Since 1987, Dublin has attracted more than 150 captives, primarily from Europe, the United States and Japan. Similar but not identical factors have influenced their choice of domicile as three case histories show. Lee Coppack explains.
Competition for the world's captive business is strong as the regularly expanding list of countries or states with captive legislation demonstrates. Having opened its doors to captives in 1987, Dublin has made considerable strides over the past 12 years and is now host to more than 150 captives. As significant as the total numbers, is the pedigree of the owners, many of whom are internationally known corporations, and the amount of business that they write through their captives. Irish government 1997 statistics show that among the direct writing captives, several wrote more than IR£3 million in premiums each.The success of the International Financial Services Centre (IFSC) in attracting captives largely revolves around the ability of Dublin captives to write insurance on a services basis throughout the European Union, thus reducing the considerable financial burden of fronting fees. This factor, when combined with the special 10% (soon to be 12.5%) corporate tax rate, provides advantages over traditional European captive domiciles.
Other factors named as those which influence a company in the choice of domicile for a captive are:
• Excellent international reputation.
• Adequate insurance legislation.
• Technical expertise in insurance accounting, legal matters and banking.
• Political and economic stability.
• Tax efficiency.
• Reasonable operating environment and cost structures.
• Absence of exchange controls.
According to Eamon O'Brien, managing director of Aon Insurance Managers (Dublin) Ltd: “In each of the above categories, Ireland compares most favourably with other captive domiciles. With the ability to direct write all corporate insurances from a company established and regulated in Dublin, the initial trickle to Dublin has now become a steady flow.
“A good operating environment and an expansive regulatory environment have also increased interest. Combined with a businesslike approach to dealing with the insurance needs of an expanding client base, this has led to the rapid development from 1987 to date. Indeed, Dublin is now confident that it has found its niche in the captive insurance market and looks to the future with considerable optimism.”
Members of The Dublin International Insurance and Management Association (DIMA) have contributed the following captive case studies:
A European captive
Van Ommeren Logistics Insurances Ltd
Van Ommeren, with its head office in Rotterdam, is a global service provider operating 56 state-of-the-art tank terminals that are strategically located along the world's major shipping routes. Additionally, the group operates an extensive fleet of ocean-going tankers, as well as coastal and inland tankers. Van Ommeren is committed to providing high quality services to its customers, from straightforward transportation right up to fully integrated terminal and transport services.
Van Ommeren Logistics Insurances Ltd (VOLIL) was established in the IFSC during 1991 and commenced trading as a reinsurance company in 1992. In 1993, VOLIL received its insurance licence from the Irish insurance regulator and converted to a direct writing insurance company. Currently, VOLIL participates in the property/business interruption, liability and marine programmes of the Van Ommeren group of companies. This necessitates issuing policies directly to subsidiaries operating within the EU and such territories as Australia and Singapore while also reinsuring subsidiaries operating in such territories as Chile, China, South Africa and United Arab Emirates. In the course of its duties, VOLIL has relationships with a variety of insurance brokers and service providers worldwide, as the group philosophy is one that allows subsidiaries the freedom to source these services locally.
The amount of risk retained by VOLIL is determined on an annual basis according to the cost and availability of reinsurance, historical claims experience and a desire to provide stability for the Van Ommeren Group instead of the traditional price cycle of the conventional insurance market. As with other captive insurance companies, the soft market of recent years has not encouraged an increase in the levels of risk retention.
The group had two primary reasons for setting up a captive. Firstly, the loss history was such that there were a number of small to medium claims falling into the classic “pound- swapping” bracket. This coupled with a stable and profitable loss history, which resulted from the group's commitment to high environmental and safety standards, left Van Ommeren in a position for which the traditional insurance market was unable to provide a favourable solution. The formation of a captive thus became the most appropriate way to optimise risk financing costs and cash-flow management. Secondly, and of equal importance, a captive would enable the Van Ommeren group to have direct access to the reinsurance markets. Complimenting both of these reasons was the fact that a direct-writing captive would, in respect of their risk financing requirements, afford the group greater control and flexibility.
