Ian-Edward Stafrace, Chief Risk Officer of Atlas PCC talks to Captive Review on what differentiates Malta from other PCC jurisdictions and how Solvency II is helping drive growth in cells within the EU

Captive Review (CR): As a full EU member state, what differentiates Malta’s PCC legislation versus offshore jurisdictions?

Ian-Edward Stafrace (IES): PCCs are essentially segregated business structures in which third parties are allowed to enter as cell owners with their business ring-fenced and accounted separately. Each cell’s assets and liabilities accrue solely to the shareholders of that cell, hence the name protected cells. Such cells could be used for multiple purposes such as captive risk financing tools or writing third party risks for added revenue and profit.

Being domiciled within the EU, the Maltese PCC, on behalf of its cells, is allowed to write directly into Europe thus eliminating the need of having additional fronting insurers. Most EU countries would otherwise require domestic risks to be insured by a local insurance company or one based within the EU. Using a fronting insurer can be expensive and may incur not just fronting fees but also the cost of letters of credit requested as support by the fronting insurer. To some extent you also lose your intellectual property to the fronter.

A feature that differentiates Maltese PCC regulation is that it presupposes individual cells have secondary recourse to PCC core capital. While absolutely protected from liabilities from the core or other cells, a cell will not have to be capitalised to the minimum EU Directive requirements for standalone insurers so long as such requirements are met by the PCC as a whole. Maltese regulations establish that once the cell has exhausted all its assets in meeting its liabilities, such cell will have perfect access (secondary recourse) to the PCC core funds. This ensures that third party policyholders or beneficiaries of a cell have the same level of protection required to be in place for other EU insurers. This is also recognised in EIOPA’s Solvency II technical specifications on the treatment of ring-fenced funds. Non-recourse provisions are allowable under regulations but solely for pure captive (affiliated) or reinsurance cells.

CR: How is Solvency II affecting protected cells?

IES: Atlas always saw Solvency II as an opportunity for PCCs which we were keen to embrace. The Maltese PCC provides benefits on all Solvency II pillars, allowing substantial cost burden sharing and reducing capital requirements.

Small mono line insurers and captives struggling with Solvency II requirements could very well consider converting to cells as an alternative to consolidation or closure. Where otherwise Solvency II could be a barrier to entry for start-ups, PCCs enable such new entrants into the insurance market catalysing innovation.

As an EU member state and EIOPA member, Malta continuously contributes to the evolving EU regulatory environment including Solvency II’s development. EIOPA, in its Solvency II technical specifications, prescribes that cells in PCCs should be considered and treated as ring-fenced funds. Under the Pillar I quantitative capital requirements, a Cell will typically only need to put up own funds equivalent to the calculation of the Cell’s notional Solvency Capital Requirement (SCR), which with small undertakings often falls far below the typical absolute floor Minimum Capital Requirement for standalone insurers of €3,700,000. A Maltese PCC may also lend its unrestricted surplus core funds to cells to meet their notional SCR where in deficit.

Atlas was the first EU insurer to convert to a PCC back in 2006. As one of the leading insurers in the Maltese local market, it is not averse to taking insurance risks on its core. It maintains substantial surplus funds over regulatory requirements. Subject to its own risk appetite, the core therefore has the capacity to use its surplus funds to host and support cells that do not fully meet Solvency II requirements from their own capital while, per legislation, the cells retain full protection of their assets from liabilities of the core or other cells.

A fully operational PCC will have risk management and governance requirements of Pillar II already catered for under its regulated licence with cost sharing significantly benefiting cells. This includes for example the possibility of producing a single Own Risk Solvency Assessment (ORSA) for the entire PCC. Same applies to Pillar III’s Reporting and Disclosure requirements where all procedural structures and resources will be in place to meet the new extensive quarterly and annual reporting requirements as one single legal entity.

CR: What kind of businesses should consider using a Maltese Insurance PCC?

IES: Organisations have established cells as captive risk financing vehicles. Such provide access to the reinsurance market with a lower cost per unit of cover versus the primary insurance market. Reinsurers tend to also be in a better position to underwrite unusual risks. Atlas was the first PCC to host an insured owned cell writing own motor fleet insurance directly to the UK.

The European market is a natural target for business to be written by a cell licensed in Malta enjoying the freedom to provide services in the countries forming part of the European Economic Area. Businesses not typically from the insurance sector have created cells to sell insurance to third-parties. By example, Atlas hosts a cell owned by a large hotel chain which sells insurance as an optional bolt-on to hotel bookings. Another cell, sells optional accidental damage insurance on property the cell owner leases out.

Non-European insurers have set up cells as fronting facilities in order to reduce their EEA fronting costs. Cells can also be created to handle run-off business or for special purpose applications by facilitating access to specialist risk-bearers.

CR: Atlas allows cells to be managed by different insurance management companies. How is this done?

IES: Maltese regulations cater for protected cells that are managed by licensed third party managers.

Atlas’s independence, together with its active core, has given insurance management companies the possibility of offering their clients an EU onshore protected cell facility that is also able to write third party risks.

Leading international management companies effectively use us as PCC hosts for their clients. This is achieved through an outsourcing agreement with the manager in respect of the specific cells they introduce.

Through our facility, managers do not need to commit unnecessary capital and high cost required had they to own their own PCC.

CR: How has interest in PCC solutions from continental Europe developed?

IES: We are reaping the benefit of years of Solvency II preparation. Now that we have certainty on its implementation, we are seeing an increase in engagements through leading insurance management companies and various entities seeking cost and capital savings, preferring the more efficient cellular route to write insurance.

While enquiries traditionally emanated from the UK, we now see even more enquiries from continental Europe, where awareness of onshore PCC solutions is growing. Atlas is having record growth in this area with three additional new cells that began operating in 2015 coming from the Netherlands, Austria and Italy. This included a conversion from a multinational’s Swiss captive to a cell boding well for the new environment under Solvency II.

Ian-Edward Stafrace MSc Risk Management, FCII, FIRM, PIOR, Chartered Insurer is Chief Risk Officer of Atlas Insurance PCC Ltd and member of its Executive Committee and Solvency II team. He also co-founded and is currently President of the Malta Association of Risk Management (MARM) and a member of the Federation of European Risk Management Associations (FERMA).