and reporting requirements under Pillar III may be carried out through the board of the PCC, resulting in a cost effective structure which diminishes the burden on individual captives or insurers writing business through a cell.

Malta’s legislative and regulatory set-up caters for the establishment of PCCs, whether through incorporation, conversion or redomiciliation, as well as through the creation of cells and the transfer of cellular assets from and to other PCCs. The PCC is being put forward as an advantageous alternative, offering a cost effective solution to the increased costs incurred as a result of the implementation of Solvency II, without sacrificing all the benefits of enhanced corporate governance and a more risk based approach under Solvency II.

This Article was submitted for the Captive Review Malta Report 2013