Malta and PCCs – What does the future hold?


A Protected Cell Company (“PCC”) is a single legal entity that acts as an insurance vehicle consisting of two essential parts – the ‘Core’, being the non-cellular part, and the ‘Cell/s’.  The core comprises the core assets which include the company’s core share capital, investments, assets and liabilities. The core sits as the Company’s backbone for most of the PCC’s business transactions.

Cells are created by the issue of a separate and distinct class of ‘cell’ shares. PCCs may be approved to carry out insurance, captive and/or reinsurance activities, as well as limited insurance intermediation activities. Each cell maintains its own assets and liabilities, that is, separate from other Cells within the structure, and from the Core. Hence, each cell has its own separate portion of share capital and the income, assets and liabilities of each cell are kept separate from all other cells and the core assets of the PCC. Each cell is ring-fenced, meaning that cell creditors only have recourse to the cellular assets attributable to the cell they have transacted with, thus generally granting a level of protection to core assets. However, the Cells are not vested with separate legal personalities and a PCC is considered to be one legal entity.

Although the assets and liabilities of the cells and the core are segregated, the creditors of a cell generally benefit from the right of secondary recourse to the assets of the core, provided that the assets of the cell with which a creditor transacted are first exhausted. Consequently, non-cellular assets may be utilised by a cell to help meet the cell’s liabilities. However, in terms of the Companies Act (Cell Companies Carrying on Business of Insurance) Regulations (the “PCC Regulations”), the right of recourse may be excluded if the relevant cell of the PCC exclusively carries on affiliated (captive) insurance business or business of reinsurance, by, inter alia, entering into a non-recourse agreement with the PCC. In the latter scenario, the assets of the core would not be available to satisfy the liabilities of the creditors of the cell if the assets of the cell are exhausted.

Solvency II Requirements and Benefits

Pursuant to the Solvency II Directive, the notional solvency capital requirements (“SCR”) of the core and each of its cells are calculated separately, as though the core and each of its cells were separate undertakings. The SCR could either be calculated using the standard formula or by adopting a full or partial internal model. In determining the notional SCR of the cell, one must draw a distinction between cells which have the right of secondary recourse and cells which preclude the right of secondary recourse to the capital of the core. Whereas in the former scenario, any shortfall in the cell’s SCR may be compensated for by the core’s assets, in the latter scenario, the cell must have sufficient funds in order to cover its notional SCR at all times.

The SCR at PCC level is the total sum of the notional SCR of each cell and the notional SCR of the core. The PCC must satisfy the minimum capital requirement (“MCR”), depending on the nature of its business activities (for example whether reinsurance, captive, liability business).

Pillar II under Solvency II introduces an enhanced system of governance. The PCC structure offers economies of scale and significant cost burden sharing, and grants cells access to a common pool of knowledge and expertise within the common management system at the core of the PCC. Even though corporate procedures relating to each cell may not necessarily be identical, a common approach may be adopted by the board of the PCC which permeates the structure as a whole.

All transparency and reporting requirements under Pillar III of Solvency II may be carried out through the board of the PCC, resulting in a cost-effective structure which diminishes the burden on individual captives or insurers writing business through a cell.  Therefore the current legal framework regulating PCCs offers benefits which may be attractive for prospective investors (e.g. small or medium captives) by requiring low minimum capital requirements at cell-level, whilst safeguarding the interests of the underwriters and their creditors by affording adequate protection. These benefits also include:

  • a relatively quicker licensing process. In order for a person to carry on business of (re)insurance or insurance distribution activities in or from Malta, it requires the Malta Financial Services Authority’s (the “MFSA”) prior authorisation. However, setting up a Cell within a pre-licensed PCC structure entails a shorter process for the promoters to begin operations;
  • the MCR must be satisfied at the level of the PCC as a whole, not by each cell;
  • each cell has to satisfy its own SCR requirements which may be less than the MCR;
  • shared governance resources between the Core and the Cells;
  • legal segregation of assets and liabilities of each cell from other cells and from the core; and
  • secondary recourse to the core upon the exhaustion of the cell’s assets (other than in cases of reinsurance / captive business).

Proposed amendments to the Companies Act (Cell Companies Carrying on Business of Insurance) Regulations

The MFSA issued a circular on the Proposed Changes to PCC Regulations in December 2022, whereby it expressed its plans to review regulation 15 of the PCC Regulations.

Regulation 15 of the PCC Regulations currently provides for the possibility of the afore-mentioned non-recourse to the core if the cell is exclusively carrying out the business of affiliated insurance or business of reinsurance. However, the MFSA is proposing the removal of the possibility of non-recourse to the core as outlined under regulation 15 of the PCC Regulations.

The segregation of assets and liabilities lies at the heart of the PCC structure, however the amendments seek to nullify any non-recourse agreement entered into with PCCs in respect of reinsurance / captive cells, and cell creditors would consequently have the right to recourse to the core’s assets. The removal of regulation 15 of the PCC regulations would therefore result in the core’s assets being at risk in the event that a cell does not have adequate SCR to cover its liabilities, thereby diminishing the notion of the segregation of assets and liabilities for reinsurance / captive cells.

This has wide-ranging implications for the market, as promoters of the PCC model would have to put their core capital on the line for reinsurance / captive business, which may not be in line with their business model and/or risk appetite. This results in a ‘barrier’ for the creation of new cells as the number of PCCs willing to accept this type of business may reduce drastically. In fact, the PCC Regulations, as currently drafted, are already rather restrictive seeing how non-recourse is only applicable in the case where cells carry on captive business or reinsurance business. Therefore, one may question whether such changes may be deemed to be excessive and disproportionate, particularly since these arrangements will unlikely have any impact or pose any risk to retail clients, considering how the counterparties are large professional clients that are able to contract freely. Furthermore, one may also question as to why any new cell applications are to exclude secondary recourse arrangements, considering how the law, as currently drafted, does indeed still allow for such an arrangement. Therefore, until the law is amended to formally remove the secondary recourse arrangement, it is hard to determine on what legal basis the MFSA may reject such cell applications.

The Circular further provides that new cells must be adequately capitalised at the level of the notional SCR – therefore, the removal of the non-recourse arrangement is likely to weaken the capital requirement protection of a cell. Consequently, such proposed change will result in the PCC having higher capital requirements when compared to a typical insurance undertaking. In fact, it would seem that the PCC would be required to hold both the MCR, as well as the sum of the notional SCRs of all the cells and core – this differs from an insurance undertaking that will be required to hold the higher of the MCR and the SCR. As a result, one of the fundamental advantages of the PCC would be eliminated.

The PCC structure has always been a unique selling point for Malta as an insurance jurisdiction – this was primarily due to the flexibility and attractiveness of Malta as a PCC domicile, including for captives and reinsurers. The possibility of utilising non-recourse arrangements for captives and reinsures has played a massive role in attracting both promoters of, and investors in, PCCs. The removal of non-recourse arrangements is likely to negatively impact the Maltese PCC model and would place Malta at a competitive disadvantage versus other PCC jurisdictions which generally allow for the use of non-recourse arrangements. In addition, existing PCCs that have built their PCC business model on the possibility of utilising non-recourse arrangements will be prejudiced as such a business model may no longer be viable nor within their risk appetite.

Therefore, it is imperative for all stakeholders and the MFSA to agree on a way forward which protects the attractiveness and flexibility of the PCC model, whilst also alleviating any concerns that the MFSA may have in respect of the current PCC model for captives and reinsurers.

This article was co-authored by Tina Mifsud.