Will passporting rights and favourable tax rules in some European countries give them the edge when it comes to attracting new business? The Reinsurance Directive is about to become law across Europe, and when it does, the balance of power could shift. Liz Booth reports
Passporting and low tax could provide some EU countries with a major competitive advantage once the Reinsurance Directive comes into effect in December. The implementation of the Reinsurance Directive across Europe will herald a new era in terms of minimum standards and passporting. For the first time there will be official Europe-wide regulation of reinsurers. The intention was to provide a level playing field, and yet non-European companies are likely to favour those domiciles that offer no barriers to entry and a more favourable tax regime.
According to the UK Financial Services Authority (FSA), passporting rights “entitle a person to set up a branch in another European Economic Area (EEA) state or to do business there on a cross-border basis, as long as they fulfil the conditions in the relevant directive.” This essentially means insurers and reinsurers can write business across Europe without having to use a fronting company. Due to passporting, both European and non-European insurers and reinsurers may opt to move to lower cost, lower tax regimes within the EU, safe in the knowledge they can continue to access the whole European market.
Within the directive, member states are not allowed to introduce a regime that is either more or less beneficial for non-European reinsurers than it is for member state companies. Beyond that point, the directive gives each member state the freedom to introduce its own detailed rules.
How those rules are interpreted, and barriers to entry dealt with, is likely to make some countries a magnet for new business whiles others will miss out. Tax, increasingly a key factor in location and relocation decisions, will also become a great differentiator. Expensive, high-tax markets such as Germany and the UK could lose out to cheaper, lower tax neighbours such as Malta and Ireland, particularly when these markets also offer a faster and easier speed of set-up.
As an expert close to the European Commission explains: “Article 49 of the directive means that each and every member state must introduce provisions ensuring minimum standards are maintained, and it is clearly stated that no member state can offer more favourable conditions to any particular group of reinsurers. But taxes are purely an internal state matter and this is where the difficulty comes from, as national states have their own tax rules which may or may not give an advantage.”
“The issue is whether by the way the directive is transposed into national law, people go for the base line requirements or whether they go for higher standards,” says Sarah Goddard, CEO of the Dublin International Insurance and Management Association (DIMA). Ireland, which adopted the directive early in July 2006, has already seen numerous non-EU reinsurers setting up shop. Whether this new business was attracted purely by Dublin’s high regulatory standards, or if the domicile’s lower corporate tax rate played a part, is up for debate.
By virtue of being the first European country to adopt the directive, Ireland has certainly enjoyed a first mover advantage. Henry Keeling, XL’s chief operations officer, told Global Reinsurance in Monte Carlo in September 2006 that the decision to establish XL’s first European platform in Dublin had been made so it could take advantage of Ireland’s early adoption of the directive. XL Re Europe received approval in October 2006. It was established with $1.5bn of capital and received an “A+” from Standard & Poor’s and AM Best.
Europe at their feet
While each member state may not give reinsurers from outside of Europe an advantage, there is nothing, in theory, to stop a jurisdiction offering more favourable conditions than other member states – as long as they maintain the required minimum standards. Conversely, they may also decide to operate a much tougher regime to ensure they only attract those with the very highest of standards.
Crucially, subsidiaries of non-EU reinsurers, which are authorised to operate in any one EU member state, will automatically have the same access to all member states, in the same way as an EU reinsurer. This means that those domiciles offering certain additional benefits could gain the upper hand.
A spokesman for the London-based International Underwriting Association (IUA) believes the directive actually offers non-EU reinsurers great opportunities for the future: “One of the big advantages of the directive is that it enables non-EU reinsurers, if they are set up as a subsidiary in an EU country, to gain access to the whole of the EU via a regulatory passport. That is a big advantage for the rest of the world,” he says, particularly when compared to the past when “if you wanted to enter the EU market, you would have to get approval from regulators in lots of different countries”.
