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Ownership and organisational requirements
Ownership of (re)insurers
Are there any restrictions on ownership of or investment in (re)insurers in your jurisdiction, including any limits on foreign ownership/investment?
There are no restrictions as to who can become a shareholder of a (re)insurer. However, all shareholders that meet the definition of a ‘qualifying shareholder’ must be approved by the Malta Financial Services Authority (MFSA) before effectively becoming a shareholder of a (re)insurer. For this purpose, a ‘qualifying shareholding’ is defined by the Insurance Business Act as a direct or indirect holding:
- in an undertaking which represents 10% or more of the share capital or of the voting rights; or
- which makes it possible to exercise a significant influence over the management of the undertaking in which that holding subsists.
What regulations, procedures and eligibility criteria govern the transfer of control of/acquisition of a stake in a (re)insurer?
A transfer of control or acquisition of a qualifying shareholding in a (re)insurer requires prior approval by the MFSA.
Qualifying shareholders increasing or decreasing their level of control within a particular bracket must notify the MFSA and supply any information which may be requested by the regulator depending on the circumstances of each particular case.
In assessing the proposed acquirer, the MFSA shall, in order to ensure the sound and prudent management of the undertaking in which an acquisition is proposed, and having regard for the likely influence of the proposed acquirer on the undertaking, appraise the suitability of the proposed acquirer and the financial soundness of the proposed acquisition.
The transfer of a portfolio of (re)insurance business requires the consent of:
- the MFSA – in the case of general insurance business and business restricted to reinsurance; or
- the Financial Services Tribunal – in the case of long-term insurance business.
Additional publication and disclosure requirements as set out in Part VIII of the Insurance Business Act would also apply to such transfers.
Must (re)insurers adopt a certain legal structure in order to operate? If no mandatory company organisation applies, what are the common structures used?
(Re)insurance entities are generally set up as a public or private limited liability company. The legal regime in Malta also provides for the possibility of setting up a cell company through which to carry out the business of (re)insurance. Such cellular structures include protected cell companies and incorporated cell companies.
Further, reinsurers can opt to establish a securitisation-type structure through a reinsurance special purpose vehicle, the purpose of which would be to assume risks from a ceding undertaking and fully fund its exposure to such risks through the proceeds of a debt issuance or any other financing mechanism, where the repayment right of the providers of such debt or financing mechanism are subordinated to the reinsurance obligations of such vehicle.
Do any particular corporate governance requirements apply to (re)insurers, including any eligibility criteria for directors and officers?
The Solvency II regime was implemented in Malta on January 1 2016. As part of the Pillar II requirements under Solvency II, (re)insurers are required to establish an effective system of governance providing for sound and prudent management of an undertaking. This would include the establishment of four key functions as prescribed by the Solvency II regime, which include:
- risk management;
- internal audit;
- compliance; and
The system of governance adopted by the undertaking should be proportionate to the nature, scale and complexity of the operations of the undertaking and should include at least:
- an adequate transparent organisational structure; and
- an effective system for ensuring the transmission of information.
The undertaking is required to review its system of governance on a regular basis.
All directors, controllers and other persons who will effectively direct or manage the business of (re)insurance must be assessed by the MFSA as being fit and proper.
Directors and officers must continue to satisfy the fit and proper requirement on an ongoing basis.
Which (re)insurers must obtain authorisation from the regulator before operating on the market and what is the procedure for doing so?
In terms of the Insurance Business Act no person may carry on or hold itself out as carrying on, in or from Malta, business of (re)insurance, unless authorised by the Malta Financial Services Authority (MFSA). The MFSA may grant authorisation to:
- a company with its head office in Malta to carry on the business of (re)insurance in or from Malta or in or from a country outside Malta; or
- a company whose head office is in a country outside Malta to carry on the business of (re)insurance in or from Malta.
