The Insurance and Reinsurance Law Review: Malta
The insurance industry in Malta has experienced appreciable growth over the past 15 years and has been delivering excellent results. The insurance sector forms an integral and important part of the Maltese financial services industry, which currently contributes just over 12 per cent of Malta's gross domestic product. It has gradually evolved from a small number of local set-ups to approximately 79 insurance and reinsurance undertakings, of which 63 underwrite risks situated outside Malta. Another 455 foreign insurers based in the European Union are underwriting direct risks in Malta, making use of their 'passporting' rights on a services or establishment basis.
In recent years, the financial services single regulator, the Malta Financial Services Authority (MFSA), has introduced a number of innovative corporate structures, including protected cell companies, incorporated cell companies and reinsurance special purpose vehicles set up either as stand-alone structures or as cells of securitisation cell companies.
Following the United Kingdom's exit from the European Union, Malta is the only remaining EU Member State to offer protected cell legislation.2 A protected cell company (PCC) allows for the creation of separate and segregated cells. The individual cells do not have separate legal personality and business is written through the PCC. This allows each cell to utilise the PCC's passport licence to write business directly throughout the European Union. The legal segregation of the cells means that the assets and liabilities of each cell are ring-fenced from each other, with each cell having a distinct pool of assets and liabilities that remain separate from the assets and liabilities of other cells and from the core of the PCC. A cell is only required to satisfy its own notional solvency capital requirements and the cells are not required to individually satisfy the minimum capital requirements that can be satisfied by the PCC as a whole. Also, there may be situations where a PCC may permit its cell or cells to utilise a part of the excess capital held by the core to meet their capital requirements under the EU Solvency II regime (Solvency II).
Another company cell structure is the incorporated cell company (ICC).3 The structure is based on corporate principles that are similar to the PCC structure. However, in an ICC structure, each incorporated cell of an ICC is deemed to have a separate legal personality that is distinct from that of the core and the other incorporated cells. As a direct consequence of this important distinguishing feature, each incorporated cell would be required to satisfy own funds and solvency capital requirements in its own right.
A securitisation cell company can be set up to assume risks as a reinsurance special purpose vehicle from a ceding undertaking through reinsurance contracts or utilised to assume risks through similar arrangements.4 The assets and liabilities of each cell would be segregated from those of other cells and those assets are not available to creditors of other cells.
i The insurance regulator
The MFSA5 is the single regulator for both insurance undertakings and intermediaries. The Insurance and Pensions Supervision Unit is tasked with the approval process, including, inter alia, approval of applications, acquisitions and disposals and appointment of key function holders, directors and senior management of licensed financial services entities, as well as being responsible for prudential matters, while the Conduct Unit is responsible for conduct of business issues.
The Insurance Business Act6 (IBA) and the Insurance Distribution Act7 (IDA), together with the regulations, insurance rules and insurance distribution rules issued by the MFSA under the respective Acts, create the legal and prudential framework for regulating insurance business and insurance intermediaries activities in Malta. The IBA is largely modelled on UK statute and implements Solvency II.
The Maltese legal and regulatory regime is fully compliant with Solvency II. Local authorised firms are, however, permitted to adopt the proportionality principle in a number of areas (e.g., systems of governance, risk management, supervisory reporting and public disclosure).
ii Position of non-admitted insurers
In Malta, only admitted insurers are entitled to conduct insurance activities. The regulatory regime prohibits the performance of insurance business or insurance distribution activities in or from Malta by unauthorised firms. Exceptionally, reinsurance treaties, contracts covering 'large risks' or contracts of insurance entered into with the approval of the MFSA or the minister responsible can be underwritten by a non-admitted insurer through a broker licensed in terms of the IDA.
EU and EEA insurers and intermediaries authorised by their home Member State are able to 'passport' into Malta, on a freedom of establishment (branch) or freedom of services basis. The MFSA has a secondary regulatory role primarily on conduct and marketing issues.
iii Position of brokers
Insurance intermediaries such as insurance agents, insurance brokers and tied insurance intermediaries are required to be authorised by the MFSA. Introducers are not required to seek authorisation; however, the activities they may carry out are limited to making introductions to insurers and insurance agents and brokers. In addition, the Insurance Distribution Directive (IDD), which came into force on 1 October 2018, has also introduced the concept of ancillary insurance intermediaries (AIIs) (see Section III.iv).
iv Requirement for authorisation
The MFSA may grant authorisation to a company with its head office in Malta to carry on insurance business in or from Malta, or to a company whose head office is in a country outside Malta to carry on insurance business in or from Malta.
