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Captives in Ireland - Regulatory Update
Captive Live UK 2015
23 January 2015
John LarkinPartnerWilliam Fry
Agenda
1. Executive Summary
2. Ireland – The Economic Recovery
3. A profile of the Irish Captive Market
4. A profile of the Regulator / Regulatory Approach
5. Solvency II – Irish Developments
6. Fitness & Probity Regime
7. New Reserving Requirements
8. Companies Act 2014
9. Appendices
Executive Summary
Preparation for Solvency II has been front and centre of all regulatory activity for 2014 (and will be for 2015)
Initiatives such as the Corporate Governance Code for Captives and the Fitness & Probity Regime will make the transition into Solvency II easier.
Significant levels of corporate re-organisation and balance sheet tidying up are ongoing.
Government support for international financial services industry continues - appointment of Minister of State, Simon Harris T.D.
New Reserving Requirements introduced.
Overhaul of company law taking place in 2015 and 2016.
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Ireland – The Economic Recovery
Ireland successfully exited Troika Bailout Programme in December 2013 (without precautionary credit line)
Credit Rating Improving – Standard & Poor’s “A” and Fitch Ratings “-A”
Real GDP increase of 3.5% in 2014 and increase of 4.7% forecast for 2015
Current unemployment rate is 10.6% (down from peak of 15.1% in January 2012)
Current inflation rate is - 0.3% (negative)
Ireland – The Economic Recovery
5Source: Central Statistics Office
A profile of the Irish Captive Market
A Profile of the Captive Market
Ireland is a major centre for captives with 140+ (re)insurance captives in Dublin.
Proportionate and robust regulatory environment in Ireland (e.g. tailored Corporate Governance Code for Captives 2011)
New captive operations being established in 2014/2015 (e.g. UPS, Snam SpA and MOL Group)
See Appendix A for other reasons why captives are choosing Ireland which includes:
Regulatory / Commercial Factors
Taxation Factors
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Irish Non-Life Market – Insurance Statistics
• Non-Life Gross Premium Income €2,993m
• Non-Life Underwriting Profit (H1 2014) +€65m
• Total Value of Non-Life Assets €32bn
• Premium Income as a % of GDP 7%
• Employment in Both Life and Non-Life Insurance Sector Totalled 14,300
• Number of Regulated Insurance and Reinsurance Companies 235
Sources: CBI Insurance Statistics 2013 and Insurance Ireland Fact File 2013: all figures as at 31 December 2013; CBI Macroeconomic Review; December 2014
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Players in Irish Captive Market(Illustrative)
Captive Parent Group
Valiant Insurance Tesco Plc
Kingfisher Insurance Kingfisher Plc
Golden Arches Insurance Limited
McDonald’s Corporation
Navillus Insurance Baxter Healthcare
Volkswagen Insurance Volkswagen
ITX Re Limited Zara
Baltimore Insurance Limited Stanley Black & Decker
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A profile of the Regulator/ Regulatory Approach
Overview – The Central Bank of Ireland
The Central Bank of Ireland (CBI) is the single regulatory authority for financial services in Ireland
Has undergone a major overhaul since the financial crisis
Supervisory strategy is proportionate (PRISM)
Cyril Roux was appointed Deputy Governor, Financial Regulation, in October 2014 (recruited from the ACPR in France)
Sylvia Cronin, Director of Insurance Supervision, and Kieran Murphy leads General Insurance Division – which includes captives.
CBI is broadly in alignment with EIOPA on matters of policy
Meeting Solvency II requirements on schedule is a priority for CBI
See Appendix B for further information on the organisation of the CBI and the legislative basis of its’ powers.
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CBI Supervisory Strategy - PRISM
The Probability Risk and Impact SysteMTM (PRISMTM) is the CBI’srisk-based framework for the supervision of regulated firms.
Assessment of regulated firms based on two concepts:
─ Impact on the economy and consumers in a crisis
─ Probability that problems will arise
Five categories - Ultra High, High, Medium High, Medium Low orLow
Most Irish regulated captives fall within Low or Medium Lowcategory
Firms which have the lowest potential adverse impact aresupervised reactively or through thematic assessments.
Supplemented by increased use of enforcement action, particularlyfor companies with a low impact PRISM rating.
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CBI Supervisory Strategy - Captives
Corporate Governance Code for Captives
A proportionate Code for captives was introduced in September 2011
See Appendix C for a summary of main requirements.
Industry Funding Levy
Annual levy is aligned with regulated entity’s PRISM rating:
2014 Funding Levy Table*
Impact Category
Low Medium Low High Ultra HighMedium High
€7,485 €25,619 €128,872 €1,242,140€563,621Levy
13* Source: Central Bank website. Note – figures for the Industry Funding Levy may change each year.
Solvency II - Irish Developments
Solvency II – Irish Developments
Ireland working towards transposition deadline of 31 March 2015 and implementation date of 1 January 2016.
European Commission – “Principle of proportionality is an integral part of the Solvency II regime”.
CBI adopting this proportionate approach in treatment of captives.
Strong co-operation and engagement between regulator legislator industry.
Nov 2013: CBI Response to EIOPA’s Guidelines Produced Guidelines on preparing for Solvency II which (generally) applied from 1 January 2014:
─ System of Governance
─ Forward Looking Assessment of Own Risks (FLAOR)
─ Submission of Information
─ Pre-application for Internal Models
1
151. Source: European Commission FAQ document published on 12 January 2015.
Solvency II – Irish Developments
Aug 2014: CBI Survey on Preparedness for Solvency II to assess progress in compliance with 2013 Guidelines.
