Dublin faces up to Solvency II

I wrote an article on captives for a Dublin financial magazine in December 2006. The last line of that article read “next step – Solvency II”. If it was on our minds then, it most certainly is a pressing issue now, as in April of this year, the Solvency II Directive was approved by the European Parliament and the Council.

With more than 200 regulated international insurance and reinsurance undertakings, both industry and the Financial Regulator are preparing for the challenges of the new Solvency II regime.

Regulation has always been a priority in Dublin. Ireland was the first country in the EU to implement the European Communities (Reinsurance) Regulations in July 2006, which was well in advance of its final implementation date of December 2007.

Perhaps as a result of this, the first reinsurance captive in the European Union under the new legislation was authorised to write business from August 1, 2006. It was somewhat of a coup for Dublin. The captive is owned by the INDITEX Group (whose brand names include Zara, Massimo Dutti, and Pull & Bear, among others), with management services provided by Allied Risk Management Limited.

As an industry, we have not looked back since. The early implementation of the Reinsurance Directive has provided a stepping stone towards Solvency II, with insurance and reinsurance undertakings pressing ahead with robust corporate governance regimes under the watchful eye of the Financial Regulator.

The new regime

So what is Solvency II? This cannot be answered without mentioning Solvency I, which has been in force since 1994. In its simplest form, Solvency I bases capital requirements on a premiums and claims-based calculation. The classes of business written may also have a bearing on the calculation, with limited credit for reinsurance permitted. The Solvency I result is subject to minimum guarantee fund (MGF) regulations. The MGF will increase for the first time on December 31, 2009 for reinsurance undertakings. It will be indexed upwards to €1.1 million for captive reinsurance undertakings, and €3.2 million for all other reinsurance undertakings.

The Solvency II capital requirement is based on a comprehensive risk-based model requiring dramatically more analysis and management resources. Solvency II looks at the business in its entirety and applies capital charges to each aspect, culminating in the Solvency Capital Requirement (SCR). In addition to the SCR, which is an integral part of Pillar I, there are Pillars II and III to be considered; Pillar II enshrines the Supervisory Review, including corporate governance measures and internal controls, while Pillar III identifies Disclosure requirements as its priority.

Dublin’s captive industry association, led by energetic chief executive Sarah Goddard, is the Dublin International Insurance and Management Association (DIMA). Goddard has been instrumentalin leading DIMA’s lobbying within the EU in respect of Solvency II on behalf of the captive industry. She has been supported in her task by DIMA’s captive subcommittee, chaired by Larry Sherin.

"Through DIMA's lobbying efforts, the definition of a captive re/insurance undertaking has nw been enshrined in the solvency II directive."

Through DIMA’s lobbying efforts, with considerable support by the Department of Finance in Dublin, the definition of a captive re/insurance undertaking has now been enshrined in the Solvency II Directive, effectively acknowledging the special case for our industry. This further provides a platform, within the framework measures, to introduce an appropriate proportional regime due to the nature, scale and complexity of captives.

Further lobbying efforts by DIMA, which fully engages with likeminded associations such as the European Captive Insurance and Reinsurance Owners’ Association (ECIROA) and the Federation of European Risk Managers Associations (FERMA), is ongoing. The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), which is responsible for advising the European Commission on how to implement the Solvency II rules, received approximately 20,000 comments by September 11, 2009 in respect of the recent consultation papers published. CEIOPS is expected to publish a consultation paper on simplifications/ specifications for captives in the coming weeks.

The Financial Regulator has identified some early tasks for industry such as putting in place a governance framework for Solvency II, appointing an accountable executive, carrying out a gap analysis and encouraging firms to focus on Pillars I, II and III at this early stage in the process. The regulator is currently engaging fully with CEIOPS and continues to assemble its Solvency II team, with proposals to arrange seminars and conferences with industry.

Growing reinsurance market

Dublin has been developing as an international centre for insurance and reinsurance for nearly 20 years and is fast becoming one ofthe reinsurance hubs of Europe. In 2007, gross written premiums in Dublin had risen to a comparable level with that written by Lloyd’s for the same period. So can we say that Dublin is now a reinsurance market? Yes, most certainly.

Lloyd’s is a unique insurance market, but Dublin can offer additional capacity, expertise and products to insurance buyers. With more than 30 leading professional reinsurers based in Dublin, there is easy access to underwriters. Two of the most recent entrants into the market are Bermudian-owned reinsurers Everest Re and Arch Re.

Dublin finds itself as the preferred option for many leading insurance groups to house their pan-European headquarters. A number of drivers are at play in this latest success story, namely, proven IFSC track record, euro currency membership, access to a well-educated English-speaking workforce, a strong regulatory regime and a business-responsive environment. Dublin ticked all the boxes for the Zurich Insurance Group. To further emphasise the continued commitment to the International Financial Services Sector, the recent findings of the government-sponsored Commission on Taxation has recommended the retention of the current corporation tax rate of 12.5 percent.

For those looking for an EU domicile in which to set up a captive, reinsurance operation and head office, Dublin does indeed tick all the boxes. The co-ordinated approach of industry and the Financial Regulator aims to ensure the successful implementation of Solvency II in Ireland. The future for Dublin is indeed bright.

Ronan Ryan is a chartered insurance practitioner and insurance manager for Allied Risk Management Limited. He can be contacted at: ronan.ryan@alliedrisk.ie