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Market spotlight

Trends and prospects

What are the current trends in and future prospects for the insurance and reinsurance markets in your jurisdiction?

In recent years, the Malta Financial Services Authority (MFSA) has introduced a number of innovative models for the insurance sector, including:

  • protected cell companies;
  • incorporated cell companies;
  • securitisation cell companies; and
  • reinsurance special purpose vehicles.

There is continued interest in these models due to the scalability and flexibility they provide to insurance and reinsurance undertakings, particularly those that are keen to tap into the European market and establish a captive undertaking while seeking to achieve economies of scale and proportionate business models.

The regulatory changes brought about by the EU Insurance Distribution Directive and the Regulation on Packaged Retail and Insurance-Based Investment Products will force some undertakings – particularly smaller outfits – to revisit their governance and internal control processes so as to ensure that these meet the tougher standards introduced by the new regulatory instruments. The authorities will also have to think hard about how to align these developments which are specific to the insurance sector to other broader regulatory changes, including:

  • the new general data protection regulation;
  • the market abuse regime; and
  • changes to the anti-money laundering framework.

The authorities will also need to keep abreast of parallel guidance, technical standards and similar pronouncements issued by local and European regulators.

The industry is not only concentrating its efforts on compliance; it is also constantly exploring ways of reinventing itself and using digitisation to remain ahead of competition. The insurance industry is keen to embrace innovative technology in an effort to personalise policyholder experience and stay ahead of competitors, including:

  • robo-advice;
  • automation;
  • InsurTech; and
  • other technologies relating to data analytics.

Today’s rapidly evolving environment, consumer-centric culture and increasingly technology-driven economy encourages insurers to be more flexible and to be conscious of the fact that disruption is likely to continue, that customers are key and that risks are constantly changing.

Therefore, the way forward for the industry is to strike a balance between innovation and compliance, with the aim of harnessing and leveraging digitisation and disruption while still navigating the legal, regulatory and commercial risks. Insurers must not lose sight of the ever-changing regulatory landscape, particularly since regulators are becoming more and more intrusive – including through the new intervention powers obtained through the Regulation on Packaged Retail and Insurance-Based Investment Products – and can therefore dictate the digitisation of insurance agenda.

Regulatory framework

Legislation

What is the primary legislation governing the (re)insurance industry in your jurisdiction?

The Insurance Business Act (Chapter 403 of the Laws of Malta), together with its associated regulations, provide the framework for the regulation of insurance and reinsurance activities. These are supplemented by rules promulgated by the Malta Financial Services Authority (MFSA), which is the national competent authority, to further provide detailed rules and guidance on:

  • licensing;
  • governance;
  • capital; and
  • the conduct of business requirements.

The Maltese legal and regulatory regime applicable for insurers and reinsurers is fully compliant with the EU Solvency II regime, although local operators are entitled to adopt the proportionality principle in a number of areas, including:

  • risk management;
  • systems of governance;
  • supervisory reporting; and
  • public disclosure.

Regulators

Which government bodies regulate the (re)insurance industry in your jurisdiction and what is the extent of their powers?

Insurers and reinsurers are regulated by the MFSA for both conduct and prudential matters. The MFSA was established under the Malta Financial Services Authority Act (Chapter 330 of the Laws of Malta). The authority is responsible for the authorisation of insurance and reinsurance undertakings operating in and from within Malta as well as the ongoing supervision of such licensed entities.

The MFSA is empowered to revoke or suspend an authorisation at any time if the circumstances prescribed at law exist. Further, if it is satisfied that sufficient serious circumstances exist, it may proceed to take one or more of the following measures:

  • require the undertaking to take such steps as the MFSA may consider necessary to rectify or remedy the matter;
  • appoint a person to advise the undertaking in the proper conduct of its business;
  • restrict the free disposal of the assets of the authorised insurance undertaking to safeguard the interests of the insured persons;
  • appoint a person to take charge of the assets of the undertaking or any portion of them for the purposes of safeguarding the interests of insureds, policyholders and legitimate creditors of the undertaking;
  • appoint a person to assume control of the business of the undertaking either to carry on that business or to carry out such other function or functions in respect of such business or part thereof, as the MFSA may direct;
  • issue an order for the dissolution and winding up of the undertaking or, in the case of a third country insurance or reinsurance undertaking, for the winding up of its business in Malta;
  • appoint a competent person to act as liquidator for the purpose of winding up the affairs of the undertaking;
  • fix the remuneration to be paid by the undertaking to any person appointed under this article;
  • do such other act or require the doing of such other thing as it may deem appropriate in the circumstances.

