“Protected cell companies can be seen as platforms to experiment, incubate or launch new technology-driven business models.”
Malta is enabling cells not only for use in self-insurance captives, but also in directly writing third party risks and consumer business.
As a full EU member state, Malta enjoys the freedom to provide services and directly cover risks throughout the EEA. It is common for captives and cells in Malta to be profit centres by including customer and ancillary business. Besides added revenue, the diversification enables capital efficiencies.
With more InsurTechs reaching the market, protected cell companies can be seen as platforms to experiment, incubate or launch new technology-driven business models. These are exciting times with our financial services community merging with the tech start-up community to shape the future of this new sector.
Malta is quickly becoming a blockchain hub with government strongly promoting the country as “Blockchain Island”, considered to be the first world jurisdiction to provide legal certainty to this space. It has legislated the creation of a Digital Innovation Authority, which can also provide voluntary certification of such technology, and established a regulatory environment for virtual financial assets.
The rapid growth has been palpable at a number of conferences in Malta dedicated to Distributed Ledger Technology (DLT) attracting thousands of delegates and several FinTechs that have set up office on the island.
As Malta is the only full EU member state with cell legislation, and with it quickly becoming recognised as a DLT hub, we are perfectly positioned to enable new innovative technology insurance start-ups or captives to thrive.
Atlas has in fact already assisted InsurTech ventures in micro-testing parametric business models before cell formation that used blockchain smart contracts to automate underwriting and claims processes.
Billions of euros of capital are flooding into the hundreds of new InsurTech start-ups around Europe and the world. Technology has the potential of transforming the entire insurance value chain including product development, customer acquisition, underwriting and claims management.
InsurTechs can accelerate the disintermediation of traditional distribution channels. While the strategy of large incumbent carriers has tended to include acquisition or investment in such ventures, our experience is that protected cells have helped those with an intermediary or technology background to take over the primary risk carrier role. The desire from some brokers and intermediaries with successful profitable schemes to move from a focus on commissions and fees to a focus on underwriting profits through protected cells has been further boosted by the introduction of the EU Insurance Distribution Directive.
When an organisation realises that it has more data, risk or technology knowledge and ideas than the primary carriers, and it is confident in the potential profitability, it begs the question, why not become the principal and tap into the reinsurance market for support? This is an old idea for captives but one that is dawning on intermediaries, InsurTechs and organisations outside the insurance sector.
With the increasing purchasing power of digital natives, more insurance is being purchased directly online. With full access to the EU single market, cells based in Malta are ideal digital insurers.
Cells targeting consumer business are a growing niche for Atlas PCC with its origins, expertise and risk appetite as an insurer. Atlas traces its almost 100-year history to family businesses representing well-known British and French insurance companies. These merged to form one of the major local insurers in Malta, which later became the first direct insurer to convert to a PCC in the European Union, and the first licensed PCC in Malta.
Cells can enable new ideas to be incubated or new business models to be attempted at a far lower cost than a standalone insurer, and without the dependency on a third party principal. This helps organisations that are often wary of indirectly providing intellectual property to insurance principals or fronters in their home country.
In order to spur innovation, InsurTechs often adopt a philosophy to fail fast, fail cheap, and learn continuously. Fitting with this philosophy, should ventures turn out to be unviable in practice, despite different model iterations, these can typically be closed faster in a cell than a standalone company, and the whole enterprise would have come at far lower cost and up front capital commitment.
PCCs help break the barrier to entry for new captives or start-up insurers unintentionally created by regulation. A new breed of RegTechs are emerging in time to reduce such burdens, however no solution presents as much promise as protected cells thanks to their capital, cost and governance efficiencies especially in a Solvency II environment.
Well-resourced PCCs can provide cells with the regulatory expertise, infrastructure and economies of scale only usually found in well-developed incumbent insurers. Atlas’ systems of governance allow cells to focus on their specific risks and business plan while providing broader support on regulatory and good governance requirements.
As a single legal entity, Atlas has one board, yet a degree of autonomy is provided to cells through committees that have representatives of the cell owner together with Atlas representatives under the board’s delegated authority. This enables a faster decision making process.
Common key functions including actuarial, risk management, compliance and internal audit apply across the PCC. For Solvency II, such can produce a single Own Risk Solvency Assessment for the entire PCC. The same applies to reporting and disclosure requirements, with one Regulatory Supervisory Report and Solvency Financial Condition Report and all resources in place to meet other quarterly and annual reporting as one single legal entity.
As one of the leading insurers in Malta, Atlas’s core maintains substantial unrestricted surplus funds over Solvency II capital requirements. A cell owner will typically only need to invest own funds equivalent to the cell’s notional solvency capital requirement, which, with small undertakings, often falls far below the typical standalone insurer minimums. At all times, cells retain full protection of their assets, from liabilities of the core or other cells per legislation.
The prolonged soft market and increased regulatory requirements could on the surface reduce the captive appeal. Cells, however, can enable more efficient risk financing. Thanks to current lower reinsurance prices and wider capacity, risk managers should review which risks to retain and which to cede. Diversification with additional lines helps improve capital efficiency, whether targeting own or third party risks for added profits. Captives also help better manage deductibles, claims handling processes and data on risks and losses. Improved control extends to policy terms and choice of claims service providers. The built earnings create further capacity for greater risk taking for the parent.
On Brexit, companies are moving from contingency planning to implementation of solutions in order to retain EU single market access. Should a hard Brexit become a reality, companies could maintain direct access to 30 member states of the EEA, through cells in Malta.
On the flip side for continued access to the UK market, the implementation period or UK’s temporary regime in absence of a deal should allow sufficient time to implement solutions. Besides using fronting insurers, an EU insurer could find obtaining a third country branch authorisation from the UK PRA to be the most feasible means to maintain access.
Atlas PCC’s team has built expertise over the past decade in this specialised sector, having assessed and implemented a variety of direct third-party, reinsurance and captive cells. This is also recognised by leading global insurance management companies that use our independent facility for their clients with management outsourced back to them.
Where there are barriers to entry for captives and start-ups including InsurTechs, PCCs like Atlas enable such new entrants into the insurance market promoting innovation.
Ian-Edward Stafrace is chief risk & compliance officer and executive committee member of Atlas Insurance PCC Ltd. In the UCITS funds sector, he is risk manager and risk regulatory committee chairman of Merill SICAV plc. His passion for effective ERM led him to cofound the Malta Association of Risk Management, where he is a board member.
This article was first published in CaptiveReview European Market Report 2018.