The following are prerequisites for the granting of a licence under the IBA:
- submission of application to the MFSA in the prescribed application form;
- submission of a scheme of operations to the MFSA in the prescribed form;
- satisfaction of the prescribed minimum own funds requirement;
- company's objects are limited to insurance business and operations arising directly therefrom;
- all qualifying shareholders, controllers and persons who will effectively direct the business are fit and proper to ensure its sound and prudent management; and
- disclosure of any close links.
The documents and information required for the enrolment of an insurance broker or insurance agent broadly follow that of insurers.
The duration of the approval process depends on whether the undertaking is being established as a direct insurer, in which case the MFSA is to consider an application within six months; or a reinsurer or captive, in which case the period imposed is reduced to three months. The approval process for intermediaries is to be concluded within three months.
Insurers and reinsurers are to hold eligible own funds covering the Solvency II capital requirements, which are calculated using the standard formula or using a full or partial internal model as approved by the MFSA. Insurers and reinsurers must also hold eligible basic own funds to cover the minimum capital requirement.
Insurance intermediaries are required to satisfy applicable own fund requirements. Brokers and agents are to maintain own funds equivalent to €58,250 or 4 per cent of the annual gross premiums receivable, whichever is the higher. The minimum own funds required to be held by insurance managers ranges from €17,000 to €58,250 depending on whether the insurance manager is managing solely captive insurers or whether it has been granted a binding authority to enter into insurance contracts on behalf of the insurers.
v Regulation of individuals employed by insurers
Persons occupying senior management posts, members of the board of directors of an insurer or insurance intermediary and key function holders must all be approved by the MFSA, prior to being appointed. Enrolled insurance intermediaries must have an individual who is registered in the managers, brokers or agents register, as the case may be.
vi The distribution of products
The distribution of products in Malta is carried out both through intermediaries or directly from an insurer at its principal office or at one of its branches. The implementation of the IDD has introduced additional requirements to both insurer and intermediaries carrying on distribution activities, the aim of which is additional consumer protection. The distribution of products is further regulated by the Conduct of Business Rulebook, which is applicable to insurers and intermediaries, as well as European insurance undertakings carrying on insurance business in Malta through the Freedom of Establishment regime. The Rulebook also implemented the conduct of business provisions set out in the IDD.
As of 1 January 2018, producers and distributors of packaged retail investment and insurance products (PRIIPs) are required to comply with the EU Regulation on key information documents for PRIIPs,8 which obliges those who produce or sell investment products to provide investors with key information documents.
Following the implementation of the IDD, producers and distributers of non-life products are required to produce an insurance product information document.
vii Compulsory insurance
A number of sector-specific laws impose compulsory insurance cover to be undertaken. These include sea vessels, third-party cover for motor vehicles and aircraft. Several professionals are also required to take out a professional indemnity cover. These include accountants, notaries, engineers, trustees and healthcare professionals.
Furthermore, under the IDA, one of the continuing obligations of licensed insurance agents and brokers is to maintain a professional indemnity insurance cover or some other comparable guarantee.
viii Compensation and dispute resolution regimes
Where an insurer or intermediary is unable to satisfactorily resolve a customer complaint, an eligible customer (natural person or micro enterprise) may lodge a complaint with the Office of the Arbiter for Financial Services.9
In the case of insolvency of an insurer, recourse by a qualifying person10 can be made to the Protection and Compensation Fund,11 whose objectives are to effect payment of claims remaining unpaid by reason of the insolvency of an insurer and to effect compensation to victims of road traffic accidents.
ix Taxation of premiums
Stamp duty in the amount of €0.11 for every €100 or part thereof of the sum assured is payable by the insured on policies of insurance (other than life insurance policies). The minimum duty chargeable is generally €13. Duty on life insurance policies that are not renewable every year is payable where the policyholder is resident in Malta or incorporated in Malta at the rate of €0.10 for every €100 or part thereof. The minimum duty chargeable is generally €11.65.
