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Why does Ireland do insurance a little differently these days? Experts reveal all
Can you give an overview of the captive market in Ireland and explain some of its characteristics?
Ann O’Keeffe: Ireland is a mature domicile at this stage and, from a European perspective, is still the direct writing domicile of choice. This year we are celebrating the 25th anniversary of the very first regulated insurance captive company, established in Dublin in 1989.
David Stafford: Dublin does not get the same degree of publicity as a captive domicile in a global context. This is because unlike say Guernsey or the Isle of Man, it is considered more of a reinsurance/insurance location than a pure captive domicile. You can see from the diverse range of membership of the Dublin International Insurance & Management Association (DIMA), there are large life reinsurers, non-life reinsurers, Bermudians using Dublin as an entry point into Europe, niche reinsurance companies, captive managers and captives. While captives are a very important part of the industry here, Dublin is not as dependent on them as some of the other domiciles.
Sarah Goddard: The Central Bank of Ireland (CBI) is already using the Solvency II definition of ‘captive’, which requires that captives are wholly owned by corporates and not have any third party business. This means that operations that would be viewed as captives in other jurisdictions are classified as insurance or reinsurance companies in Ireland.
What have the past few years been like in terms of captive activity?
O’Keeffe: We have seen an uplift recently in captive applications and we have found that, when companies make the decision to set up an entity here, often it is because they want to get into a European base, possibly relocating from somewhere else. The trends we have seen at Aon, show that when a company takes the decision to set up a captive, it is usually bigger captives being set up, with these captives involved in a bigger portion of the core business of their parent, and so they are not using the outside market to the same extent as previously. We have also seen growth by sector, particularly in energy and pharma.
The number of captives being regulated at the moment is lower than it was a couple of years ago, but the overall total of gross premium of captives in Dublin has increased significantly, so this ties in with the trend we have seen of bigger captives.
Stafford: The regulator in Ireland makes a clear distinction between captives and non-captives. Although it may be captive business, it may not be considered that way by the CBI. A large industrial company writing third party risks could be viewed as being outside of the captive definition by the regulator and therefore additional requirements are necessary. This is why we tend to see the larger captives coming to Dublin, which have critical mass. There is a good network of support services here. All the big actuarial, accounting and law firms are here to support these relatively complex captive structures.
Goddard: There is a wide-range of captive-type activity in Ireland, up to large self-managed businesses such as those operated by Hertz and Volkswagen.
The entities can range from simple to complex. Some are even referred to by the industry as ‘super captives’, which are the convergence of several different captives. Over years of mergers and acquisitions (M&A) at the parent company level, smaller captives may be amalgamated to become one big multi-line captive. M&A in parent companies becomes a factor in this convergence.
To put this into context, about three years ago, two big energy companies merged and each had its own separate captive. There is no point in having two captives for one structure so the merging of captives follows as a parallel to what has happened at company level.
How is Ireland prepared for Solvency II and are there any other regulatory issues on the horizon?
O’Keeffe: Ireland is well-placed for Solvency II, and with only 20 months to go before full implementation, we would expect most companies to be well on the road to Solvency II preparedness.
Each regulated entity must have in place a Solvency II ‘implementation and readiness‘ plan with specific requirements specified by the CBI between now and 1 January 2016.
Stafford: Any captives, for which Solvency II would be an issue, are largely already gone. Those that are here understand that they need to deal with Solvency II and they are prepared to deal with it. I do not think there is anybody sitting on the fence anymore. Owners are now investing more in captives than they were before but are also using them more in order to justify the investment and expense.
Goddard: There are still many parts of Solvency II that are in the process of being implemented here, however. For example, at the moment there is a programme going on with the regulator here around the Own Risk and Solvency Assessment (ORSA), currently called the FLAOR. The ORSA reporting tool is optimised to what the regulators want and what makes sense, as well as what is doable from the industry perspective. It is not a done and dusted programme, but there are a lot of challenges that have already been taken into stride.
If you go back several years to when some of the quantitative impact studies (QIS) took place, the captive industry in Ireland started actively assessing the proposals when QIS3, looking at the pillar one capital requirements of Solvency II, took place. Captives in Ireland got really involved and began to see the impact of the changes. More recently, because we have had the long lead-in time to really understand the concepts, fundamentals and proposals, and to adapt to the Solvency II environment, when it comes in it should not be the challenge it might be in other places because of that.
Some have said that Ireland has a stringent regime when it comes to regulating captives. Is this the case and, if so, is it a positive or negative factor?
