The global crisis may have caused Ireland’s economy to fall as dramatically as it had risen, but recession-proof reinsurers are still favouring this marketplace. With sound regulation and a warm business welcome, it’s not just about the cost advantage
Little more than 50 years ago, the sight of cattle being driven through the streets of Dublin, on their way to ships bound for the UK, was commonplace. Cattle, along with the country’s ambitious young people, were Ireland’s main export.
These days, Ireland is one of the world’s largest exporters of hi-tech software goods and services. It has the youngest population in the EU who, with global corporations like IBM, Google and Microsoft domiciled in Ireland, no longer need to leave its shores to find jobs.
Over the last 20 years, successive Irish governments have implemented a raft of fiscal reforms to promote foreign investment and the tax burden on businesses, reducing government spending as a percentage of gross domestic product and increasing the skills of its workforce. These reforms, combined with EU membership, created the ‘Celtic Tiger’ whose meteoric rise is only matched by its spectacular crash on the back of the global credit crisis.
Yet despite the breathtaking collapse of the country’s banking and property sectors, Ireland remains an important hub for insurance and reinsurance groups which, largely undamaged by the recession, are still keen to take advantage of its skilled workforce and tax benefits.
Ireland’s love affair with the international insurance business began in the late ’80s when a handful of captives arrived in Dublin. Since then, growth has been rapid, encompassing global carriers and brokers as well as captives.
The last available figures from the Irish Financial Services Regulatory Authority reveal the country’s insurance and reinsurance market enjoyed total gross premium income of €35.9bn ($49.27bn) in 2008. This was down from €46.15bn in 2007, but despite the decline, around €7.4bn was generated by non-life business.
Recent converts to Ireland include Beazley, moving from London to Dublin, and XL Capital, which in January announced plans to redomicile from the Cayman Islands to Dublin, joining its subsidiary XL Re Europe. XL Re writes cross-border business under the Reinsurance Directive, which Ireland was the first country to implement in 2006, a year and a half before other EU member states.
Sarah Goddard, chief executive of the Dublin International Insurance & Management Association, which represents insurers, reinsurers and captives, credits the Irish government’s speedy adoption of the Reinsurance Directive for much of its success, arguing that the decision provided vital clarity to reinsurers while other countries dithered.
“There’s a lot of communication between business and government agencies, and that’s a really important facet of what’s happening here – and it happens at every level,” she says.
“For example, there is an insurance group organised through the Taoiseach’s [Irish prime minister’s] department, which is looking at the longer-term future of the international insurance sector in Ireland. It meets monthly and looks at various issues, such as whether there are areas where Ireland isn’t on a par with other jurisdictions and if this can be corrected. Ireland has an attitude that is pro-business but it also takes a practical approach and listens.”
The primary ‘practical’ attraction for most companies is, of course, Ireland’s corporate tax regime, fixed at a flat rate of 12.5% and among the lowest in Europe.
Earlier this year, insurance and reinsurance broker Willis – which employs more than 300 people in offices in Dublin, Limerick and Cork – completed the incorporation of its parent company from Bermuda to Dublin. It cited Ireland’s “more stable environment” and its desire to “maintain a competitive corporate tax rate” as the principal reasons for the switch.
Moreover, when Beazley posted a pre-tax profit for 2009 of £100.7m ($151.6m) in February, it revealed it had halved its tax bill by opening an office in Dublin, run with a handful of staff, and becoming a tax resident. Beazley said its profit had risen by £14m as a result of the move, which reduced its tax rate for the year by more than half.
But attractive as the tax regime is, there are plenty more attractions in Dublin’s fair city. “There are many other reasons for locating in Ireland,” says Angus Jordan, programme director with RSA, which employs around 400 people in Ireland, says. “Ireland has a well-established financial and regulatory regime, and membership of the EU. There is also the availability of talented and experienced people, not only as employees but also as directors. And we, of course, are able to take advantage of our existing operations there, sharing premises and some other resources.”