The MFSA is also empowered to impose administrative penalties with respect to breaches of applicable law and also has the right to enter premises. It may, whenever it deems necessary, give such directives as it may deem to be appropriate in the circumstances.

On conduct matters relating specifically to anti-money laundering and the countering of financing of terrorism, insurers and reinsurers are regulated by the Financial Intelligence Analysis Unit (FIAU), which is a separate competent authority. Under Maltese law, only insurers (to the exclusion of reinsurers) carrying on long-term insurance business are obliged to comply with the anti-money laundering and countering of financing of terrorism regime, which is enforced by the FIAU. This regime would also be applicable to cell companies and captive undertakings if they carry on long-term insurance business.

The FIAU is empowered to impose administrative penalties and demand information, as well as issue directives in writing requiring an undertaking to do or to refrain from doing any act. The FIAU has the power to request undertakings to terminate business relationships where certain circumstances exist.

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.

Organisational requirements

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
  • actuarial.

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.

Operating requirements

Authorisation procedure

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.

Financial requirements

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.

Personnel qualifications

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.

Business plan

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.

Risk management

What risk management systems and procedures must (re)insurers adopt?

An undertaking is required to establish an effective risk management system comprising:

  • written policies;
  • strategies;
  • processes; and
  • reporting procedures necessary to:
    • identify;
    • measure;
    • monitor;
    • 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.

Other requirements

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:

  • outsourcing;
  • intra-group loans;
  • establishment of audit committees;
  • passporting rights;
  • complaints handling processes;
  • conflicts of interest; and
  • other general supervision rules.

Non-compliance

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.

Contracts

General

What general rules, requirements and procedures govern the conclusion of (re)insurance contracts in your jurisdiction?

The rules of Maltese contract law apply to (re)insurance contracts and accordingly, for a valid contract to be concluded:

  • the parties must have capacity to contract;
  • there must be the consent of the parties;
  • there must be a certain element which constitutes the subject-matter of the contract; and
  • a lawful consideration.

In (re)insurance contracts, there must also be an insurable interest. For the purpose of the conclusion of the contract, the prospective insured would typically conclude a proposal form for the consideration of the prospective insurer.

Mandatory/prohibited provisions

Are (re)insurance contracts subject to any mandatory/prohibited provisions?

In terms of Maltese law, the parties to a contract are free to agree on the terms to be included in the contract between themselves, provided that the parties do not contract out of the provisions which are intended for the protection of the consumer or agree to clauses which would be considered invalid or unenforceable on the basis of public policy considerations.

Implied terms

Can any terms by implied into (re)insurance contracts (eg, a duty of good faith)?

Maltese jurisprudence has established the importance of the common law principle of ‘uberrima fidae’ (utmost good faith), which obliges both parties to enter into an insurance contract in good faith through the disclosure of all material information related thereto. While this principle is applicable to both the insurer and the insured, it is generally the insurer that invokes this principle when seeking to avoid an insurance contract on the basis of non-disclosure of a material fact by the insured.

The provisions of the Civil Code in relation to contracts apply to all contracts generally, including (re)insurance contracts. The obligation to carry out contracts in good faith is implied into (re)insurance contracts. In addition, in terms of the Civil Code, contracts are binding not only in regard to the matter therein expressed, but also in regard to any consequence which, by equity, custom or law, is incidental to the obligation, according to its nature.

Standard/common terms

What standard or common contractual terms are in use?