Insurance policies issued by Maltese insurers insuring risks that are situated outside Malta are exempt from Maltese stamp duty or any other form of Maltese insurance premium tax. Furthermore, policies of aviation, marine cargo, marine hull or boat, export credit, suretyship and medical cover are exempt from the payment of stamp duty, even where the risk is deemed to be situated in Malta.
Insurance and reinsurance law
i Sources of law
The Maltese legal system has foundations in both English common law and civil law. The basis of insurance law is general contract law. There is no generic insurance contract law. However, in 2005, a number of amendments were added to the Maltese Civil Code aimed at regulating life insurance contracts.
Case law precedents are not binding and courts are free to interpret the law, which could result in the same issue being treated differently by the courts.
The elements of contract law are governed by civil law doctrine contained in the Civil Code.12 The IBA and IDA and the rules and regulations issued thereunder by the MFSA also deal specifically with compulsory insurance.13
ii Making the contract
Essential ingredients of an insurance contract
A contract of insurance means an agreement in which an insurer agrees, for a consideration, to pay to or for the account of the insured a sum of money or other consideration, whether by way of indemnity against loss, damage or liability or otherwise, on the happening of a specified event with respect to which there is an element of uncertainty as to when or whether it will take place.14
The rules of contract law apply to contracts of insurance and reinsurance. Hence, for a contract to be valid the following essential elements must be satisfied:
- the parties must have capacity to contract;
- there must be the consent of the parties;
- there must be a certain element that constitutes the subject matter of the contract; and
- there must be a lawful consideration.
Together with the Civil Code elements, Maltese jurisprudence has established the importance of the common law principles of insurable interest and utmost good faith in contracts of insurance.
Recording the contract
Generally speaking, a contract can be concluded verbally;15 however, the IBA requires a written policy document to be issued by the insurer to the policyholder.
iii Interpreting the contract
General rules of interpretation
Insurance and reinsurance contracts are subject to the same general rules of interpretation that apply to other contracts, as provided for in the Civil Code. Where the terms of an agreement are clear and words in the agreement are attributed the meaning attached to them by usage at the time of the agreement, there shall be no room for interpretation.16 Where the literal meaning differs from the common intention of the parties as clearly evidenced by the whole of the agreement, preference shall be given to the intention of the parties.17 In case of any doubt, the agreement shall be interpreted against the obligee (insurer) and in favour of the obligor (insured).18
Types of terms in insurance contracts
It is common practice for an insurance policy to include clauses relating to policy limits, excess amounts and other general exclusions, indemnity limit and period of insurance, warranties, conditions precedent and consumer complaints' process.
iv Intermediaries and the role of the broker
The IDA regulates insurance brokers, insurance agents, tied insurance intermediaries and insurance managers. Insurance distribution activities means the activities of introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance or of concluding such contracts or of assisting in the administration and performance of such contracts, in particular in the event of a claim.19
Insurance agents are persons appointed by an insurer to be its agent with the authority to enter into contracts of insurance on its behalf. Insurance brokers are those who acting with complete freedom as to their choice of insurers, bring together persons seeking insurance and insurers, who carry out work preparatory to the conclusion of insurance and reinsurance contracts and who assist in the administration and performance of such contracts, in particular in the event of a claim.
Tied insurance intermediaries are defined as persons carrying on insurance intermediary activities for or on behalf of one or more insurers in the case of insurance products that are not in competition. These persons may collect premiums or amounts intended for the policyholder; however, they cannot make any insurance commitments towards or on behalf of the public. Insurance brokers are prohibited from appointing tied insurance intermediaries but can set up branches and appoint introducers. Under the IDD, insurance brokers are now permitted to appoint AIIs.
An AII is not considered to be an insurance intermediary but a specific type of intermediary operating under specific conditions (e.g., a travel agent, car rental company or motor vehicle dealer). The activities of AIIs are described as the activities of persons who, for remuneration, take up or pursue insurance distribution activities on an ancillary basis, acting under the full responsibility of authorised undertakings, for the products that concern them, provided that all the following conditions are met:
- the principal professional activity of the natural or legal persons does not comprise insurance distribution activities;
- the natural or legal persons only carry out insurance distribution activities in relation to certain insurance products that are complementary to a good or service; and
- the insurance products concerned do not cover long-term insurance business or liability risks, unless that cover complements the good or service that the natural or legal persons provide as their principal professional activity.
