Ireland continues to be successful in attracting captives, with 165 now under management (see Table 1), according to the latest figures provided by the Industrial Development Agency (IDA), Ireland. It caters for both reinsurance and direct writing captives and has 51 direct captives, using the European freedom of services directives to cover risks in all EU countries from a single location. Major corporates with captives in Dublin include BMW, Ericsson, Hewlett Packard, McDonald's, Seagrams, Coca Cola ,Volvo, H J Heinz and Rand Merchant Bank. In addition, specialist insurers, such as ACE, are also using their captives operating in Dublin's International Financial Services Centre (IFSC) to access European markets.
UK sponsors account for a relatively small share of Ireland's captives (around 6%), with most parent companies originating in other parts of Europe and in the US (Table 2). Indeed, Dublin's single largest market is the United States, principally composed of captives sponsored by Fortune 250 companies with substantial insurable interests in Europe, and who are focused on risk management and financing tools. Some of these captives have sister captives in other jurisdictions, with the Dublin captive being used for either direct writing, EU risks or for a worldwide insurance programme. Dublin captives can reinsure back to other domiciles to use an existing built up capital base.
The IDA says that a prime reason for forming a Dublin direct writing on-shore captive is to avoid fronting fees in Europe - a logical conclusion of the recognised trend towards unbundling of services, where activities such as underwriting, claims handling, loss adjusting and HPR engineering advice can be separately priced and sourced. As fronting fees can range from 5-7%, this can be a significant consideration.
New formations in 1999 included Co-operators of Canada Reinsurance International Ltd, a wholly-owned subsidiary of Co-operators General Insurance Company, Canada, allowing the group to centralise management of retention levels of reinsurance. The IDA commented that this formation showed the continued attractiveness of Ireland for internationally traded financial services even after the final IFSC 10% tax certificates were issued in July 1999. The standard rate of corporate tax, then at 28%, is to fall by 4% per a year on 1 January each year to reach a 12.5% rate from 1 January 2003. Captives can continue to be approved at the 10% IFSC tax rate until 31 December 2002 when they will also start paying the 12.5% standard rate of tax.
However, said the IDA, it is now accepted that the IFSC's low tax regime, although attractive, is less significant than the non-fiscal benefits including access to EU markets using the freedom of services directives from a cost-effective location. Recent news that Ireland is looking to set up legislation to allow protected cell companies is also expected to boost captive interest.
According to David Finch, ERC Management, the soft market has not affected interest in captive formations in Ireland.
“There seems to have been ongoing interest - Dublin continued to gain captives last year,” he says. However, he believes it is a natural assumption that signs of market hardening will be beneficial. “As the market hardens, interest in other forms of risk transfer, whether through captives or ART, will increase.”
ERC differs from many captive managers in Dublin in so far as most of its clients are insurance groups, setting up their own vehicles to which to pass business. “Most of them will also take on some third party business so they are rather different from commercial captives,” comments Mr Finch. He sees tax benefits as being outweighed by the growing interest in Dublin as a market.
“There has been so much growth here over the last few years. Dublin has established itself as a real insurance and reinsurance market and some of the drivers for interest here have changed. Developments, such as some reinsurance and Bermudian companies setting up here, mean that other organisations want to be represented in Dublin.”
Mr Finch also believes that sponsors are becoming more demanding in respect of their captive management requirements. “Some of the captives are getting larger and more complicated. As a result, sponsors are becoming more sophisticated in their demands both from a risk management and an investment point of view. They're looking for more analysis and more sophistication generally from their managers.”