“Within the Directive, member states are not allowed to introduce a regime that is either more or less beneficial for third country reinsurers than it is for member state companies
The IUA spokesman admits that different countries may adopt different standards and that reinsurers from outside of Europe may be able to take advantage of a more relaxed regime to enter Europe, but he is confident that the minimum standard requirements should also mitigate those risks.
Malta has made no bones about its bid to attract non-European reinsurers looking to set up in Europe for the first time and to lure European reinsurers away from more expensive markets. Malta was already a successful offshore captive domicile ahead of its ascension to the EU in 2004, but it now has grand ambitions of becoming a successful onshore reinsurance market.
In addition to offering a responsive regulator (the Malta Financial Services Authority, MFSA, has mandated that it will take just three months or less to issue a captive license and six months or less for an insurer or reinsurer), it has taken various initiatives, including offering passporting. “We looked at all the legislation and were careful to remove all the gold plating. We took certain initiatives that do not infringe the directives,” explains Professor Joe Bannister, chaiman of the MFSA.
One initiative was to introduce redomiciliation regulations. This means insurers, reinsurers or captives can up sticks and move to Malta without the usual cumbersome process of shutting down one business and opening another from scratch. Providing the jurisdication the captive is looking to move from also has redomiciliation regulations, it makes no difference whether domiciles are within or outside the EU. But because only Gibraltar also offers such an option within the EU, it could prove another attraction for non-European captives looking for an easy route in.
Malta also offers 43 double tax treaties with all European countries and beyond, and its tax regime includes the possibility of a minimal net effective tax rate. Mike Munro, a partner in the reinsurance and international risk team at Barlow Lyde & Gilbert, says non-EU reinsurers will be weighing up which jurisdiction will offer the best option. Considerations will include the regulatory framework of each country, in combination with the tax regimes. He points to the Malta as an obvious choice given these requirements.
Higher standards useful
There is of course a counter argument. Not everyone believes insurers and reinsurers will be drawn to those countries offering low tax and a relaxed regime. Michel Brunner, legal counsel at Swiss-based Glacier Re, says: “It is always very difficult as a reinsurance company. You are looking for an easier regulatory framework but also a sound regulatory framework. Being authorised by a sound regulator gives us an advantage over our peers.” It really depends on the individual company as to which route they will follow, he says, and every boardroom will be summing up the balance of that equation.
The Swiss benefit from a smaller regulator, according to Brunner. He explains that it is often easier to deal with the Swiss regulatory authority because there are fewer people involved. On the other hand, it can also be a more stringent regulator and demand higher standards than many of the EU regulators. Quality will always be a consideration, Munro insists: “Any hiccup in one market will often result in a flight to quality because reinsurers’ assets are so very important. So a gold-plated regulatory framework may, ultimately, be the most attractive proposition.”
Munro’s support for the Swiss regime belies the fact it will miss out on passporting under the Reinsurance Directive. According to the FSA, because Switzerland is not an EEA state there are no passporting rights under directives. EEA general insurers have the right to set up a branch in Switzerland (and vice versa) under the provisions of the First Non-Life Directive, but this does not give passporting rights. A Swiss general insurer will therefore need to obtain Part IV permission to set up a branch in the UK. “At the moment we are very well placed. But 38% of our business comes from Europe and therefore we are very interested in what is happening and how we can approach the market in the future,” concedes Munro.
Liz Booth is a freelance journalist.
The Reinsurance Directive: Timing is key
The Reinsurance Directive was finally adopted in late 2005 and, as is usual with any European Union directive, member states have two years to implement any necessary changes into national law.
However, observers are predicting that the Reinsurance Directive may not be straightforward. Although the directive should be implemented nationally by the end of this year, the issue of Solvency II may result in some delays.
As one explains, “The Commission is promising a Solvency II Directive by July this year. Because solvency requirements are so crucial to reinsurance, it may be that this becomes a special case.”
The Commission may well therefore be more flexible towards those that delay implementing the Reinsurance Directive in order to also adopt the principles of the new Solvency II Directive.