Jordan’s view is echoed by Goddard. “There are other places in Europe with a lower corporate tax rate, but in Ireland there is an established insurance and reinsurance marketplace. It has an infrastructure of leading insurance lawyers, accountants and actuaries supporting the industry here,” she says.
RSA is currently in talks with the county’s authorities to set up a reinsurance operation in Dublin despite recently shelving plans to shift its domicile because of the disruption a move could cause to its business.
“We looked at other ways of getting a significant portion of the benefits [of operating in Ireland] without the need to re-domesticate,” Jordan explains. “Through our close working relationship with HM Revenue & Customs, we were able to agree a reinsurance structure that will achieve this over time. This involves launching a reinsurance company in Ireland to reinsure our non-UK group risks from our operations around the globe.
“Subject to securing the necessary regulatory approvals, we hope to start trading later this year. We have operated in Ireland for well over a century and this marks a natural extension to our commitment to the Irish market.”
Swiss-based Zurich Financial Services, which has more than 1,000 employees in Ireland, uses the EU directive on freedom of services to write insurance business across Europe via Zurich Insurance Ireland.
“Zurich has transferred the vast majority of its general insurance portfolios in Portugal, Italy, Spain, the UK, Belgium, Finland, Denmark, France, Norway, Sweden and the Netherlands to local branches of Zurich Insurance, based in Dublin,” Zurich Insurance’s head of government and industry affairs Ireland, Dr Brian Hunt, says. “A similar transfer is planned for Zurich’s GI business in Germany later this year.”
Hunt says Ireland is a “highly developed” insurance marketplace. “It is also an excellent entry door into the EU. Ireland is a longstanding member of the EU and the eurozone and gives us access to the single market and the ability to be better represented vis-à-vis the EU institutions.”
The pull that Ireland exercises over companies is matched in the USA by a strong push factor, prompted by fears that the Obama administration will crack down on companies based in what Washington, DC perceives are tax havens or offshore jurisdictions.
In addition to Willis’s decision to leave Bermuda for Ireland, Cayman Island-based United America Indemnity announced last month that its board had approved plans to redomicile to Dublin after rejecting a move to Switzerland.
Making the announcement, United America president and chief executive, Larry Frakes, cited the “significant cost advantage”, but added that the Irish legal system was similar to that of the USA.
“It is more readily comprehensible to our Yankee management team and shareholders. While the weather in Dublin may from time to time be rainy and cold, the people are sunny and warm and embracing of corporate immigrants.”
There is the concern, of course, that a number of these corporate immigrants, particularly captives, are merely ‘brass plating’, establishing an office in Ireland but contributing little to the Irish economy in terms of jobs or revenue. Not so, says Goddard.
“There are captives that over the years have developed to the point that they have their own employees within them dedicated to that captive. It’s not brass plating; they are being actively run as insurance or reinsurance entities. You cannot get a licence for an insurer or reinsurer if there isn’t sufficient substance in the operation,” she says.
“Captives are a different business model so don’t necessarily have the substance in terms of employees to operate but they have to have substance in terms of the business they are doing.”
There have been fears that the sector will feel the impact of the government’s tighter fiscal policy as it seeks to reduce Ireland’s huge budget deficit, now running at a staggering 12%-plus of GDP. In December, the government unveiled one of the most severe budgets in the country’s history, which slashed public sector pay and welfare spending.
So far the government has resisted calls to up corporate taxes, but raised a few eyebrows when it unveiled legislation to tighten the rules on transfer pricing, due to come into force next year, following longstanding overseas concerns that multinationals were avoiding tax in their home markets by basing their operations here.
“In terms of the direction of government policy, there is a danger that the recent financial crisis will give rise to reactionary regulation, which has the potential to be damaging if it spills over into the insurance sector,” Hunt says.
But Goddard believes the fiscal regime will remain favourable for the sector. “There was an increase in VAT but that has been brought down again and, yes, people are seeing that their take home is slightly less, but it isn’t giving terminal pain. In terms of corporate tax, the government has said it will not change the current level. It recognises what its commitment to keep corporate tax at this level offers to businesses.”
That’s good news, then, for those already on the Emerald Isle – and strong incentive for any company planning to join them. GR