Introduction

This briefing explains why Ireland is proving so attractive a location to the captive industry. It also explains the application process involved in establishing a captive insurer or reinsurer and the ongoing supervisory controls to which a captive is subject.  

Advantages of Ireland

There are many advantages to locating an insurance or reinsurance captive operation in Ireland:  

  • Ireland is a full member of the European Union (“EU”) and has implemented all of the EU Non-Life Directives and the Reinsurance Directive so that captives regulated by the Central Bank of Ireland (the “Central Bank") can service all other EEA markets without the need for further authorisation (see paragraph on passporting at the end of this briefing);  
  • the Central Bank has implemented a streamlined authorisation process and supervisory regime for captive insurers (summarised below);  
  • captive insurers and reinsurers are exempt from the requirements imposed on third party insurers and reinsurers to appoint two Independent Non-Executive Directors to their Boards and a dedicated General Manager;  
  • the Central Bank is widely regarded as a responsible yet responsive regulator - applications for authorisation typically take 2 to 3 months from date of submission of a completed application to the Central Bank;  
  • the standard rate of corporation tax on trading profits is 12.5%;  
  • Ireland has an extensive network of double taxation treaties with most of the world’s leading industrialised nations. There are currently 69 signed treaties of which 64 are in effect;  
  • a captive insurer can carry on both insurance and reinsurance business provided it does so in accordance with its approved business plan;  
  • it is a well-developed insurance market with many of the world’s leading insurers and reinsurers based here;  
  • Ireland’s close proximity to London enables close interaction with brokers and other insurance and reinsurance entities operating in the London market;  
  • an exemption can be obtained from the 20% dividend withholding tax by many companies resident in or controlled by residents in EU member states or countries with which Ireland has a taxation treaty;  
  • no value added tax is payable on the supply of insurance services; and  
  • with a plentiful supply of top quality legal, actuarial, accounting, and insurance management service providers, there is an experienced pool of service providers.  

Authorisation Process  

When a group is considering Ireland as a location for a captive insurer or reinsurer, one of the initial steps it should take is to arrange a preliminary meeting with the Central Bank to discuss, at a high level, its proposed operations. Thereafter, the applicant, generally with the assistance of local advisers, will prepare an application containing prescribed information, which is submitted to a dedicated (re)insurance authorisation team in the Central Bank. Following its review of the application, the Central Bank will typically issue a series of follow up queries to the applicant seeking additional information in respect of aspects of the application. Once the application is clear of comments from the authorisation team it will be submitted to a senior management committee for formal approval. An applicant cannot commence business until the Central Bank has granted the formal authorisation. There is currently no application fee payable to the Central Bank.

Application to the Central Bank  

The applicant must provide detailed information to the Central Bank in relation to the proposed captive. The information required is set out in a checklist issued by the Central Bank and the following is a non-exhaustive list of the information and documentation that must be prepared:  

  • overview of the applicant’s parent/group;  
  • ownership structure including details of all qualifying shareholders;
  • applicant’s objectives and proposed operations including products and markets;  
  • legal structure of the proposed company including the constitutional documents;  
  • internal governance structures including details of the board of directors and senior managers (if appointed);  
  • risk oversight arrangements including compliance, risk management, underwriting, claims handling, reinsurance, financial control, investment management;  
  • what activities are to be outsourced (including envisaged oversight/captive managers); and  
  • capital and solvency projections and financial information.  

Additionally, the Central Bank must be satisfied with the fitness and probity of the proposed shareholders and persons who will occupy controlled functions or pre-approval controlled functions, including: directors and senior management (if any) of the captive. Directors and senior managers (if appointed) are required to complete an Individual Questionnaire in the prescribed form that should be submitted to the Central Bank with the application in accordance with the Central Bank’s fitness and probity requirements.  

Authorisation in Principle  

When the Central Bank has approved the application and before the formal authorisation is granted, the applicant will receive confirmation of “authorisation in principle”. Attached to the “authorisation in principle” will be a list of conditions which the applicant must satisfy prior to final authorisation being granted.  

One important condition is a requirement on the applicant to provide evidence that the appropriate capital has been received by the proposed Irish entity, to enable it to satisfy its regulatory requirements in relation to the business projected in the application.

Once all the relevant conditions have been satisfied, the formal authorisation is granted to the applicant and the Certificate of Authorisation will be issued.  