O’Keeffe: We are working in an era where strong corporate governance is seen as a positive. It is challenging for regulators to get the balance correct so that we are not over regulated. Regulators only get noticed when they are unsuccessful and do not get a great deal of credit for doing things well.
Stafford: I think a demanding but fair regime is welcomed. Regulation needs to be appropriate and if you don’t have a strong well-regarded regulator then question marks arise. Are you only using that domicile because you perceive that regulator to be weak? Dublin does have a strong regulator but one that has also tried to make the regime proportional to the smaller companies. Ireland also has a large domestic market. All of these companies have to be regulated in addition to the international sector and captives. This large domestic industry differentiates Dublin from regulators in Guernsey or Malta.
Goddard: The reason Ireland is perceived as being more demanding than other EU jurisdictions is because various aspects of the Solvency II-type environment have already been introduced in Ireland, for example, around corporate governance requirements. There is a code specifically for captives so it is not the same as if you were a conventional insurance or reinsurance company, and it brings in the principle of proportionality. Because, in the captive’s model, the insurance company owner is also the policyholder, there is a unique risk profile, and that is recognised in the corporate governance code for captives. The captive code in Ireland means that they will not need to implement sweeping changes as Solvency II is brought in, unlike what may be imposed in other EU jurisdictions.
It was interesting talking to a captive manager earlier on this year. She said that, from her perspective, it had been a difficult path to follow to implement the changes but, once embedded, they are safe in the knowledge that there will not have to be any further changes for the foreseeable future. Every EU country is required to bring in these types of regulations under Solvency II, so it is simply a case that captives in Ireland took the pain earlier in the process. As a result, the manager has more knowledge about the captives and their risk profile, which makes them better optimised to do what the parent company wants.
O’Keeffe: The CBI has recognised that captives need to be treated differently and I see this as a positive. The regulator introduced a risk-based supervision framework, PRISM (Probability Risk and Impact System), which reiterates its proportionate approach to ‘captives’, ie, those ‘with the lowest potential adverse impact on financial stability and the consumer’. This has reduced some time consuming regulatory requirements for captives.
We have also seen this with the introduction of the Corporate Governance Code for Insurance Companies, which specifically exempted captives. A proportionate corporate governance code for captives was subsequently introduced with minimum requirements. This was implemented in 2011, and covers many of the requirements under Solvency II.
What is it that sets Ireland apart, as a captive domicile, from its local competitors?
Stafford: Captives would never select Ireland because they perceive the regulatory regime to be easy, but I think that is a good thing as the regulator’s reputation is paramount. Patrick Manley mentioned at the European Insurance Forum that when Zurich were choosing a head office location, tax was near the bottom of the list, while the regulatory environment was much more important. It wanted to be viewed as a company that would choose a strong regulator. It is all about getting the balance right and making sure that it does not tip to the other extreme.
Ireland went through a tough time a few years ago, especially on the banking side, and that played a large part in the reform of regulations. However, I feel that the central bank is doing its best to strike a balance.
As an industry, we have an active dialogue with the regulator and arrange quarterly meetings. They want a highly regarded international industry and, as far as I am aware, there has never been an issue with any of the international insurance and reinsurance companies regulated by the central bank.
Goddard: It really depends on the parent company. There are a number of US companies that have pan-European operations and in the US the model of risk management is very well established. For a number of those that have European operations, it makes sense to domicile a captive in Europe.
You can go through freedom of services and write risks in any of the EU or European economic area countries. Dublin, Luxembourg and Malta all fit those parameters. We feel that commonality of language, linked heritage and a similar business culture stand us in good stead.
Given the rising trend for insurance-linked securities and cat bonds, are these structures becoming more popular in Ireland?
O’Keeffe: Ireland is a very attractive location for less common vehicles, such as insurance-linked securities (ILS) and the catastrophe bond market, with legislation specifically aimed at special purpose vehicles (SPVs) for the reinsurance industry and tax legislation providing special treatment in relation to qualifying SPVs, so the SPV business is firmly on the agenda for Ireland.
As the market has evolved and becomes sophisticated, Ireland’s legal and tax framework has consistently responded in order to continue to position itself as a very attractive location of choice for SPVs. While Ireland’s structured regulatory process does not allow the regulatory speed of set-up that Bermuda and the Cayman Islands, or more locally Guernsey, can provide, the onshore status and legitimate tax regime are attractive to many.
Goddard: There has been some cat bond activity in Ireland over the last few months. Special purpose reinsurance vehicle (SPRV) legislation has been in place since about 2007 and recently we responded to a discussion document from the CBI reviewing the SPRV regulatory environment. From what I can gather, there is a definite appetite for these types of instruments in an EU jurisdiction.