In order for a company to obtain authorisation under the Insurance Business Act, the MFSA must be satisfied that:
- the applicant has submitted the prescribed application form to the MFSA;
- the applicant satisfies the prescribed minimum own funds requirement;
- the applicant’s objects are limited to the business of insurance and operations arising directly therefrom;
- sufficient information is made available on persons having any proprietary, financial or other interest in or in connection with the company;
- all qualifying shareholders, controllers and all persons who will effectively direct the business of (re)insurance are fit and proper to ensure its sound and prudent management;
- a scheme of operations has been submitted to the MFSA in the prescribed form; and
- the applicant discloses any close links that it may have with any other person.
What are the minimum capital and solvency requirements for (re)insurers operating in your jurisdiction?
The minimum capital requirement of an authorised undertaking is:
- €2.5 million for an undertaking (including a captive insurance undertaking) carrying on direct general business, except in the case where all or some of the risks covered include those relating to:
- motor vehicle liability;
- aircraft liability;
- liability for ships;
- general liability;
- credit; and
- suretyship, in which case the minimum capital requirement is €3.7 million;
- €3.7 million for an undertaking carrying on direct long-term business, including a captive insurance undertaking;
- €3.6 million for an undertaking carrying on business restricted to reinsurance, except in the case of a captive reinsurance undertaking, in which case the minimum capital requirement must be of no less than €1.2 million; and
- €6.2 million for an undertaking authorised to carry on both long-term and general business.
Subject to the above, the minimum and solvency capital requirements, technical provisions and amounts of own funds are calculated in accordance with the Solvency II framework.
Do any other financial requirements apply?
(Re)insurers are also subject to rules that regulate the valuation of assets and liabilities as well as investment rules.
When valuing assets and liabilities as follows, an undertaking must value assets at the amount for which they could be exchanged between knowledgeable willing parties in an arm’s length transaction and must value liabilities at the amount for which they could be transferred or settled, between knowledgeable willing parties in an arm’s-length transaction.
Insofar as investment policies are concerned, an undertaking must invest all its assets in accordance with the prudent person principle. This would imply that:
- an authorised undertaking must only invest in assets and instruments the risks of which the undertaking can properly identify, measure, monitor, manage, control and report and appropriately take into account in the assessment of its overall solvency needs;
- all assets must be:
- invested in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio of assets of the undertaking as a whole; and
- localised to ensure their availability.
Are personnel of (re)insurers subject to any professional qualification requirements?
All persons who are holders of key functions must be assessed by the MFSA as being fit and proper to ensure the sound and prudent management of the undertaking. Only following the MFSA’s approval can such individuals assume their respective roles within the undertaking. While there is no prescribed exhaustive list as to which individuals would require pre-clearance from the MFSA, these would generally include the:
- chief executive officer;
- chief financial officer;
- chief operations officer;
- head of internal audit;
- money laundering reporting officer;
- head of compliance;
- head of risk;
- head of legal; and
- other key individuals holding equivalent functions.
Such individuals must continue to satisfy the fit and proper requirement on an ongoing basis.
What rules and requirements govern the business plans of (re)insurers?
An undertaking applying for authorisation to carry on the business of (re)insurance must submit a business plan, which is referred to as a ‘scheme of operations’, which must:
- clearly describe the applicant’s business strategy;
- include financial projections with appropriate scenarios;
- describe the assumptions which underlie those forecasts, the reasons for adopting those assumptions and the accounting policies on which the projections are based;
- be accompanied by a report of an approved auditor or the undertaking’s auditor on the adequacy of the undertaking’s business plan and that it has been properly prepared on the basis of the assumptions stated;
- in the case of long-term with-profits business, also be accompanied by a report on the undertaking’s actuary on the adequacy of the undertaking’s policy of reserving; and
- be signed by a person who:
- holds a warrant of a certified public accountant under the Accountancy Profession Act (Chapter 281 of the Laws of Malta);
- is a fellow of an institute of actuaries;
- a fellow of a faculty of actuaries; or
- otherwise holds professional qualifications of similar standing of an institute of repute recognised by the MFSA.
A scheme of operations should include the following information:
- background on the applicant and business planning;
- business strategy;
- sources of business;
- organisation of the applicant and governance arrangements;
- risk management;
- underwriting and claims procedures;
- financial projections and resources;
- investment strategy;
- IT systems;
- outsourcing and agreements with third parties;
- reinsurance or retrocession arrangements; and
- any other information which the MFSA may require as set out in the applicable law.
