Marsh Captive Solutions Dublin
Many captive owners are exploring alternative forms of capital in order to strengthen their capital base in a more efficient manner, says Brian McDonagh of Marsh
How well is the Ireland insurance industry doing? Are numbers still on the up?
A review of the list of regulated insurance and reinsurance undertakings produced by the Irish regulator, the Central Bank of Ireland, shows that overall numbers for licenced insurance and reinsurance entities are down year on year, 2016 to 2017. Behind that headline number are myriad stories and views. For instance, this is a reversal of the positive developments during the 2015 to 2016 period when Ireland experienced an increase in the number of new captive authorisations issued by Central Bank of Ireland.
The continuation of the soft insurance market is probably the main driver, a story that resonates globally. Ongoing consolidation of regulated entities owned by multinationals (both captive and non-captive) could be another factor in the downward trend. However, one should not assume a trend based on a one-year review.
Surprisingly, the number of captives increased during 2015 in advance of the implementation of the new Solvency II regime. However, it does appear that the market is currently waiting to see an appropriate application of the proportionality principle to the regulation of captives (as defined within that legislation) in the new Solvency II era.
Dialogue between European Insurance and Occupational Pensions Authority, local supervisors and the insurance industry needs to be reflected in a proportionate approach to the supervision of captives and lower-risk entities to ensure the continued growth of ‘onshore EU’ as a sustainable location for captives.
What trends are you currently seeing in the captive insurance market in Dublin?
Under the banner of Solvency II, many captive owners are exploring alternative forms of capital, second- and third-tier capital, in order to strengthen their capital base in a more efficient manner. To date, options including the use of letters of credit, parental guarantees, subordinated debt, and unpaid share capital have received regulatory approval.
We are seeing a greater call for the services of captive managers and advisors as captives address evolving aspects of the solvency capital requirement optimisation and focus further on a fully integrated service solution across all three Solvency II pillars.
The owners and managers who have fared best through implementation are those who have invested in integrated IT platforms to ensure maximum automation with respect to solvency capital requirement calculation and reporting. This again has proved to be crucial as we move through the first annual reporting cycle due in mid-May.
Multinational organisations have increased their focus on consolidation and alignment of their global employee benefit costs, which continues to be the single biggest growth area for these firms. Many multinationals are involved in projects and feasibility work or have gone to the implementation phase, which often involves using a captive for portions of that retained employee benefit risk.
There appears to be little doubt that the sophistication by which non-life covers have been managed by multinationals for many decades will be replicated in the employee benefits space over the medium term.
Cyber is the other high profile risk area. This is reflected in the increase in the number of captives underwriting that specific risk.
Finally, there are many conversations around the virtual captive concept and once again that will continue to be an area for rapid growth.
How is the reinsurance industry developing in Dublin? Are you still attracting new clients?
My personal view is that aspects of the continued development of the reinsurance industry market have been ‘on hold’ for a number of years as the uncertainties of how the Solvency II regime will be supervised in each EU location continue to play out.
That uncertainty may now be offset by opportunities created in the aftermath of the Brexit vote and the triggering of Article 50 in the UK. Brexit represents an opportunity for the reinsurance industry and the larger international financial services industry in many EU locations, including Dublin.
Specific to the Dublin reinsurance market is the continued growth of the insurance linked-securities (ILS) sector. There have been many repeat bond issuances replacing the typical three-year cycle afforded to each catastrophe bond programme and Dublin has seen new entrance to this specialised market in the past 12 months.
How is Ireland faring against economic uncertainties at present?
There never will be, nor should there be, a period when world economic uncertainties do not have an impact on how people go about their business. How one reacts to those uncertainties determines whether these are threats or opportunities. Since the 1950s, Ireland has pursued a strategy of attracting foreign direct investment essentially to provide employment opportunities to a growing population. Since that time, Ireland has managed to remain an attractive location for multinationals by providing a well-educated English-speaking workforce and a stable commercial, business, and tax environment.
This strategy has remained the cornerstone of every government since that time and has proved to be a successful strategy even up to today. As a result, it is likely that adapting to each new global reality has been subsumed into the fabric and culture of the international financial services sector here.
How has Brexit affected Ireland as a captive insurance and reinsurance domicile?
To date, the Brexit project has being an exercise in contingency planning. While some operations currently based in London have made decisions on where and how they may reorganise themselves in a post-Brexit environment, most are still researching and/or considering their options.
The decision of ‘where’ is the opportunity for other EU financial centres, including Dublin, and we are keeping as close as possible to those prospects.
The existence of an international insurance market, combined with a regulator who has staffed up in expectation of new applications, make me optimistic that Dublin will land more than its fair share of those opportunities.
As a further angle to this, EU captives who access the UK commercial reinsurance market will also need to follow developments closely. Current thinking is that it is likely the UK will look to achieve “equivalence” similar to Bermuda, Australia, Japan, and Switzerland.
This equivalence status would be necessary to ensure appetite for EU companies to access the UK reinsurance markets.
In addition, credit ratings for reinsurers and insurers should also be closely monitored for potential downgrades and knock-on effects of the captive’s solvency capital requirement under Solvency II.