Insurance managers can provide services to either an insurer or an insurance broker. In the former case, an insurance manager can accept an appointment from an insurer to manage any of its business and may have the authority to enter into contracts of insurance on behalf of the insurer. Insurance managers may also accept an appointment from an insurance broker with certain limitations specified in the law.
The procedure for filing insurance claims is typically set out in the insurance contract itself. It is common practice for contracts of insurance and reinsurance, especially liability policies, to require that the insured notifies his or her insurer of a claim within a given time frame for the claim to be valid. Prompt notification of an event that may or is likely to give rise to a claim is usually included in the contract as a condition precedent.
In terms of the Civil Code, the prescriptive period for filing a judicial action for damages for breach of contract is typically five years. If the damages are in tort, the prescriptive period is two years, which may be extended if the action for compensation is related to a personal injury. The aforementioned periods may be suspended or interrupted in certain cases as prescribed by law.
Good faith and claims
The insured is required to provide the insurer with full, complete and correct information both pre-contractually and at claims stage. Providing false information will result in the denial of claim, cancellation ab initio of the policy and could give rise to criminal liability for insurance fraud.
Set-off, funding and reinstatement
Article 1166(c) of the Civil Code grants the insurer an automatic right of subrogation on payment of an indemnity. Nonetheless, a subrogation clause is included in most insurance contracts. Upon payment of an insurance claim by the insurer, the insurer may claim indemnity from a third party for the loss covered by the insurance contract. An act or omission on the part of the insured that could prejudice the insurer's subrogation rights may forfeit policy coverage.
i Jurisdiction, choice of law and arbitration clauses
Choice of law in insurance contracts is regulated by the Rome I Regulation (Rome I), where parties to an insurance contract that falls within the ambit of Article 7(3) of Rome I are provided with a limited list of applicable laws.20
The provisions of Article 7(3) of Rome I are in conflict with the applicable provisions of the Civil Code. Malta has not introduced any further legislation following the coming into force of Rome I pursuant to Article 7(3)(2). Despite the fact that, to date, there has been no judgment delivered by the Maltese courts that has resolved this conflict, it has been argued that Article 7(3)(1) of Rome I should prevail over the provisions of Civil Code with respect to the choice of law applicable to contracts of life insurance.
The procedure regarding the institution of court proceedings is regulated by the Code of Organisation and Civil Procedure.21 Generally speaking, court proceedings are initiated by the filing of a sworn application, with the defendant having 20 days from date of service to file a sworn reply. An application to appeal a judgment delivered by a court of first instance is to be filed within 20 days of delivery of the judgment.
There are two forms of arbitration, mandatory arbitration and voluntary arbitration.22 Motor vehicle claims, not arising in connection with a claim for damages for personal injuries, are subject to mandatory arbitration, provided that the value does not exceed €11,646.87 in the event that the dispute arises from:
- a collision between vehicles;
- involuntary damage to property involving vehicles; or
- any such claim against:
- an authorised insurer;
- an assurance company;
- an approved underwriter; or
- the liable person in accordance with the Motor Vehicles Insurance (Third-Party Risks) Ordinance (Chapter 104, Laws of Malta).
Arbitration proceedings are governed by the Arbitration Act, which provides rules for both domestic and international arbitration. International arbitration is governed by the UNCITRAL Model Law, which is implemented by the First Schedule to the Arbitration Act.
In the case of mandatory arbitration, the parties may appeal to the Court of Appeal in certain limited circumstances contemplated under the Arbitration Act. However, in the case of voluntary arbitration, if the parties to the insurance contract would have expressly excluded the right of appeal, the decision of the arbitrator will be final and no appeal to the Court of Appeal can be made.
iv Alternative dispute resolution
Besides arbitration, mediation and conciliation, eligible customers (natural persons or micro enterprises) may file a complaint with the Arbiter for Financial Services. The Office of the Arbiter is required to invite the claimant and the financial service provider to resolve the dispute through mediation. When the mediation proves unsuccessful or the parties do not wish to pursue this option, the Office of the Arbiter will proceed with the investigation and decision on the complaint.
Mediation is seldom resorted to by the parties to an insurance contract. Mediation is regulated by the Mediation Act.23 Mediation can be resorted to either voluntarily, following an order of the court or by law. The applicable forum is the Malta Mediation Centre.
