Exploring new products. An interview with Dr. Matthew Bianchi, Chairman, MFSAC Insurance and Pensions working group

EXPLORING NEW PRODUCTS

The chairman of the MFSAC working group on insurance and pensions, Matthew Bianchi, believes that the time is ripe for Malta to leverage its experience within the captive insurance and reinsurance market – to launch insurance-linked securities (ILS).

“As a jurisdiction, we are well positioned to step in to this growing market,” he said, explaining that ILS were the juxtaposition of capital markets and insurance.

“The pieces of the puzzle have come together nicely and the level of sophistication is ripe for activity to be stepped up.”

Malta is already one of the leading jurisdictions in Europe for captive insurance, having attracted some major European companies to set up here. It is also the only jurisdiction in the European Union to offer protected cell structures through a large number of protected cell companies offering their specialist services. In the past, Malta shared the sector with Gibraltar, but the latter’s exit from the EU left this island in a unique position when it comes to cell companies.

This means that there is already an established ecosystem, for example of insurance managers representing the large international companies. However, the island has yet to venture into collateralising the reinsurance market. This essentially means taking risk, insuring it, and then allowing investors to each take on a small parcel of that risk through specialist reinsurance vehicles. This is a highly regulated market and the reinsurance vehicles are usually either stand-alone companies or cells within cell companies licensed specifically for this purpose. The investors usually, but not exclusively, take a stake in the risk through the bond markets or through private placements which could be structured in Malta or elsewhere.

“This would do a number of things. It would raise the level of sophistication, opening up workstreams for insurance managers, accountants, lawyers and actuaries,” he said.

So far, there are two other EU jurisdictions active in this area but there is enough space in this market for Malta to play a role. The advantage is that everything is already in place here, including the fiscal regime, regulation and legislation, since Malta already securitises other assets, like loans, receivables and debt. And what it offers is unique, since other jurisdictions offer stand-alone vehicles, while Malta could offer cell companies too.

The island’s experience with this model has allowed the regulator to develop a high level of sophistication, with its Insurance Supervision team already preparing to deal with ILS.

With everything ready to welcome the first clients, the only issue is identifying them and attracting a few initial transactions. Finance Malta is already attending conferences, speaking to the larger players in the market and encouraging its members and the Regulatory team to “rub shoulders with the key people in this sector”, he said.

“When the first deal comes, we will be ready to take it on board. I think that we have been reaching out to enough people in the market to reap a few rewards. Hopefully very soon we will see a few of these structures,” he said.

ILS is only one of the issues being tackled by this Working Group, one of the others being occupational pension reform – quite a contrast from a deliverable that would affect a few specialists to an area more akin to a social reform affecting thousands.

The issue at the heart of the strategy is the need to increase the breadth of occupational pensions locally, something to which the Government is already committed. However, it is a major leap from the concept to the deliverable, and the Working Group’s role was to seek convergence across a wide spectrum of stakeholders, from employers’ associations and employees’ representatives, to investment advisers, insurers and local banks.

Dr Bianchi explained that the first step was to meet all the various stakeholders, to seek points of convergence on which to build consensus. Once these had been deciphered, a proposal was made to the Finance Ministry, which of course added its own recommendations to ensure that proposals matched Government policy and thinking.

“It was the starting point and we could move to the next level of discussions, on points such as whether auto-enrolment would be presented with or without opt-out options, thresholds for eligibility by number of employees and so on. At this point, the project was handed over to the policy-makers to decide,” he said.

Another side of the issue was to discuss how to make the schemes attractive enough to users – mainly fiscal incentives but not exclusively so – which meant looking at other jurisdictions’ experiences.

“Our sense is that once people get used to it and it becomes a routine factor in employment arrangements, they will start to embrace it, while employers will see that it improves retention and loyalty, which will also be a bonus for them,” Dr Bianchi said.

As the scheme matures, he believes that employers may start to offer multiple pension providers, but one thing is sure: as with ILS, the role of the regulator – the MFSA – is crucial. Its decades of experience with regulating pensions through foreign schemes like QROPS will ensure that it is ready to adequately supervise this new sector, providing confidence – particularly important given the huge amount of money this move would generate,

“The integrity of the system depends on a good regulator which establishes clear parameters based around conservative investments across various products, which spread the risk but still give a reasonable return,” he said.

He is confident that the MFSA has the necessary expertise and experience to ensure the right level of comfort and integrity to this market and all its stakeholders.