An insurance policy typically includes clauses relating to:

  • policy limits;
  • excesses and general exclusions;
  • the amount and period of cover;
  • warranties; and
  • the procedure for giving the insurer notice of a claim.

‘Smart’ contracts

What is the state of development in your jurisdiction with regard to the use of ‘smart’ contracts (ie, blockchain based) for (re)insurance purposes? Are any other types of financial technology commonly used in the conclusion of (re)insurance contracts?

While smart contracts are not currently used for (re)insurance purposes, the utilisation of blockchain-based contracts has attracted much interest among local start-up companies and authorities, with the government of Malta stating that it intends to implement a national blockchain strategy. The aim of this strategy is to study the potential effect of blockchain technology across various industry sectors, including insurance.

In this context and pending publication of an official blockchain strategy, the MFSA has shown itself to be amenable to financial technology (fintech) innovation and has adopted a proactive approach towards the implementation of this type of technology. The authority has demonstrated its willingness to understand proposed applications of the technology and encouraged the development of fintech products.

On November 30 2017, the MFSA issued a discussion paper (‘Initial Coin Offerings, Virtual Currencies And Related Service Providers’) with the purpose of gathering views from the industry on the proposed policy to be adopted by the MFSA for the regulation of initial coin offerings, virtual currencies and related service providers. The MFSA has stated that it aims to devise a policy framework that supports innovation and new technologies for financial services in the area of virtual currencies while seeking to ensure effective investor protection, financial market integrity and financial stability. One of the topics of discussion in the paper issued by the MFSA relates to the authority’s proposal to prohibit (re)insurance companies and retirement pension schemes from dealing in virtual currencies for their clients or their own accounts.

Breach

What rules and procedures govern breach of contract (for both (re)insurer and insured)?

In the event of a breach of contract, the remedy available will depend on the breach sustained, as well as on who the perpetrator and injured party are.

Insurer If the insurer breaches a contract, the insured may proceed against the insurer for such breach and seek either the performance of the obligation in question or payment of damages resulting from non-performance of the obligation.

Insured General law of contract requires that the consent of a party to a contract is not vitiated. An error of fact would not void the contract unless it affects the substance of the thing which is the subject-matter of the agreement – this is taken into account in cases of misrepresentation or non-disclosure by the insured. Misrepresentation or non-disclosure by the insured may render a contract of insurance void.

Judgments of the Maltese courts have reiterated the principle that parties to contracts of insurance are bound by the duty of utmost good faith.

Consumer protection

Regulation

What consumer protection regulations are in place to safeguard the rights of purchasers of insurance products and services?

The following are among the regulations in place to safeguard the rights of insurance purchasers:

  • EU Regulation 1215/2012 of the European Parliament and of the Council of December 12 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) – Article 14 of this regulation provides that an insurer may bring proceedings only in the courts of the member state in which the defendant is domiciled, irrespective of whether he is the policyholder, the insured or a beneficiary. Only a few exceptions to this rule are provided for in the regulation (including that any choice of court agreement entered into by the parties must comply with Article 15 of the Regulation which provides, that the agreement must have been entered into after the dispute has arisen).
  • The Consumer Affairs Act (Chapter 378 of the Laws of Malta) prohibits traders from engaging in misleading or unfair commercial practices. Specifically in relation to insurance matters, the act specifies that requiring a consumer who wishes to claim under an insurance policy to produce documents which are not relevant for determining the validity of the claim or persistently failing to respond to correspondence from the consumer in order to dissuade them from exercising his or her contractual rights in respect of the claim, is deemed to be misleading and unfair. The act also prohibits the inclusion of any unfair terms in a consumer contract. A contract term would be deemed unfair if it were to cause a significant imbalance to the parties’ rights and obligations to the detriment of the consumer or causes the performance of the contract to be significantly different from what the consumer could reasonably expect. Examples of unfair terms include prohibiting the consumer from cancelling the contract if the trader fails to fulfil his obligations and enabling the trader to unilaterally alter the terms of the contract.
  • The Distance Selling (Retail Financial Services) Regulations (Subsidiary Legislation 330.07) regulate contracts between consumers and suppliers providing financial services – including those of the insurance kind – at a distance by means of a distance contract. In terms of these regulations, a consumer has the right to receive certain pre-contractual information before being bound by the distance contract or offer. Such information would include the details of the supplier and the financial service being offered, the nature of the distance contract and the forms of redress, including the right of withdrawal.

