Its early adoption of the Reinsurance Directive should be another string to Dublin's bow, argues Sarah Goddard.
Things happen fast in Ireland. In these post-International Financial Services Centre (IFSC) days, when employment is at an all time high, when the economy continues its unprecedented growth and immigration is the order of the day, it would be easy for the country to become complacent. The selling points of the early days of the IFSC of tax incentives, a cheap labour force and a low-cost jurisdiction no longer hold sway. But Ireland Inc has recognised the benefits of the success of the IFSC regime, and has pushed its position up the value chain, actively encouraging innovation, research and development in numerous ways. This will soon manifest itself for the international financial services sector, and specifically for insurance and reinsurance, in a pending strategy document, which will provide the basis for the development of the industry in Ireland for the next few years.
From the reinsurance sector's point of view, this fast pace of change has shown itself most apparently in the accelerated transposition of the Reinsurance Directive into domestic legislation. The Reinsurance Directive was published in the Official Journal of the European Union in December 2005, and gave EU member states a two-year period to implement it into domestic legislation, with a further year for the final implementation of certain aspects of the new regulatory regime. Ireland, with its typical enthusiasm, decided to accelerate the introduction of the new regulations, and in July of this year the minister for finance signed into law a statutory instrument enacting the Directive.
The decision to create a single regulatory framework for reinsurance business across Europe was first mooted in the 1990s. In 2000, the European Commission published its first paper on the subject, "Discussion paper to the IC reinsurance subgroup - approaches to reinsurance supervision", which identified the increasing globalisation of the reinsurance sector and the lack of commensurate development of regulatory environments. "In a changing environment it is important that rules and business practices adapt in order to provide a sound, efficient framework for the activities," stated the document. "The supervision of reinsurance has not kept pace with recent developments."
A harmonised framework
There is an emerging patchwork of national legislation that hinders the further development of the internal market for reinsurance. Also, at an international level there are still barriers to trade that create inefficiency in cross-border business. The supervisory situation gets even more complicated by the emergence of new risk transfer techniques and financial products that only partly relate to classical insurance and reinsurance. A lot could therefore be gained by agreeing on a harmonised framework for reinsurance supervision, in the EU as well as internationally."
The paper also recognised the need for a fast-track implementation for reinsurance regulation: "A majority of member states and organisations ... believed that there is a need for expedient action to achieve tangible results in a short to medium term perspective," it observed.
At the same time as the European Commission was deciding upon implementing a fast-track, but essentially interim approach, the reinsurance market in Dublin was fast-tracking in its own right, with an ever-increasing number of reinsurance entities setting up in Ireland. Historically, Ireland had not been host to an indigenous reinsurance market, unlike many other EU member states. Thus there had been no previous necessity to set up a regulatory system for reinsurance. As the market developed, however, a notification regime was put in place, to a certain extent mirroring the proposals in the initial EU document that the proposed EU-wide regime should focus on the "fit and proper" characteristics of directors of reinsurance entities.
During the development of the structure of the Reinsurance Directive, Ireland's international reinsurance market burgeoned. After the huge market dislocation of 9/11, many of the new Bermudian entities decided to establish their European headquarters in Dublin, attracted by the speed to market for licensing, the ability to transact business across Europe, the pool of seasoned professionals and the relaxed corporate tax environment. As these and the already established reinsurance businesses continued to develop, the Irish regulator engaged with industry to consult on the development of the Directive. From the Irish perspective, the impending directive was the ideal opportunity to implement a full regulatory system, providing the bridge between a notification-based regime to Solvency II.
As the Directive developed, Ireland found itself in a very small group of European member states that have what is essentially an "export" reinsurance industry. By contrast, in most other European member states, the reinsurance sector provides cover for the domestic insurance industries and since a main remit for regulators is policyholder protection, European regulators' attitude towards the reinsurance industry took varying perspectives.
The Irish way
Ireland increasingly engaged in the negotiations surrounding the developing Directive, looking at the practical implications of its first draft, published in April 2004. The Directive changed significantly between its first incarnation and the final version published in December 2005, not least because of the input from Ireland.
Inter alia, Ireland had been involved in the carve-out of special purpose vehicles and finite reinsurance, to ensure that appropriate regulatory regimes for those types of business could be implemented where necessary - particularly since most European member states had little interest in these types of business. The argument supporting the carve-out pointed out that an overly restrictive regulatory regime for such structures would result in these types of business being conducted in other territories outside the European regulatory regime.
The commotion surrounding various finite reinsurance contracts with a Dublin connection threw a red herring to commentators; the Irish regulator's attitude towards the proposed regulation of these types of contracts had been accepted at European Commission level and under the terms of the Directive, the systems put in place by each regulator must be up to EC-required standards.
The Dublin reinsurance industry's contribution to the development of the regulatory system didn't stop with the final publication of the Directive. In fact, if anything, the engagement ramped up as industry, the Financial Regulator and the Department of Finance consulted closely to develop the domestic legislation in an appropriate way, to properly reflect and implement the requirements of the Directive.
On 15 July 2006, Ireland became the first member state to formally implement the Directive into domestic legislation, in the form of a statutory instrument. This gives certainty to the regulatory environment for the reinsurance sector in Ireland, establishing the framework for regulation going forward. Since the Directive was published, the Financial Regulator has issued a number of consultation papers to develop guidelines around the legislation, including details on corporate governance requirements, the transitional arrangements for implementation, finite reinsurance and life reinsurance. Many of these are in their final stages or completed, again lending certainty to the regulatory system.
But it was always clear that any certainty established by the Reinsurance Directive would be transient - a stepping stone to Solvency II. With this in mind, the Financial Regulator engaged Watson Wyatt to develop an augmented solvency model for the non-life reinsurance industry, as well as solvency model and reserving requirements for life reinsurance business. These reports and the subsequent regime take the Irish reinsurance sector beyond the Solvency I regime and down the road to Solvency II, perhaps cushioning the impact of the fundamental changes that will take place in the next few years. Things happen fast in Ireland.
- Sarah Goddard is CEO of the Dublin International Insurance and Management Association.