Year in review
The year 2020 was certainly a challenging year for all. The covid-19 pandemic changed not only the way businesses operate, but also consumers' needs. The pandemic put into practice the insurance market's business continuity plans and tested business models and capital adequacy. In the face of all these challenges, the Maltese insurance market proved to be resilient.
The pandemic coupled with Brexit-related applications kept the MFSA busy. The MFSA engaged with insurance undertakings, intermediaries and mangers to ensure that their business continuity plans were robust, that they were taking the necessary actions to mitigate cyber risk, that they had sufficient financial resources and that ultimately their clients and consumers would not be negatively impacted by the pandemic. In particular, the MFSA engaged with insurance undertakings that had included a covid-19 exclusion from cover in their products to ascertain that they had assessed these products and had ensured that they still provided 'value for money' for their clients, despite the decrease in cover.
Notwithstanding this, the MFSA continued to adopt a pragmatic approach by adopting the principle of proportionality. In its supervision priorities for 2021, the MFSA communicated that it shall continue to focus on prudential requirements, conduct supervision, cross-border activities and cyber risk.
Outlook and conclusions
While covid-19 has certainly put a strain on the world's economy, 2021 and the development of multiple vaccines seem to have put hope back in the air. Malta's small size has always meant that rapid adaptation is ingrained in its approach to the challenges it faces. The insurance industry has a key role to play in supporting customers and societies through the crisis and the recovery.
The insurance industry is facing fundamental change. Companies had to adapt quickly to change during the pandemic or risk being left behind. Given the operational impacts insurers have experienced, particularly in customer-centric areas, digitalisation has become ever more vital to ensure that they are agile, responsive and connected organisations. Looking ahead, the pace of change is set to accelerate still further.
As organisations have had to shift overnight to remote working, the insurance industry has had to become much more agile, secure, connected and digitally enabled. This has brought about increased costs, but has also provided insurers with the wake-up call the industry needed to embrace digitisation, as well as an opportunity to streamline processes using newly available technology, such as artificial intelligence and the internet of things. Those market participants that have welcomed the digital transformation will be the ones that gain over those who will fall back into the old ways.
1 Edmond Zammit Laferla is a partner and Petra Attard is a senior associate at Mamo TCV Advocates.
2 Companies Act (Cell Companies Carry on Business of Insurance) Regulations, 2010, SL 386.10.
3 Companies Act (Incorporated Cell Companies Carry on Business of Insurance) Regulations, 2010, SL 386.13.
4 Securitisation Cell Companies Regulations, 2014, SL 386.16 and Re-Insurance Special Purpose Vehicles Regulations, 2016, SL 403.19.
5 Established by the Malta Financial Services Authority Act (Chapter 330, Laws of Malta).
6 Chapter 403, Laws of Malta.
7 Chapter 487, Laws of Malta.
8 Regulation (EU) No. 1286/2014.
9 The Office was introduced on 18 April 2016 by the Arbiter for Financial Services Act (Chapter 555, Laws of Malta). Prior to that complaints were addressed to the Consumer Complaints Manager within the MFSA.
10 A qualifying person is: (1) an insured of the insolvent insurer eligible for protection; (2) a person other than the policyholder, to whom payment in respect of any sums falling due under the policy could have been made in accordance with the policy (e.g., a beneficiary); or (3) a person to whom the insolvent insurer is liable to pay any sum or other consideration in respect of the insured's legal liability to that person under the policy of insurance (e.g., a third party). In the case of general business protected risks, payments shall be made to every qualifying person who is an individual and to every non-corporate body or association of persons if all those persons are individuals.
11 Set up by the Protection and Compensation Fund Regulations 2003.
12 Chapter 16, Laws of Malta.
13 See, inter alia, the Motor Vehicles Insurance (Third-Party Risks) Ordinance (Chapter 104, Laws of Malta).
14 Article 2(1), IBA.
15 However, the Civil Code specifically requires that a number of agreements be concluded in writing, either by means of a private writing or public deed.
16 Article 1002, Civil Code.
17 Article 1003, Civil Code.
18 Article 1009, Civil Code.
19 Article 2(1), IDA.
20 Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations.
21 Chapter 12, Laws of Malta.
22 Arbitration Act, Chapter 387, Laws of Malta.
23 Chapter 471, Laws of Malta.