Sunday, April 21, 2024

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Domicile Wars: Dublin “back on the radar” as regulatory changes likely

  • Ireland traditionally popular for direct writing captives
  • Solvency II led to a reduction in new formations
  • Ireland is facing increasing competition from other European domiciles
  • Long application process putting off prospective captives
  • Open dialogue under way with Central Bank to improve procedures

There is a sense of optimism that potential changes concerning captive regulatory procedures at the Central Bank of Ireland (CBI) could help put Ireland “back on the radar” after a period of stagnant captive activity.

Ireland was an early pioneer in direct writing captives in Europe, and experienced swift growth following the inception of its captive regulation, with the first direct writing captive formed in 1989.

Initially the domicile had relatively relaxed capital requirements, facilitating easy formation for companies interested in establishing a captive in the jurisdiction.

Despite its early success, however, the number of new captive formations in Dublin has dwindled since 2016 with the introduction of Solvency II, a perceived lack of proportionality and a conservative regulatory approach largely influenced by the fallout from the 2008 financial crisis.

At the end of 2022, Ireland had 66 captives domiciled in the jurisdiction.

There are 14 captives in Ireland owned by French companies, eight captives are German owned, four are Italian owned, and three are owned by Spanish companies.

Ireland has also historically been a popular European captive domicile for US companies, with 17 US owned captives currently domiciling in the jurisdiction.

While new captive activity has markedly increased in Europe since 2019, due to the hard commercial market, Ireland only licensed one new captive in 2022. Nine new captives were formed in Luxembourg in 2022, with both jurisdictions traditionally competing for European-owned captives.

Since the late 1980s, many large multinationals established European hubs in Ireland because of government policies targeted at developing the financial services sector.

“The captive insurance industry began in Ireland alongside this trend but really exploded around 2002 when there was a global shortage of fronting insurance capacity,” Lorraine Stack, international consulting and sales leader at Marsh Captive Solutions and leader of the Dublin management office, told Captive Intelligence.

“This is when direct writing capabilities really grew in Ireland. Out of all the domiciles in Europe, Ireland has become well established as the home of the direct writer.”

Nicolas Deparday, corporate director of insurance & real estate strategy at Michelin, told Captive Intelligence that when the company was deciding on a captive domicile in 1994, Ireland was one of the only options that allowed the formation of a direct insurance company.

“At the time, the requirements in terms of capital and capital contribution were relatively low and flexible, which means it was easy to set up a direct insurance company,” he said.

Miripro Insurance Company remains domiciled in Ireland today and writes lines including liability, property, cyber, marine and cargo, environmental liability, and fraud.

Deparday said Ireland has a “very professional” ecosystem involving actuaries, captive managers, and fiscal services, as well as many different brokers and tax advisors.

Following the introduction of Solvency II, and the increased regulatory burden it entailed, a reduction in captive activity appeared across Europe, and Dublin was no exception.

A recent Milliman report, commissioned by Insurance Ireland, highlighted that there is a perception internationally Ireland is “not an attractive location for captives”.

The report also suggested that some in the captive sector are generally “pessimistic” about growth in the coming years.

Only a handful of captives have been established in Dublin in the past five years, including for Heineken, Alphabet and Schwarz Gruppe.

Stack said that there are a few reasons why there are currently fewer captives being formed in Ireland than in other European domiciles.

“With new captive domiciles emerging in Europe, new captive owners might be more interested in being domiciled closer to home, as there is more choice in terms of domiciles,” she said.

“There’s also this general reversal in globalisation happening, so it is not necessarily related to the environment here, but rather what’s happening in a more macro way.”

Concerns have been raised around the current time frame for new captive applications, as well as the CBI’s application of proportionality under Solvency II.

In addition, according to SFCR’s reviewed by Captive Intelligence, there are six Dublin captives currently in run-off.

McDonald’s Corporation has owned Golden Arches Insurance in Ireland since 1993, but it stopped issuing new policies in 2020. The corporation formed a new captive, by the same name, in Bermuda the same year, in effect deciding to move domiciles.

There are discussions taking place between the CBI and the industry that could lead to a more streamlined process and encourage new captive formations.

Although the number of new captives has dried up, the size of existing captives in Ireland is growing.

“One telling metric is around the number of extensions to existing licences in Dublin,” Mike Matthews, international commercial director at Artex Risk Solutions, told Captive Intelligence.

Matthews revealed Artex is involved in several feasibility studies that could result in a new Irish captive formation.

“One of them is a very large US corporate who is looking at multiple captive solutions, including employee benefits,” he said.

Other captive managers told Captive Intelligence they have had a limited number of feasibility studies within the last 12 months that suggested Ireland as an optimal domicile.

Like most domiciles, property continues to be the most popular line of business for captives in Ireland, due to a lack of capacity in the commercial market and its short-tail nature.

