Regulation is always a concern for the captive sector. Captive (re)insurers are more sensitive to the burden imposed by regulation than other sectors of the insurance industry. Captive owners are generally non-financial service groups and use a captive as an efficient way of accessing the (re)insurance markets and generally managing group risks.
Increased regulation can mean increased cost (whether represented by increased time commitment from group management or increased fees to managers and advisers). Increased regulation may also represent a greater risk profile for the group because if the captive cannot comfortably comply with the increased regulatory requirements, it may face reputational damage because of regulatory sanctions. If the aggregate cost of operating a captive (whether financial or other cost) is perceived by management to be too expensive, then other risk transfer and management solutions will be explored.
Consistent regulatory environment.
As it approaches its twenty-fifth anniversary, it is interesting to gauge the development of the Irish captive sector against these types of benchmarks. Other factors can be seen to have changed through the years – the growing sophistication of the market, soft pricing and the effects of the financial crisis to name just three. However, a consistent regulatory environment has helped maintain Ireland’s status as a captive centre.
Indeed, the competitive advantages of Ireland from a regulatory point of view are largely the same as they were when the first captives were established:
- Ireland is a full member of the European Union and was an early adopter of all of the Life, Non-life and Reinsurance Directives, as well as each of the more recent EU and international initiatives. Captives regulated by the Central Bank of Ireland (the “Central Bank”) can service all other EEA markets without the need for further authorisation
- In the (re)insurance sector, the Central Bank continues to be regarded as a responsible yet responsive regulator – applications for authorisation typically take 4 to 6 months from the date of submission of a completed application to the Central Bank
- The standard rate of corporation tax on trading income remains 12.5 %
- Ireland has an extensive network of double taxation treaties with most of the world’s leading industrialised nations. The list has grown over the past 25 years. There are currently 78 treaties in force and 4 more have been signed and are awaiting implementation.
- 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 tax treaty
- No value added tax payable on the supply of (re)insurance services
Easing the red tape
Much has remained the same from the regulatory point of view. However, the sector has not been immune from changes in regulation. Not least have been areas like corporate governance and the roll-out of Solvency II.
The re-engineering of the supervisory model (and of the Central Bank generally) after the financial crisis has meant growing emphasis on corporate governance, the fitness and probity of those in key functions and use of the new “PRISM” supervisory model. There has been a need to strike a balance between prudential concerns and the unique nature of a captive’s business.
The Corporate Governance Code for Captive Insurance and Reinsurance Undertakings has sought to get the balance right, with requirements for captives including the following:
- a minimum of three directors
- reporting of material deviations from the Code within 5 days
- submission of an annual compliance statement
- notifying the Central Bank in the event the captive ceases to be a captive
- putting in place robust governance arrangements
- establishment of a risk appetite statement
- the effective operation of key control functions such as internal audit, compliance and risk management
There had been a concern that the more intrusive characteristics of the Corporate Governance Code for Credit Institutions and Insurance Undertakings would be applied to captives. However, the Central Bank can be commended for responding with an approach which is proportionate as far as the captive sector is concerned.
New Companies Bill
The broader environment in which Irish corporates operate will also see the easing of regulatory “red tape” with the imminent introduction of the new Companies Bill. The Bill, currently working its way through the final stages in the Irish parliament, will reform, consolidate and amend the existing company law statutes applicable to all Irish companies, including captives.
Captive (re)insurers are generally structured as Irish private limited companies. Much of the Bill is targeted at making it easier for these types companies to conduct their activities. Useful changes will take away some of the company secretarial aspects which have been an unnecessary intrusion on day-to-day business. It includes the potential to dispense with annual general meetings and streamlining how directors and shareholder meetings are conducted. Recent changes to company law have also made the filing of corporate returns in the Irish registry more straightforward.
As an EU member state, the key regulatory challenge for the Irish captive sector in the coming years will be Solvency II. The captive sector continues to seek detail on the proportionate approach envisaged by Solvency II (in recognition that there is no outright distinction made between captives and other commercial (re)insurers under the new regime).
The Central Bank has issued guidelines on preparing for Solvency II, including papers on four areas:
- System of governance (including risk management systems)
- Forward looking assessment of own risks
- Submission of information
- Pre-application for internal models
The guidelines apply from 1 January 2014 to high impact and medium-high impact undertakings under the “PRISM” supervisory model. Captives, with typically medium-low or low impact status, will only be properly affected from 1 January 2015.
The approach to the regulation of captives in Ireland remains a key strength. It has a consistent history book-ended by the Life and Non-Life Directives of the 1990s through to the Solvency II regime of 2016 and onwards. Here’s to the next 25 years of Irish captives!
This article first appeared in Captive Review’s Dublin Insurance Report 2014.