Dublin suited Van Ommeren, because Ireland's membership of the EU entitles all insurers licensed within the state to benefit from the third non-life directive. The group's desire to have a direct writing captive, therefore, made Dublin the obvious choice of domicile. However, this was not the only reason for the company to locate its captive within the IFSC. Excellent professional services, including banking, treasury, legal and fund-management operations, proximity to Netherlands, and a pro-business regulatory environment also contributed to this position.
Stephen Casey, underwriting manager, Willis Corroon Management (Dublin) Ltd.
A Japanese captive
Yokogawa Reinsurance Ltd
Yokogawa Electric Corporation was founded in Japan in 1915 and now is one of the world's leading manufacturers and suppliers of process automation, test and measurement equipment as well as other high-tech products including information processing equipment and systems. Its facilities in Japan are complemented by an extensive global network that covers 25 countries in Asia, North and South America, Europe and Oceania.
Following a detailed review of its insurance needs and in consultation with Zurich International in Japan, the company established Yokogawa Reinsurance Ltd, a wholly owned subsidiary of the group, with a captive reinsurance licence in the IFSC in April 1998. The main objective of the captive company was to strengthen risk management expertise and, at the same time, reduce casualty insurance premiums that amount to 500 million yen annually. The decision to choose Dublin as the domicile for the captive was largely based on the high quality infrastructure and the competitive cost base. The captive company is managed by Zurich International Services (Ireland) Ltd.
In its first year of operation, the company wrote domestic Japanese property/business interruption, cargo/transit and some personal accident business. The business was ceded, on a quota share basis, to the captive by nine large Japanese domestic insurance companies. Retrocession protection for the captive was purchased on an excess of loss basis.
In light of its successful first year, Yokogawa Reinsurance expects to expand its business by introducing a global reinsurance programme for property/business interruption and ocean marine/inland transit with effect from April 1999. As a result of continued direct access to the reinsurance market, an increased level of cover should be obtained at a lower cost to the group.
Frank Coyle, accounts manager, Zurich International Services (Ireland) Ltd.
An enduring friendship
Judging from the large number of US parented captives in Dublin, risk managers from US multinationals with significant European exposures have got the message about Dublin. Currently there are 39 direct insurance and reinsurance captives controlled by US parents operating out of the IFSC, of which the vast majority are direct writing captives. Of this, to date, we have established captives for Hewlett-Packard, McDonald's Corporation, Motorola, Parker Hannifin and H.J. Heinz Company. Others have been established by AT&T, Coca-Cola, Ford Motor Company, Hertz & IBM to name but a few.
The early direct writing Dublin captives were the brainchildren of various, forward-thinking US risk managers who recognised at an early stage the benefits that a direct writing captive based in Dublin would offer for the non-US portion of the companies' risks.
Several companies now have very broadly based licenses. The Heinz captive is currently licensed to write 13 of the 18 available classes of insurance in the EU, making it the most broadly licensed captive in Dublin. Unlike companies who traditionally put a number of lines through the captive, many US based risk managers are now seeking to establish their Dublin captive as the central point of their corporate risk financing strategy. Via their Dublin captive, they aim to reduce their cost of risk significantly as a whole.
These captives cover risks in countries from the Pacific Rim through Asia, throughout Europe and in some cases the US itself. Dublin-based US owned captives are in many cases moving towards achieving the goal of the US parent to have one single insurance company co-ordinating and managing the worldwide needs of the group.
Dublin captives write all classes of business, in the main involving property, liability, marine, aircraft, accident and sickness lines of insurance. In addition, some companies have established a separate reinsurance captive to underwrite the companies' life and benefits business. Dublin's proven ability to offer a wide range of insurance options in an established domicile has attracted many of the blue-chip names already. Doubtless, this pattern is set to continue.
Eamon O'Brien, managing director, Aon Insurance Managers (Dublin) Ltd.