Claims

General

What general rules, requirements and procedures govern the filing of insurance claims?

The procedure for filing insurance claims is typically set out in the contract itself. (Re)insurance contracts contain notification clauses which set out the time within which the claim must be made and the manner in which it must to be brought.

The Schedule to Chapter 12 of the Insurance Rules (Best Practices by Undertakings concerned in Handling Complaints) sets out the guidelines on best practices for handling complaints by an authorised insurance undertaking and specific examples of the areas to be considered when handling complaints.

Time bar

What is the time bar for filing claims?

The time limit within which an action may be instituted largely depends on the type of claim. If the action is for damages deriving from a breach of contract, the prescriptive period for filing a judicial claim is typically five years; whereas if the damages are in tort, the prescriptive period is typically two years. The aforementioned time periods may be suspended or interrupted in certain cases prescribed by law.

Denial of claim

On what grounds can the (re)insurer deny coverage?

Coverage may be denied on a number of grounds, including:

  • failure to observe the notification requirements in the policy;
  • exclusion of coverage;
  • in the case of fraudulent claims; and
  • in the case of non-disclosure or misrepresentation by the insured.

What rules and procedures govern the insured’s challenge of the denial of a claim?

If the claim of the insured is denied, he or she may choose to resort to the competent court or tribunal. The rules and procedures governing the manner in which an insured may challenge a claim depend on the forum before which the dispute is litigated.

Third-party actions

On what grounds can a third party file a claim directly with the (re)insurer?

Maltese law upholds the doctrine of privity of contract and only where expressly provided in the law may a contract be enforceable in favour of or against, a person not a party thereto. One such instance is contained in the Motor Vehicles Insurance (Third-Party Risks) Ordinance (Chapter 104 of the Laws of Malta) where an injured party resident in Malta or a designated state (in the European Union or the European Economic Area) and entitled to compensation in respect of any loss or injury resulting from an accident caused by the use of a motor vehicle which is insured by an authorised insurer and normally based in Malta or the territory of a designated state has a direct right of action against the authorised insurer in Malta, if the accident occurred in Malta or a designated state or if the accident occurred in a third country whose foreign bureau forms part of the green card system.

On the basis of the doctrine of privity of contract, it is unlikely that a third party (who is not a party to the contract) would have the right to bring a direct action against a (re)insurer.

Punitive damages

Are punitive damages insurable?

The Civil Code provides that damages consist of:

  • the actual loss which the act directly causes to the injured party;
  • expenses;
  • the loss of actual wages or other earnings; and
  • the loss of future earnings.

Damages are directed towards placing the victim in the state he or she was in before the harm was suffered and, on this basis, Maltese courts uphold the principle that compensation for damages ought not to be seen in a punitive light.

Accordingly, the (re)insurance of punitive damages may well be held to be invalid on grounds of public policy.

Subrogation

What regime governs (re)insurers’ subrogation rights?

Although an insurer has an automatic right of subrogation on payment of an indemnity (under the Civil Code), it is desirable and typical to have a specific clause in a contract of insurance providing for subrogation. Subsequent to the insured being compensated further to a claim brought to his or her insurer, the latter would seek recourse against the third party in the name of the insured. The cooperation of the insured may be requested in terms of the conditions of the policy of insurance.

Intermediaries

Regulation

How are the services of insurance intermediaries regulated in your jurisdiction?

The Insurance Intermediaries Act (Chapter 487 of the Laws of Malta) and related intermediaries rules issued by the Malta Financial Services Authority (MFSA) regulate the operation of insurance intermediaries, including:

  • brokers;
  • managers;
  • agents; and
  • tied insurance intermediaries.

