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A Creative Spirit
In the current hard market, opportunities around for those who can offer creative solutions, particularly in the captive sector. Barry White addesses Ireland's captive sucess to date and discusses the future potential.
Ireland has long been home to some of the most creative and talented artists of the twentieth century; from Joyce’s ‘Ulysses’ to U2’s ‘Unforgettable Fire’, Dublin exudes creativity and innovation. However, these infamous artists cannot hog all the limelight since for over a decade now Dublin has been a leading light in the world of insurance and reinsurance solutions. The city is home to half of the world’s leading insurers and reinsurers, with the current listing being a veritable who’s who of the global insurance marketplace.
The emergence of Dublin as a world class international location for insurance and reinsurance operations was initially related to the successful development of the International Financial Services Centre (IFSC). From a deserted wasteland has sprung a veritable cornucopia of riches. Dublin is now a global player and most definitely has earned and deserved its title as the ‘Bermuda of Europe’.
With its direct access to Europe, corporate friendly tax rate, high quality infrastructure and much sought after transparent regulatory regime, Dublin has become a financial hub and acts as a natural gateway to European markets. It has acquired a first class reputation across the world, not only for providing excellent captive management services to multinational corporations but also for highly original insurance and reinsurance solutions.
It is no coincidence that the world’s most successful and innovative insurers and reinsurers have chosen to locate here. Dublin has experienced fantastic growth and recently released 2003 industry figures from the Dublin International Insurance Management Association (DIMA) show that premiums written by member companies topped 12 billion Euro, with total assets under management of 42 billion Euro.
The harmonisation of EU legislation in the insurance sector, allied with Ireland’s low tax environment, has seen the domicile become an increasingly important location for head office operations seeking to provide insurance and reinsurance services throughout the EU or EEA.
Dublin has experienced great growth and the most recent surge can be linked to troubles throughout the industry. The last three years have seen a seemingly endless stream of problems for insurers and reinsurers, with investigations into commission and accounting practices, poor underwriting results, low interest rates, falling returns on equity and high exposure to failed companies. Such conditions have been like a proverbial stake through the heart of global insurers and reinsurers. These issues led to a hard market with spiralling prices, restrictive terms and conditions and sudden lack of capacity. Dublin, as an international financial hub and natural gateway to European markets, is primed to take advantage of these hard market conditions.
As a direct result of such conditions, opportunities abound for brave new players with no links to a troubled past. Billions of dollars of new capital poured into the industry in 2002 and it is highly significant that companies like Axis Specialty, Ace Tempest Re and Allied World Assurance Holdings chose to establish operations in Dublin’s Fair City to act as a platform to access European markets.
These tough market conditions have also led to significant captive formation and development. Dublin is currently home to 230 captives ranging from a variety of different industries and locations. Large multinationals have become increasingly disillusioned with soaring insurance costs, lack of capacity and restrictive terms and have decided to take matters into their own hands by going solo and establishing their own insurance subsidiaries and, in the process, possibly saving themselves considerable funds.
Captive interest is not restricted to any particular industry or location. In Aon’s experience, we organised captives from industries as diverse as telecommunications, retail and agriculture last year. There is a discernible trend towards the establishment of direct writing captives, thereby offering multinationals with significant operations in the European Union the ability to issue policies directly from a Dublin based company. The direct writing option also gives risk managers a greater control of their insurance programme and helps them avoid the vagaries of the fronting market where average fees and collateralisation costs have increased appreciably in recent times.
Not only have these market conditions led to an influx of new business but Aon’s existing client base has also been affected, with the majority of our clients facing serious problems finding fronting capacity and when finding it being abhorred at the price.
This has led to some clients spreading their wings with greater utilisation of their captive programmes. Some are writing new lines of business, others are retaining greater risk while there are those who are even considering converting to direct insurance status due to the inherent difficulties being experienced in the fronting market.
The captive market is changing and people are relentlessly looking for new ways to utilise their insurance vehicles to the better interest of their organisations. ‘Innovation’ is a key word within the Aon Captive Services Group as we are constantly searching for ways to save our clients money and in the same vein allow them to obtain maximum benefit from their captive insurance companies. As the sector is an immediate rival to the traditional insurance industry, however, innovation must always be employed, regardless of market conditions. Clients expect us to come up with solutions for them and we try our very best to do that.
This innovation can be seen with the successful introduction of Aon’s incubator concept in 2001, where clients are offered a complete wrap-around service for the set up, operation and management of a Dublin based company until the client decides to fly on an independent basis. (The incubator system allows a new entrant to the Dublin market to hit the ground running, using local skills, knowledge and assistance to launch and develop its operations.)
In keeping with this spirit of innovation is the use of captives for employee benefit programmes. There has been much discussion in the captive industry regarding this area but actions speak louder than words and in the last year Aon have worked with two of their clients to introduce such programmes to their reinsurance captives. It is now viewed that funding employee benefit programmes via a captive can provide an employer significant advantages. Doing so not only can increase an employer’s benefit cost controls, but also offers potential tax savings, helps diversify operations of the captive and spread risks and, probably most importantly of all, could potentially increase benefits for plan participants.
A further evolution of the captive concept has been the expansion of underwriting facilities by some large retailers, travel companies and telecommunications companies. Bolt-on insurance products which were traditionally sold by retailers through an agency agreement with a commercial underwriter have been transformed. Retailers which previously took a commission for each policy sold have expanded their insurance operations and formed their own insurers in Dublin to capture the healthy underwriting profits attributed to their core products. Customer insurances on mobile phones, retail store cards and holidays have been a strategic and profitable exercise for progressive and forward thinking retailers.
The enlargement of the European Union in May 2004 by 10 new countries was and is one of the most important developments affecting foreign direct investment in Europe. Having a stable economy with low costs and flexible working practices is the reason why so much investment over the last few years has moved to destinations like the Czech Republic and Poland. In the build up to accession investment into the EU accession countries increased by 14% in 2003 alone. (Ref: ‘The Ernst & Young European Investment Monitor’, 22 June 2004 .)
Investment into the new EU countries gives access to an integrated market where it is no longer necessary to set up in individual countries to access particular markets. Such capital expenditure by major US and European corporates has also provided an increase in insurance values needing to be insured. Existing multinationals with direct writing captives in Dublin have been very pleased to be able to issue policies directly to these new facilities against having to utilise a local fronting company. This ability to issue direct policies allows the risk manager to keep policy coverages on an even keel for all locations.
The investment has been so strong in these new countries that there is now firm interest in multinationals establishing new captives in Dublin to manage this risk or indeed to convert existing reinsurance structures into direct writers. This is certain to grow as the local economies develop. We also expect existing insurers and reinsurers in the accession countries to show an interest in Dublin. As a sophisticated and leading European (re)insurance location, accession insurers may plan to establish here in order to tap the intellectual capacity developed by the Irish in the freedom of services sector.
Dublin remains an evolving market, not allowing itself to stand still as it strives to offer new products and services to the global marketplace. Both exciting and interesting times lie ahead but Dublin appears poised to embrace these future challenges with open arms.
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