The first Dublin edition of Global Reinsurance explores the setting and developments in this dynamic market. Lee Coppack reports.
Anyone who visited Dublin in the early 1980s and then came back after a gap of some years as I did will recognise the comments of novelist Douglas Kennedy writing about Dublin in the UK Daily Telegraph magazine on 23 January 1999: “Just 10 years ago - when my wife and I jumped ship and moved to London - the Dublin we left behind was economically depressed, lacking in confidence and visually bleak . . . Whenever I visit the city now, I basically like what I see. Dublin's new found success and confidence suit the place.”
In February this year, the Irish government announced that unemployment had fallen to its lowest level for 15 years. The Exchequer surplus, at IR£747million, is the highest in the history of the state. Tax revenue is up by 13% and corporation tax receipts have surged by 21.6%, while the annual growth rate is projected to be 6.7% this year, and 6.4% in 2000.
Ireland is in the process of becoming a prosperous, small European country and the international insurance industry has played a role in that change in the country's fortunes. The International Financial Services Centre (IFSC) is now home to more than 150 captives and over 70 non-life (re)insurance operations, including some of the most sophisticated companies in the world. It also has major finance houses such as Merrill Lynch, Mitsubishi Trust & Bank, NatWest and ABN Amro.
The IFSC was the creation of the government and as its name suggests, not exclusively an insurance centre. As the number and range of companies in the IFSC grew, the captive managers and (re)insurance who had set up the Dublin International Insurance and Management Association (DIMA) felt more needed to be done to promote Dublin as such. It took advice from Tillinghast-Towers Perrin and the result has been first the appointment of David Smith in a wholly insurance marketing role at the Industrial Development Agency (IDA) Ireland. The next major step has been the conference which will take place at Dublin Castle on 15 and 16 March on Merging insurance and financial risk - the next five years.
Ireland always knew that the 10% corporation tax concession permitted by the European Commission for companies in the IFSC had a time limit, but instead of a steep hike to bring them up to the current level paid by other business, the Irish government has opted to phase in a rate of 12.5% for all companies, which it can afford to do thanks to the buoyant economy.
As a result, the distinction in taxation will disappear between financial companies based in the restored docklands area that, geographically, has become the IFSC and the rest of Dublin, though some property benefits remain. The two terms, IFSC and Dublin, are now being used interchangeably in marketing.Whatever the brand name, as a (re)insurance market, Dublin looks to Bermuda as a model, hoping to fulfil in Europe the role that Bermuda has played for the United States. Comparisons between the two are not far fetched, even though Dublin is today considerably smaller as a market. It got off to a later start, but one of its main advantages is the availability of the single passport for European Union business, and deregulation did not come into effect until 1994.Both offer a favourable tax regime and have a reputation for flexible, responsive regulation. Dublin is the more open because all companies incorporated in Ireland have to file their results with the companies office. Those who are writing direct business have more extensive reporting requirements in that they must make an annual return to the Department of Enterprise, Trade and Employment.
The more opaque system in Bermuda will suit some organisations but it can have a public relations disadvantage in home markets. Likewise, Bermuda's zero rate of corporation tax often provokes the suspicion of fiscal authorities elsewhere, but the high quality of the investors in the market and the leading companies, who do make extensive disclosure of their results, has dispelled any reputation the island may have had as a pure tax haven.
Both Bermuda and Dublin have some similar limitations, particularly the need to find trained and experienced staff and pressure on property prices, although they are more severe in Bermuda since it is significantly smaller geographically and demographically. The IFSC was originally established and permitted by the European Commission to offer a preferential tax rate for its potential to generate employment, but (re)insurance companies in Dublin today find some problems getting sufficiently experienced staff. Insurance is a growing industry and there has not been time for young people coming out of universities with insurance qualifications to build up much experience.
However, speakers at our roundtable lunch (page 15) may hint at the future for Dublin. As we become more European, companies with an international dimension will look for a staff drawn from a much wider geographical pool than the local population. A pan-European staff is likely to become more the norm. The EU has removed many of the legal barriers to such mobility and those impediments which remain, such as the cost of housing and continuity of schooling, are practical.
The expanding economy has pushed up house prices in Dublin substantially and traffic is a now a regular complaint. Continued development in Dublin will add to these problems, but it is not clear whether they would have a material effect on growth in the financial sector or be just a source of irritation. The IFSC insurance committee members will undoubtedly let the government know its views.
Bermuda's business is closely linked to the US, and recent acquisitions by ACE and PartnerRe mean that more of the income coming through Bermuda (re)insurers will be generated in the US. They have also looked for a shop window on the rest of the world, particularly Europe. Dublin, with its EU and now eurozone membership, low tax rate and friendly environment, has been their route into continental Europe. XL, ACE, AIG's Starr Excess and Centre Solutions all have operations in Dublin. Of course, it may not be entirely co-incidence that the first Bermuda company to establish itself in the IFSC has a ceo who is American but is named O'Hara. In addition, a number of major US companies find it useful to have captives in both domiciles.
Bermuda was effectively a captive domicile until the liability insurance crisis of the mid-1980s when XL and ACE were set up to cater for the needs mainly of large US corporations for high level liability cover. A similar scenario took place in 1992 and 1993. Hurricane Andrew sucked capacity out of the catastrophe reinsurance market, and eight new property reinsurance companies came into being.
Dublin so far has not had that same element of being “the right place at the right time”, but the conference in March on merging insurance and financial risk shows where it is positioning itself. The conference, which is sponsored by Aon Group and XL Europe with the support of the IDA and DIMA is part of the insurance marketing drive.
Speakers include corporate users of risk products, providers, advisers, technicians and regulators. The conference begins with two plenary sessions, first on the future of alternative risk finance in expanding world markets and then other risks and other alternatives. Workshops cover financing difficult risks, multi-line, multi-year policies and captives. The day concludes with a forum discussion by three experienced international risk managers who will give the buyer's perspective.
The second day begins with a session on insurance and capital markets and what they offer the risk manager, followed by advanced risk financing and the European regulatory and taxation environment. Workshops cover the “how to” of special purpose vehicles used in securitisation, investing at the efficient frontier and holistic risk management. The final plenary session looks to a vision of capital and insurance in the future.
By preparing the ground for the merger of insurance and financial risk, Dublin could be the domicile that becomes the major European centre for new forms of risk management and finance. As a famous European, Louis Pasteur, said: “Chance favours the prepared mind.”
Lee Coppack is co-editor of Global Reinsurance.