EU cell solution to harsh market

Risk managers and insurtech innovators in Europe are increasingly looking to cells to tackle common challenges. In particular, Malta’s cell growth continues to outpace standalone captives. In 2021, insurance carrying cells grew 16 percent, outnumbering captives and non-domestic insurance undertakings.

Protected cells are often more capital-efficient and cost-effective than owning a standalone carrier or captive. The difference is more significant within the EU, where the costs of a more robust regulation are significantly reduced when shared within a protected cell company (PCC) structure.

A harsh market

With higher premiums and reduced insurer appetite and capacity, EU onshore cells often provide a more viable solution for those wishing to finance their risks better or sell insurance.

Cells are well-suited for short-tail risks such as property and business interruption.

Financial lines on a claims-made basis have grown in popularity as one of the classes most affected by the hard market conditions, coined as a harsh market by Airmic, the UK insurance and risk managers’ association.

Consumer lines with low limits, such as gadget insurance and extended warranties, are also common. Cells allow insurtechs, distributors and managing general agents to become carriers, providing more control and stabilising capacity. Instead of relying on commissions, they can benefit from retaining underwriting profits.

Some captives and distributors have reinsurance capacity lined up but no willing fronting insurers, and therefore they can set up cells to predominantly front the risks.

Malta-based cells can be ideal digital insurers. PCCs can be seen as sandbox platforms for experimenting, incubating, launching and scaling new technology-driven business models.

Some organisations see cell structures as a faster, simpler and less expensive way to meet their immediate needs and gain experience before establishing an insurance or captive company. Most eventually prefer to remain within the efficient simplicity and comfort of the PCC.

Brokers in the middle market are increasingly interested in such solutions. They are becoming more proactive when the harsh market rightly causes their most significant clients to question their risk financing. The collaboration between independent PCCs and brokers is mutually beneficial. Brokers are closer to their customers in their countries and provide compliant local services in their language.

EU & UK access

Malta is the only EU member state with insurance protected cell legislation, providing cells with direct access to the European Economic Area single market.

Following the UK’s departure from the EU, some PCCs continue to provide access to the UK market. Atlas was one of the first PCCs to submit a branch application to the UK Prudential Regulation Authority. While the application is being processed, new UK business continues to be written under the UK Temporary Permissions Regime.

Fronting

Fronting partners can provide added value and simplify compliance requirements. However, they can be increasingly selective. Fronters also add costs to the programme, affecting feasibility, especially when premiums are below their rising minimums.

EU direct writing cells are slightly more costly to manage than pure reinsurance cells. However, the saving of fronting fees can make them more cost-effective, especially where local compliance and outsourcing needs in the country of risk are limited or are handled by intermediary subsidiaries of the cell owner.

Shared substance & resources

With their shared economies of scale, Maltese PCCs provide substance and resources. They give confidence in being onshore in the EU, without a standalone company’s complexities, costs and time, potentially also saving capital.

Insurers are increasingly expected to have adequate on-the-ground staff and key function holders. PCCs can significantly help address substance requirements as cells form part of a broader single entity that provides shared board, governance and key functions in Malta.

Some PCCs actively write business through their core. Atlas’s core, for example, is focused on the traditional non-life domestic insurance business in Malta with multiple branches and offices, naturally providing ample substance to the PCC.

PCCs have the resources to meet quarterly and annual reporting as one single legal entity. A single Own Risk Solvency Assessment (ORSA), required under Solvency II, can be produced for the entire PCC. The same applies to other reporting and disclosure requirements.

Malta fully adopts the latest International Financial Reporting Standards, including the new IFRS17. While implementation may be challenging for standalone insurers, PCCs help facilitate compliance as they implement it for their other cells, and in Atlas’ case, for its active core.

Capital efficiency

There is no minimum capital requirement for individual protected cells, as these apply at an overall company level.

A cell owner will generally need to invest funds only equivalent to the cell’s notional solvency capital requirement which, with small undertakings, usually falls far below the typical standalone insurer minimums.

Cell owners retain complete legal protection of their assets from liabilities of the core or other cells.

Regulatory timelines

The Malta Financial Services Authority (MFSA) is a well-established, respected, yet approachable regulator. In 2019 it commenced a three-year strategy, significantly increasing its human resources and investing over €10 million in its technology to improve its supervisory capacity and efficiency.

MFSA is a member of the European System of Financial Supervision, including the European Banking Authority and the European Insurance Authority. MFSA also forms part of the Single Supervisory Mechanism within the European Central Bank.

Owing to increased resources, MFSA has improved timelines for well-produced cell applications, with risks falling firmly within its appetite, especially if approached beforehand.

MFSA is very responsive and actively engages with promoters in each application. Insurance management companies and PCCs can help guide the application and regulatory exchanges.

Setting up a cell is faster than a standalone company due to the core capital, broader governance structures and resources already present in the PCC.

PCCs with an active core can rapidly write and incubate risks through the non-cellular core, giving more time to assess and set up a cell. Therefore, the core can provide a sandbox facility that improves time-to-market and the gaining of actual market data. Business plans and projections can then be revised based on experience.

Economic strength

Malta has a well-diversified and resilient economy. In November 2021, Fitch affirmed the country’s A+ long-term rating with a stable outlook. In its winter economic forecast, the European Commission projected that Malta would have the highest economic growth rate in the EU in 2022. In February 2022, the unemployment rate stood at 3.1 percent.

Malta offers businesses an efficient environment with lower operational costs versus other EU domiciles, yet with a highly qualified and experienced local workforce.

As an onshore EU domicile of choice for a growing number of insurance operators, with EU and Organisation for Economic Co-operation and Development-compliant financial and tax regulations facilitated further by its over 70 double taxation treaties, Malta has a reputation as an established finance centre.

Other positive factors include its Central European timezone and strategic location in the middle of the Mediterranean sea, excellent flight connections and English as the business language.

Malta’s growing and stable economy with the euro as its official currency, reliable and well-developed IT infrastructure, and safe and pleasant lifestyle, further attract international business.

Well-resourced and experienced PCCs and insurance management companies continue to foster sustainable innovation, providing new solutions to emerging insurance challenges.