What risk management systems and procedures must (re)insurers adopt?
An undertaking is required to establish an effective risk management system comprising:
- written policies;
- processes; and
- reporting procedures necessary to:
- manage; and
- report, on a continuous basis and at an individual and aggregated level, the risks to which it is or could be exposed and their interdependencies.
The risk management system must be effective and well integrated into the organisational structure and in the decision-making processes of the undertaking with proper consideration of the persons who effectively run the undertaking or have other key functions and must also cover the risks to be included in the calculation of the solvency capital requirement, as well as the risks which are not or not fully, included in the calculation thereof.
Where an undertaking uses a partial or full internal model approved by the MFSA, it must ensure that its risk management function has a wider scope.
As part of its risk-management system, an authorised undertaking must conduct its own risk and solvency assessment (ORSA). The ORSA must be performed regularly and, in any event, following changes to the risk profile of the undertaking.
Reporting and disclosure
What ongoing regulatory reporting and disclosure requirements apply to (re)insurers?
(Re)insurers must draw up their audited financial statements in accordance with the International Financial Reporting Standards as adopted by the European Union. Such audited financial statements are to be submitted to the MFSA within the stipulated timeframes and must, as a minimum, include:
- a directors’ report;
- a statement of directors’ responsibilities;
- an auditor’s report on financial statements; and
- a complete set of financial statements, including notes thereto.
Undertakings are required to display a copy of audited financial statements in a conspicuous position and keep on display for the following year in each of its offices, agencies and branches in Malta.
In accordance with the requirements of Pillar III of Solvency II, undertakings must also submit the following in accordance with the timeframes stipulated by the applicable law:
- a solvency and financial condition report;
- a regular supervisory report;
- an ORSA;
- annual and quarterly quantitative reporting templates; and
- national specific reporting templates.
At least once a year, undertakings must inform the MFSA of the names of the persons that hold a qualifying shareholding in the undertaking and the percentage of such holding.
More broadly, undertakings must inform the MFSA of any changes to their business activities, some of which may require pre-clearance by the MFSA.
Do any other operating requirements apply in your jurisdiction?
(Re)insurers must comply with the supplementary rules issued by the MFSA as well as any guidance promulgated by the European Insurance and Occupational Pensions Authority, in addition to the specific licensing conditions that the MFSA may impose on particular undertakings.
These include requirements in relation to:
- intra-group loans;
- establishment of audit committees;
- passporting rights;
- complaints handling processes;
- conflicts of interest; and
- other general supervision rules.
What are the consequences of non-compliance with the operating requirements applicable to (re)insurers?
In the event of breaches of the solvency capital requirement (or where there is a risk of non-compliance within the next three months), the MFSA must be notified immediately and a realistic recovery plan must be submitted for approval to the MFSA within two months from the discovery of non-compliance. The undertaking must also take measures necessary to achieve, within six months from the discovery of non-compliance with the solvency capital requirement (or nine months if so extended by the MFSA), the re-establishment of the level of eligible own funds covering solvency capital requirement or the reduction of its risk profile to ensure compliance with the solvency capital requirement. In circumstances where the financial situation of the undertaking is deteriorating significantly, the MFSA may, in exceptional circumstances, restrict or prohibit the free disposal of the assets of that undertaking.
In reacting to cases of non-compliance, the MFSA is vested with broad powers, ranging from a warning to a withdrawal of licence as well as the imposition of monetary administrative fines (up to a maximum of €150,000). The nature and extent of the penalties would depend on the nature of the breach as well as other aggravating or mitigating factors.
Criminal penalties consisting of monetary fines up to a maximum of €466,000, imprisonment for a maximum of 4 years or both, are also contemplated under the Insurance Business Act in cases which include:
- where the business of (re)insurance is transacted without appropriate authorisation;
- failure to comply with an order or directive issued by the MFSA; or
- where the directors or officers of the undertaking attempt to conceal evidence.
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