The future of Ireland is tied to a number of factors, including Brexit and Solvency II
The future of Ireland is tied to a number of factors, including Brexit and Solvency II
Ireland’s captive insurance industry has become static in recent years, remaining in a strong and stable place but with little growth. However, the domicile has begun to develop an insurance and technology ecosystem that is focused on innovation, with insurtech, regtech and fintech startups popping up all
over Dublin.
This injection of innovation into the sector could be the impetus needed to cement the insurance industry’s place as the jewel of Ireland’s financial sector, and allow the Emerald Isle to shine brighter on a global stage.
A solid market
Ireland’s captive market is in a solid place, there are currently 78 captive (re)insurers licensed in the domicile with total assets of €6.4 billion, as of 31 December 2017. At that same date, gross written premiums were €1.227 billion with €800 million retained within the captives, while gross technical provisions were €600 million with €400 million retained. While solid, however, the market appears to have been stagnant over the past two years—just two captives were licensed in 2017, while in 2018 none were licensed and three captives withdrew.
Despite a lack of market growth in terms of formations, there has been a rise in interest in diversifying the uses of the captives active in the domicile.
“More and more companies are looking at other options and uses for their captives,” says Trevor Madden, managing director of Willis Towers Watson’s captive team in Dublin.
“Particularly to make better use of the capital employed in the vehicles, be that employee benefits, cyber, or customer related risks.”
Brian McDonagh, client operations leader and office head for Marsh in Dublin, notes that he has seen a similar diversification amongst captives.
He explains: “We are seeing a trend of existing captives adding additional lines of business and becoming more sophisticated in their captive utilisation. We are also seeing an increased interest in captives accessing the commercial reinsurance market for those seeking ‘capacity’.”
“Additionally, we are seeing an uptick in requests for captive feasibility studies to assist clients in their ongoing evaluations to determine whether a captive could achieve optimal balance for them in the long-term, between retained and transferred risk.”
Solvency II
One of the factors that has limited the growth of the Irish captive market has been Solvency II. The legislative programme was implemented 1 January 2016 and introduced a harmonised EU-wide insurance regulatory regime. Regardless of size, captives activities are supervised to the same extent as commercial insurers under Solvency II and are held to the same reporting requirements, which has increased the burden for many captives and seemingly slowed the growth of Ireland’s captive market to a near standstill.
McDonagh comments: “The protracted implementation period of the Solvency II regulatory regime was a struggle for the Irish captive industry.”
The initial bedding down period for Solvency II has now passed, and Kevin Thompson, CEO of Insurance Ireland, the domicile‘s insurance industry representation, says the industry is becoming more confident of what the regime means for them.
“Solvency II was a huge thing to get implemented,” he says. “I think people firstly just wanted to get it implemented and now we have had a period of bedding down. I think people are a bit more sure footed in terms of their obligations under Solvency II and what that means for them.”
The lack of proportionality in Solvency II is an issue that has been regularly brought forward by the captive industry, and with a major review of the regulation upcoming at the end of 2018, we could see some improvements in that area for captives.
“There are Solvency II reviews coming up and that gives us a chance to refine the regulation,” notes Thompson. “The reviews are important because they will be an opportunity to refine Solvency II and give us the opportunity to reinforce the idea of proportionality.”
Solvency II has not, however, been all doom and gloom for the Irish market as McDonagh explains it has put Ireland “ahead of the regulatory curve”.
He adds: “Principles such as substance, robust governance, and transparency are well embedded into the operational DNA of the captive industry in Ireland, and indeed across the EU, so existing and potential new captive owners will be very well placed to meet those challenges.”
Regulation
On a local level, Ireland’s financial services sector, including its captive industry, is regulated by the Central Bank of Ireland (CBI). The CBI’s supervision of regulated firms is based around the probability risk and impact system (PRISM). Under PRISM, the firms that have the greatest impact on the financial stability of the economy and the consumer receive the highest level of supervision, while firms with the lowest potential impact are supervised reactively or using thematic assessments.
In this sense, the PRISM framework recognises the principle of proportionality, as reinsurers ranked as ‘low’ or ‘medium low’, such as captives, are subject to less onerous requirements. For example, lower down the framework, the CBI allows for fewer directors and less frequent board meetings.
Teresa Ready, senior supervisor at the CBI, suggests there is a “strong ongoing engagement between the CBI and the industry”. She adds that the CBI “endeavors to be open and transparent in its communication and has issued a number of industry letters in recent times providing feedback on key areas of risk, noting examples of best practice”.