This regime regulates the:

  • registration and enrolment of such intermediaries;
  • their regulatory capital requirements;
  • governance and internal control structures; and
  • other conduct of business rules, including:
    • complaints handling;
    • conflicts of interest; and
    • promotional activities.

The MFSA is currently in the process of transposing the Insurance Distribution Directive (due to be completed by February 23 2018) which will result in an overhaul of the regulatory regime for intermediaries. In this respect, the MFSA has issued a consultation paper to replace the Insurance Intermediaries Act with a new Insurance Distribution Act, which is to be supplemented by insurance distribution rules. The MFSA is currently assessing the feedback it received following the consultation period and is expected to issue updated laws shortly.

In addition to imposing additional conduct of business obligations, the scope of the Insurance Distribution Directive will also be extended to (re)insurers directly selling (re)insurance to their customers, which will also necessitate changes to the Insurance Business Act.

Tax

Tax liability

What tax liabilities arise in the conduct of (re)insurance business?

In terms of Maltese Income Tax legislation, a company that is registered in Malta is deemed to be domiciled and resident in Malta and is subject to tax on a worldwide basis. A company that is registered outside of Malta is deemed to be resident in Malta when its management and control is exercised in Malta and is subject to tax on a source and remittance basis (ie, only on income and capital gains sourced in Malta and income arising outside Malta, excluding capital gains, remitted to Malta).

Insurance companies are taxed at the standard flat rate of income tax rate of 35%. Malta operates a full imputation system for the taxation of dividends. When a company distributes dividends out of profits on which it has paid tax, no further tax is due from the shareholder and a credit for the tax paid by the distributing company is available to the shareholders. On the assumption that all taxed profits are distributable and are in fact distributed, the company’s shareholders should, on a distribution of such profits be entitled to a refund of the tax suffered on the distributed profits. The refund is dependent on a number of factors, including:

  • the nature of the underlying profits out of which dividends are distributed; and
  • the application of any double tax relief on such profits.

Moreover, in the context of reinsurance special purpose vehicles, the Maltese tax position is generally neutral at the level of the special purpose vehicle.

Insurance companies may be required to withhold a 15% tax at source on the capital gains derived by a Malta-resident policy holder on the surrender or maturity of units relating to linked long-term business of insurance. Such gains are exempt from income tax when derived by non-residents, provided various conditions are satisfied.

It is also important to note that duty on life insurance policies which are not renewable every year, is payable (only where the policy holder is resident in Malta or incorporated in Malta if a legal person) at the rate of €0.10 for every €100 or part thereof of the sum assured. The minimum duty chargeable is generally €11.65. Duty on policies of insurance (other than life insurance policies) is €0.11 for every €100 or part thereof of the sum assured. The minimum duty chargeable is generally €13. Re-insurance is specifically excluded from the definition of ‘insurance’ and therefore falls outside the scope of the aforementioned duty charges.

Insolvency

Regulation

What regime governs the insolvency of (re)insurers?

The primary legislation governing insolvency is the Companies Act (Chapter 386 of the Laws of Malta). The Insurance Business (Reorganisation and Winding up of Insurance Undertakings) Regulations (LN 208/2004) are specific to the insurance sector. For the purpose of the aforementioned regulations, the definition of a ‘Maltese insurance undertaking’ refers to an undertaking whose head office is in Malta and is authorised under the Insurance Business Act to carry on the business of insurance, but excludes an undertaking whose business is restricted to reinsurance.

A Maltese insurance undertaking must be wound up in accordance with the abovementioned regulations and the provisions of the Companies Act rendered applicable to insurance companies by virtue of the regulations.

Effect on insureds

How does a (re)insurer’s insolvency affect insureds and the (re)insurer’s obligations to insureds?

