For a small country, Ireland is home to a strong captive insurance market but what challenges is the domicile currently facing and what can industry participants expect to see over the next 12 months?
As one of the smaller members of the European Union, Ireland has a total population of 6.5 million. Nicknamed the Emerald Isle for its vibrant green landscape, this small country has made itself a place in this big world.
Ireland’s insurance industry is no different, currently holding €200 billion in assets in Ireland of which €35 billion is invested in Irish infrastructure and government debt, according to Insurance Ireland. The insurance market provides a major contribution to Ireland’s economic growth and development and is a cornerstone of modern life.
Since its establishment in 1989, Ireland’s strong and stable captive insurance market has also made a name for itself. Over the last few years, although there has been little growth, industry players emphasise that the figures are not a true reflection of growth as existing captives continue to expand through the addition of new lines of risks or by providing increased capacity to their parent.
In 2017 the Central Bank of Ireland (CBI) revealed there were 78 captive (re)insurance companies domiciled in Ireland. For 2018, total assets stood at €6.5 billion, gross written premiums non-life was €900 million and gross written premiums life was €23 million.
CBI is Ireland’s sole regulatory authority for the financial services that adheres to Solvency II and aims to initiate a strong relationship with an applicant from the outset.
Insurance Ireland is also a contact point for any captive management companies looking to establish in Ireland and keen to get a sense of the market and the opportunities Ireland presents to captive managers.
Ireland has a sophisticated financial services sector, which regulated by the CBI and covers; life and general insurance; credit institutions; investment intermediaries; stockbrokers; financial exchanges; collective investment schemes; funds; investor compensation; and related consumer issues.
On the most common type of captive insurance, John Magee, senior vice president, Marsh Captive Solutions believes “there is generally an equal split between the traditional reinsurance captive, utilising fronting insurers and the direct writing model, which has been highly successful in Dublin.”
The ability to utilise freedom of services to issue admitted paper within the EU, the ability adapt policy wordings, coupled with the benefits of prompt premium collection and management of claims, means that the direct writing structure remains a favourite among captive owners.
Ciarán Healy, director of client solutions for Europe, the Middle East and Africa at Aon Captive and Insurance Managers, explains that Ireland is a good location for direct writing owing to its membership in the EU, but there’s also a good proportion of reinsurance captives and employee benefits captives that are starting to become more popular across the board.
Healy notes that “roughly 40 to 50 percent of the population of captives in Dublin are owned by US multinationals”.
The US is actually a very big marketplace for captives for Dublin, according to Healy, which is a very different profile across the rest of Europe. For example, Switzerland or Luxembourg have a much smaller percentage of US-owned captives compared to Ireland.
He highlights that this is Dublin’s unique selling point, while Ireland as a whole has a progressive economy with an educated, English-speaking workforce, which is attractive from a US perspective.
What’s trending?
On trends within the sector, Healy says that Ireland is an interesting location for captives at this moment. There has been a lot of talk about proportionality, the CBI and how captives are being perceived and managed from a regulatory perspective, which Healy explains has had negative connotations to a certain extent among prospective captive owners over the past few years.
He states: “Ireland has not been seen as the place to do business from a captive perspective for a while; thankfully, that perception is starting to be challenged.”
CBI has seen a number of captive setups in Dublin, which has recently led Aon to some high-profile Silicon Valley-type clients, which Healy described as “really encouraging.”
He adds: “We’re receiving many enquiries about Ireland as a location to do business in, and the understanding that the CBI has a solid regulatory regime has also contributed to the improving reputation of Ireland.”
John Magee, senior vice president of Marsh Captive Solutions, Dublin notes that there are two distinct trends which reflect the expanding use of captives. He comments: “With the firming of the market in some areas, existing captives in Dublin are seeking to add additional risks into their captives.”
He explains that “clients with established captives are using them to weather increased premium rates and/or reduced capacity within the market”.
Outlining the trends from last year, Magee suggests that one particular feature “was the use of captives to provide additional capacity to assist the completion of programme layers, particularly for property lines”.
He adds: “We are also seeing increased interest in companies seeking to establish new captive companies, again as a reaction to changing market conditions.”
Initially, with the introduction of Solvency II, some companies were reluctant to establish a captive. However, Magee believes that with a greater understanding of Solvency II mixed with market firming, that they are now at a stage where we see more clients moving from the captive feasibility stage to the development of an application for regulatory approval.
Magee explains that last year he also saw a sizeable increase in interest from clients in the use of captives which will convert into new formations over the next 12 months.