“We are however seeing some recent interest in cyber, professional indemnity and a small bit of directors and officers due to the continuing lack of capacity in these areas,” said Ronan Ryan, chief commercial officer and Robus Group.

Matthews highlighted that cyber is particularly becoming more “attractive”.

“We are seeing a lot of clients saying that they really want to get to grips with understanding their underlying cyber risks and are going to dip their toes in the water this year,” he said.

Solvency II

A common reason cited for the initial reduction in captive formations in Dublin was the introduction of Solvency II in 2016, applicable to all (re)insurance companies domiciled in European Union states.

The regulatory burden of Solvency II compliance and its capital requirements has deterred certain companies from considering an EU domicile such as Dublin.

Stack said that after Solvency II, there was essentially a “pause” around Europe with fewer captive formations, which also coincided with a soft market.

“We lost a few captives around Europe at this time, but these were primarily companies who just did not have the scale or appetite for Solvency II capital requirements,” she said.

Post Solvency II, insurance managers and industry groups have shown a desire for greater engagement with regulators regarding the application of proportionality.

“Since 2016 there have been opportunities for the CBI to apply greater proportionality particularly in the area of reporting, however in the main the CBI has opted not to,” Derek Bridgeman, managing director at Strategic Risk Solutions, told Captive Intelligence.

“Where European Insurance and Occupational Pensions Authority (EIOPA) guidance has stated regulators may apply proportionality, the CBI generally erred on the side of caution resulting in elements of misalignment with other EU captive domiciles.”

Bridgeman said that this coupled with a longer, more onerous implementation experience when compared to other EU jurisdictions has likely contributed to stagnation.

However, he noted it is this sturdiness that also makes a domicile an attractive captive proposition to some.

“This may appear to somewhat contradict earlier comments around Ireland’s regulatory regime, however it is important to recognise that the attraction of a particular captive domicile can often be the robustness of the regulatory and supervisory framework.

“This is a fine balance to strike and one which often requires open and transparent dialogue across the local industry groups together with regulators.”

A review of Solvency II begun by the European Commission in 2020 is currently on-going, and one potential alteration concerns the application of proportionality to captives and low risk undertakings.

The industry is expecting final wording of the Solvency II reforms at the end of November.

Application process

Several sources speaking to Captive Intelligence highlighted the length of time it is takes the CBI to complete captive applications as a reason for a lack of captive formations.

“If you are considering forming a captive in Europe, Ireland is always on the initial list for review, because it’s got such a fantastic reputation,” Stack said.

“Recently, the application process was a bit of a stumbling block because companies needed something sooner. I would say it was taking somewhere between nine and 12 months.”

The CBI is required to undertake the process over a six-month period under Solvency II but that is dependent on the manager or the client presenting a complete application.

“If I look at where the complaints are coming from, and people saying it’s taking 12 plus months to set up a captive in Dublin, then it’s really because the business plan has not been thought through properly and the application has not been as complete as it should be,” added Matthews.

Captive Intelligence understands there is currently an open dialogue between the industry and the CBI, which could lead to some improvements.

“They are making some tweaks to improve things, and I’m very hopeful about that,” Stack said.

“The areas that we are focusing on is the application process and the clarity and transparency around adding new lines of business to existing captives.”

Captive Intelligence is aware of a recent application to change a licence from a reinsurer to a direct insurer that was completed within three months.

Deparday said he would like to have a more dynamic two-way approach when it comes to engaging with the regulator.

“They have everything to win by doing that and we have also a lot to gain so it would be a win-win situation,” he said.

“The time where you say to people, ‘you have to do that’ and they just do it, these times are over.”

Matthews believes that one challenge has been the CBI’s “bandwidth and resources”.

“If we think about what’s happened over the last number of years, particularly with Brexit, Ireland became a home and a Brexit solution for a lot of large commercial insurers, reinsurers and UK brokers, so the CBI, like most regulators, has had its resources extremely stretched,” he said.

He said the regulator is now thinking more commercially and looking to attract captives again.

“I think we have seen that blip, but it has been a very specific Brexit driven blip, and now we’re going to see Dublin coming back on everyone’s radar,” he added.

“We are certainly seeing more opportunities presenting themselves where Dublin is a potential solution.”

One source close to the CBI told Captive Intelligence that they believe the regulator does have the resources it needs and is good at moving them around when required.

“They don’t proactively do a lot of work on companies, but what they do is react to applications,” they said, speaking on condition of anonymity.

“If they need more people to allocate to a certain thing that’s time sensitive, they do that.”

Ryan believes that the current timescales of the application process is not necessarily a drawback as those captives coming to Ireland understand they are coming to a highly regulated environment.

“In terms of how long it takes to set up a captive, any Solvency II jurisdiction is not that dissimilar,” he said.

Matthews told Captive Intelligence that before Artex submits anything to a regulator, it will go through a technical review committee internally.

“It has to pass that process before it sees the light of day and get submitted to the regulator,” he said.