Pursuant to the abovementioned regulations, the assets of the Maltese insurance undertaking which are prohibited from being freely disposed of in terms of the Insurance Business Act must be available only for meeting the liabilities of the undertaking arising out of its business of insurance. Further, insurance claims rank before any other claim against such assets. An insurance claim includes any amount which is owed by an insurance undertaking to insured persons, policyholders, beneficiaries or any injured party having direct right of action against the insurance undertaking and which arises from an insurance contract or from any operation provided for in Articles 2(3)(b) and 2(3)(c) of the Solvency II Directive in direct insurance business.

Dispute resolution

Litigation

Are there any compulsory or preferred venues for insurance litigation in your jurisdiction?

The Arbitration Act (Chapter 387 of the Laws of Malta) specifies that certain classes of disputes are subject to mandatory arbitration and the parties thereto are deemed to be bound by an arbitration agreement. Motor traffic disputes – not arising in connection with a claim for damages for personal injuries – are subject to mandatory arbitration provided the value thereof does not exceed €11,646.87 where the dispute arises from:

  • a collision between vehicles;
  • involuntary damage to property involving vehicles; or
  • any such claim against an:
    • authorised insurer;
    • assurance company;
    • approved underwriter; or
    • the liable person in accordance with the Motor Vehicles Insurance (Third-Party Risks) Ordinance (Chapter 104 of the Laws of Malta).

In addition, the arbiter for financial services, appointed pursuant to the Arbiter for Financial Services Act (Chapter 555 of the Laws of Malta) deals with complaints filed by eligible customers. A ‘customer’ is defined as a natural person or a micro enterprise (an enterprise which employs fewer than ten persons and whose annual turnover or annual balance sheet total does not exceed €2 million). An ‘eligible customer’ for the purposes of the act is a customer:

  • who is a consumer of a financial services provider;
  • to whom the financial services provider has offered to provide a financial service; or
  • who has sought the provision of a financial service from a financial services provider.

A financial services provider includes a provider which is authorised by the Malta Financial Services Authority (MFSA) in terms of any financial services law, including insurance. In terms of the Arbiter for Financial Services Act, the claimant and the financial services provider will first be invited to resolve the dispute through mediation, provided both parties consent. If the parties do not consent or if the mediation is unsuccessful, the Office of the Arbiter will proceed to investigate and decide on the complaint.

In a number of instances, the arbiter must decline to exercise its powers in terms of the act, including when the conduct complained of is or has been the subject of a law suit before a court or tribunal initiated by the same complainant on the same subject matter.

The arbiter cannot award monetary compensation in excess of €250,000. The arbiter may, if it considers that fair compensation requires payment of a larger compensation, recommend that the financial service provider pay the complainant the balance, but the recommendation is not binding on the service provider.

Certain disputes – generally with respect to measures adopted by the MFSA – may fall within the competence of the Financial Services Tribunal.

How are insurance disputes with a cross-border element handled in your jurisdiction?

In order to determine whether the Maltese courts have jurisdiction in order to hear and determine a claim, reference must be made to the provisions of the recast EU Regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters and, if this regulation does not apply, to Maltese law.

What issues are commonly the subject of insurance litigation?

The majority of insurance disputes involve:

  • claims by an insured against the insurer for payment;
  • claims by an insurer which has been subrogated into the rights of its insured against the person occasioning the damage;
  • claims with respect to whether the insured has complied with the claims conditions set out in the policy; and
  • claims regarding whether the insured has acted in a fraudulent manner with respect to the presentation of a claim or has failed in his or her duty of utmost good faith to provide all necessary and correct information at the point of seeking cover.

What is the typical timeframe for insurance litigation?

Although this primarily depends on the complexity of the dispute, the length of proceedings also depends on whether the case is being heard by a court or by a tribunal. In the former case, the proceedings are likely to last between three to six years and more should an appeal from the court’s decision be filed. If the case is heard by a tribunal, the proceedings are more informal and typically do not extend beyond the two or three year timeframe (barring an appeal).

Arbitration

What regime governs the arbitrability of insurance disputes?

 The applicable regimes are the Arbitration Act and the Arbiter for Financial Services Act.