He adds that what is not visible within the captive figures is the continuing expansion of existing Dublin captives, either through the addition of new lines of risks or by providing increased capacity to their parent.
The statistics in the European captive market show that it has been “fairly stable” in terms of captive numbers, according to Healy.
He says although there has been a slight decline in recent years due to the high volume of mergers and acquisitions that resulted in numerous captive consolidations.
Healy said he predicts growth across most of all domiciles, adding that he believes that 2020 is going to be a very interesting year.
He suggests that in 2019, some companies may have left discussions around captive establishments a bit too late and now for the January 2020 renewals, they probably didn’t have budget enough time to get a captive set up.
“That cohort will start looking at captives during for the 2020 and 2021 renewals, so I expect in 2020 we will see a spike in captive numbers around the middle part of the year as companies prepare for the 2021 renewal,” Healy adds.
Ongoing regulatory challenges
Much like other European domiciles, Ireland’s challenges are similar as Solvency II continues to cause a headache for those who work within the captive insurance space.
Magee states: “We are disappointed that meaningful proportionality for captives has not yet been implemented, but captive owners and captive managers alike are still hopeful the CBI will take action soon on the matter.”
The European Insurance and Occupational Pensions Authority (EIOPA) are currently reviewing Solvency II, with aims to present their final findings to the sector in 2020.
Megee explains that the captive industry welcomes EIOPA’s 2020 review of Solvency II and in particular, the focus by EIOPA on the issue of proportionality.
He adds: “Given the challenges that corporate insurance buyers will face in the coming years as they address ever-increasing complex risks, it is in everyone’s interest that there is a consistent application of Solvency II across all EU domiciles.”
Healy agrees, stating that the biggest challenge is without a doubt regulation.
The time it takes to set up captive and some of the perceived additional regulatory requirements on top of Solvency II in which you don’t get in other domiciles really puts a negative spin on Ireland as a captive location, according to Healy.
He adds: “As an industry, the Dublin captive community needs to address this. It’s important that all the bodies such as Insurance Ireland and various stakeholders continue to push the agenda that Ireland is a good place to do business and that captives are a valued, important part of the overall insurance landscape in Ireland.”
Brexit is another issue on everyone’s minds, especially businesses. Ireland has another unique position as its the only country in the EU that has a part of the UK attached to it.
However, due to the troubles in the past, the Northern Irish border, and the close relationship with the UK, the Irish government has massively invested in a Brexit plan for people and businesses as the Department of the Taoiseach launched an initiative known as ‘Getting Irish Brexit Ready’.
Mcgee explains that all captives have detailed plans in place to minimise the impact of Brexit.
Magee adds: “While Brexit in itself does not create particular opportunities for Dublin captives, the relocation of commercial (re)insurance companies to Dublin certainly assists in the further development of Dublin as an international (re)insurance market, which in turn brings benefits to captives in terms of being able to access new markets and expertise in Dublin.”
Agreeing, Healy says that generally speaking, Brexit has not been much of a challenge to Irish-based captives.”
“He notes that a lot of Irish captives have UK risk, but would already have measures in place for Brexit. Overall, the delay to the Brexit timeline won’t impact the market in Dublin massively.”
“A lot of the companies that have predominantly UK risks are not typically choosing Dublin as the first place to go – they may choose the Isle of Man or Guernsey – so Dublin is more of a pan-European programme location.”
Looking to the future
As the market reaches a point where there is now a greater emphasis on retaining risk, Healy says the captive market will see the benefits. He also notes that there is a change in the profile of risk within companies, such as an increase in intangible, intellectual property-related risks.
He comments: “Captives will start to play a bigger role in things like cyber and other intangible risks that are not fully insurable in the current market. I think we’ll see a lot of captives entering that space and acting as an incubator of financing solutions for these risks, which is becoming more and more of a challenge for larger corporations”
He adds: “I think we will also see captives being used on a more enterprise-wide basis, for example, not just looking at property and casualty, but also human capital benefits and pensions as well.”
Healy thinks there’s a great opportunity for captives now to become more relevant than they ever have been and to be central to an enterprise-wide view of risk management. Adding that a lot of risk managers are already starting to think on a portfolio basis about all those elements.
Magee says that this year the industry is likely to see the continued expansion of existing captives to address pricing and capacity issues in the marketplace.
He explains that in turn, this will lead to other companies considering the potential use of captives as part of their risk management strategy.
He also adds that we can also expect to see the increased use of captives for non-traditional lines of cover, in particular for cyber risk, as part of a client’s overall risk management strategy.