Ongoing Supervision  

Both insurance and reinsurance captives are supervised on an ongoing basis by the Central Bank. The principal requirements derive from the European Communities (Non-Life Insurance) Framework Regulations 1994 (the “Framework Regulations”) for captive insurers and the European Communities (Reinsurance) Regulations 2006 (the “Reinsurance Regulations”) for captive reinsurers. Below is a description of some of the main ongoing requirements applicable to these captives.  

Captives are subject to the Central Bank’s risk based supervision framework called “PRISM” (Probability Risk and Impact System). PRISM is a software application and a supervisory tool designed to assess financial firms based on two distinct concepts – the impact on the economy and consumers in a crisis and the probability that problems will arise. Captives are generally categorised by the Central Bank in the medium to low risk range.  

Regulatory Capital Requirements for Captives Insurers  

Captive insurers are required to maintain technical reserves, a solvency margin and a minimum guarantee fund in accordance with the rules contained in the Framework Regulations. Third party non-life insurers are required to maintain a solvency margin of 200% of the required minimum solvency margin for its first three years of operation (typically the Central Bank reduces this to 150% thereafter). However, this requirement can be reduced to 125% for captives writing pure property and ancillary business interruption lines and 150% for all other captives. In both cases the solvency margin is subject to the minimum guarantee fund requirement, which is the greater of one third of the solvency margin or, either €2,500,000 or €3,700,000 depending on the classes of business being written by the captive.  

Further modified regulatory requirements (e.g. in relation to writing both inwards insurance and reinsurance) are available to captives on application to the Central Bank who will determine what is applicable on a case by case basis. The streamlined regime is only applicable to captives writing risks limited to the group of which it is a part. Therefore, a captive writing any non-group risks will not be entitled to avail of the modified regulatory requirements.  

Regulatory Capital Requirements for Captive Reinsurers  

Captive reinsurers are required to maintain technical reserves, a solvency margin and a minimum guarantee fund in accordance with the rules contained in the Reinsurance Regulations. Generally, captive reinsurers are required to maintain a solvency margin of 150% of the minimum requirement. If a captive reinsurer proposes to maintain a solvency margin of less than 150% (subject always to it not being below 100%), it must justify its proposal to the Central Bank. Captive reinsurers are also obliged to maintain a minimum guarantee fund that must contain an amount equal to at least one-third of the reinsurer’s required solvency margin, subject to a minimum of €1,200,000.  

Regulatory Return  

Captive insurers and reinsurers are obliged to file returns with the Central Bank. In addition to the annual return requirement, captives may be requested to provide quarterly returns to the Central Bank.  

The returns comprise various forms and guidance on their completion is available on the Central Bank's website (www.centralbank.ie).  

Central Bank Requirements  

Captives are subject to a variety of regulatory requirements issued by the Central Bank. Information on these requirements is available on the Central Bank’s website (www.centralbank.ie).  

The most significant of these is the Corporate Governance Code for Captive Insurance and Captive Reinsurance Undertakings. This is a variation on the code that applies to third party insurers and insurers. It introduces a proportionate corporate governance regime having regard for the nature of the captive industry.  

On-site Supervisory Visits  

From time to time the Central Bank carries out on-site inspections of captives. In practice, the inspection will be carried out at the offices of, and will be co-ordinated by, the captive management firm appointed by the captive. The captive receives prior notification of the inspection and is typically requested to provide certain documentation to the Central Bank in advance of the inspection. The inspection itself begins with a preliminary meeting and ends with a close-out meeting which is followed by a post-inspection report that contains issues identified by the Central Bank that must be addressed by the captive.  

Passporting  

Captive insurers and reinsurers that are authorised by the Central Bank are entitled to write business in all other EEA markets either by establishing a branch in the market (known as a freedom of establishment) (“FOE”) or by way of freedom of services (“FOS”). This facility does not require additional authorisation from the supervisory authorities in the target markets.  

Prior to passporting into another EEA Member State for the first time, captive insurers are required to submit an appropriate notification to the Central Bank. An FOE notification must contain reasonably detailed information concerning the proposed branch operation. The branch is entitled to commence operations at a date no later than 5 months after the date the completed FOE notification was filed with the Central Bank. An FOS notification is more straightforward and captives are entitled to commence operations on an FOS basis into another market within 1 month from the date that the relevant notification was filed with the Central Bank.  

There are no formal notification requirements for captive reinsurers wishing to passport into other EEA markets on an FOS basis. However, a captive reinsurer intending to establish a branch in another EEA Member State, should notify the Central Bank of its intention and provide the Central Bank with certain limited information on the branch operation.