Providing the industry perspective, Madden said the current relationship works well “on a practical and day-to-day operational level”, but that “as an industry group, the captive managers would certainly welcome much more of a dialogue with the regulator particularly around proportionality for captives and low prism entities”.
Brexit means uncertainty
As the UK’s closest neighbour, Ireland has had a front row seat for the Brexit negotiation debacle and the main feeling in the Irish insurance market about surrounding the situation appears to be the same as with everywhere else–uncertainty. “From an insurance industry viewpoint, the Brexit mechanisms and timing are still far from clear,” says McDonagh.
“Other than local policy considerations around the mechanism of using freedom of services to issue cover from captives into the UK, there has been little direct impact on the captive industry.” It remains uncertain whether or not the UK will leave the EU, and what sort of consequences any final deal will have for Ireland, but Ready says the CBI “requires firms to have sound and adequate Brexit plans in place regardless of the type of Brexit implemented”.
Madden notes that as “a significant number of Irish captives will have some level of UK-based risks in their portfolio, Brexit will require these captives to consider their options and make amendments to the current arrangements”.
He continues: “It’s likely that the use of a fronting partner in the UK will be the simplest solution for most, though this will have a cost impact for clients in terms of increased fronting fees and collateral requirements.”
In keeping with Brexit’s unofficial theme, Thompson adds: “Brexit creates uncertainty for all insurers. The main issue is the lack of certainty on future regulatory frameworks between the UK and the EU.”
What the Irish insurance industry appears united on is that Brexit will provide opportunities, and to some extent is already. According to McDonagh, Ireland is one of the domiciles that appears to be faring well from the “UK based insurers/reinsurers that are seeking to relocate aspects of their business into other EU locations in preparation for Brexit”.
He explains: “The potential relocation of insurance expertise and talent out of the London market will no doubt have a positive effect on overall activity in the domiciles, including Ireland.”
John Quinlan, Insurance Ireland non-life council chair and CEO of Aviva Ireland, describes Brexit as “an obvious opportunity”, and emphasises that the domicile “needs to make sure we have the right regulatory and tax regime in place to make the most of what is a really big opportunity.”
The arrival of talent from the UK due to Brexit adds to a talent pool that the industry already views as one of its key strengths. Madden suggests that the “experienced and highly talented pool of captive expertise is one of the main factors that sets Dublin apart”.
He expands: “Be that from a captive management, actuarial, audit, legal or investment perspective, Ireland has some of the most creative, innovative and customer focused captive people around. This is a service-led sector and clients buy and trust the people that manage their business.”
A chance to shine?
Thompson believes Ireland will grow exponentially as an insurance hub over the next few years. He argues that it has the necessary talent and the regulatory and technological infrastructure present to continue to grow in its place as “an international hub for insurance”.
McDonagh echoes the sentiment, noting that there is significant potential for growth across the European captive domiciles and that Ireland will hopefully gain its share of that growth. He also predicts 2019 will see growth in the insurance-linked securities (ILS) sector.
He says: “Within Ireland we should see the continued use of ILS structures. With the likely growth in alternative captive structures this will broaden access to captive structures beyond multinationals to the small and mid-size enterprise organisations.”
Thompson warns, however, that 2019 is unlikely to see much growth in the captive market, rather that it would continue its “stable status” as “there is enough volatility out there from all different quarters”.
The Irish government is currently drafting IFS2025, the strategy for the development and promotion of the financial services up until 2025, and Insurance Ireland, believes the central aim should be to move insurance and financial services up the value chain.
Thompson comments: “We see this as being critically important for existing insurers in the market and for potential new entrants.”
McDonagh suggests that for the Irish captive industry to survive and thrive in the global market changes need to be made to implement a regulatory regime that includes proportionality for captives.
He explains: “There is a prevailing concern among practitioners that supervision of the industry could become an exercise in data analytics which provides limited value to any stakeholder and is certainly not in keeping with the principles of proportionality.”
McDonagh adds: “As an industry, we must focus on what truly needs to be protected, otherwise it will be a lot harder for the captive industry in Ireland and the EU to survive and thrive in a global environment.”
Ireland’s insurance sector undoubtedly appears to be moving in the right direction, but though the promise is there, it seems work is still needs to be done to allow the Emerald Isle to shine to its full potential in the global captive market.