Nov 2014: Department of Finance published Consultation Paper on certain transposition options of Solvency II.
Nov 2014: CBI Survey on Phasing-In Approvals to assist in resource planning/process design in advance of applications on 1 April 2015.
Dec 2014: CBI re-issued Consultation Paper in relation to national specific templates to address specific local market issues.
Dec 2014: FLAOR submissions for 2014 – feedback anticipated shortly from CBI.
Alternative statutory regime for entities outside scope of Solvency II Heads of Bill currently being drafted.
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The Fitness & Probity Regime
Fitness & Probity – Background & Scope
Part 3 of the Central Bank Reform Act 2010 - Fitness and Probity Regime -took effect from 1 December 201.1
Minimum standards applicable to individuals holding certain positions in regulated entities.
‘Fitness’ relates to an individual’s competence and capability.
‘Probity’ relates to:
1) an individual’s behaviour, act with honesty, integrity, fairness, ethical
behaviour, previous convictions.
2) Financial Soundness – ability to manage affairs in a sound and prudent
manner.
Controlled Functions (CF) v Pre-approval Controlled Functions (PCF)
PCF roles – require submission of Individual Questionnaire (IQ)
Ongoing compliance obligations – ‘Annual PCF Confirmation Return’
Fitness & Probity – New Changes
Fitness & Probity well-embedded in Irish regulatory framework in advance of Solvency II.
September 2014 - the CBI announced 6 new PCFs (3 relevant to insurance sector) effective from 31 December 2014.
Newly Prescribed PCFs introduced by Central Bank are:
− Chief Operating Officer (for all regulated entities)
− Head of Claims (for insurance undertakings only)
− Signing Actuary (for Non-Life Insurance Undertakings and Reinsurance Undertakings)
Reserving Requirements for Reserving and Pricing for Non-Life Insurers and Reinsurers 2014 introduced the requirement for the role of the Signing Actuary (SA) to be designated as a PCF.
Reserving Requirements for Non-Life Insurers and Life and Non-Life Reinsurers
Reserving Requirements for Non-Life Insurers and Life and Non-Life Reinsurers 2014
Requirements published in May 2014 and take effect for financial years ending on or after 31 December 2014.
Main changes in Requirements are:
− Non High Impact companies must appoint an appropriate PCF with responsibility for overseeing the preparation of data provided to the SA.
− Additional responsibility on SA to ensure that “data used for reserving is appropriate, reliable, reasonable and complete” and notify any concerns to CBI if not addressed.
− Addition to Non-Life Insurers’ SAO requiring SA to review the Total Required Solvency Margin calculation.
− Board required to put in place a Reserving Policy to govern setting of the company’s reserves.
− Board also required to “enumerate, justify, quantify and document” the ‘Margin for Uncertainty’
− No requirement for Low Impact companies to introduce:
a formal Internal Audit Assessment process; or
produce a Peer Review report by a Reviewing Actuary.
Companies Act 2014
Companies Act 2014
New Act will commence on 1 June 2015.
Simplifies and consolidates existing company law (16 existing Companies Acts into one)
New types of company:
─ “companies limited by shares” (a “CLS”)
─ designated activity companies (a “DAC”)
─ others – e.g. PLCs, companies limited by guarantee, etc.
All companies affected – transition period of 18 months from commencement date
Under Section 18 – all ‘insurance undertakings’ will become a DAC, including captive undertakings.
See Appendix D for further information on the new regime.
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Executive Summary
Preparation for Solvency II has been front and centre of all regulatory activity for 2014 (and will be for 2015)
Initiatives such as the Corporate Governance Code for Captives and the Fitness & Probity Regime will make the transition into Solvency II easier.
Significant levels of corporate re-organisation and balance sheet tidying up are ongoing.
Government support for international financial services industry continues - appointment of Minister of State, Simon Harris T.D.
New Reserving Requirements introduced.
Overhaul of company law taking place in 2015 and 2016.
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Appendix A
Why Ireland? – Regulatory/Commercial
Access to all EEA countries on a direct writing basis as well as many other countries on a non-admitted basis.
Pool of experienced talent with specific (re)insurance captive expertise and skilled service providers.
Well developed insurance market with many of the world’s leading (re)insurers and peer captive operations based here.
Close proximity to London enables ease of interaction with brokers and insurers operating in the London market.
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Why Ireland? – Taxation
Standard rate of Corporation Tax is 12.5%
Trading profits generally based on accounting profits (e.g. deduction for equalisation credits)
No stamp duty or insurance tax on non-Irish risk
No US Federal Excise Tax under Ireland – US Double Taxation Agreement
Ireland is a very attractive location for internationally headquartered business:
Extensive network of double taxation treaties (currently 72)
CGT substantial interest exemption
Foreign dividend exemption
Generous relief for foreign taxes suffered
Broad domestic exemptions from withholding tax on interest/dividends paid
Income tax incentives for relocated employees
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Appendix B
Central Bank Commission
Governor
Patrick Honohan
Deputy Governor
Central Banking
Stefan Gerlach
Chief Operations Officer
Gerry Quinn
Deputy Governor
Financial Regulation
Cyril Roux
Credit Institutions
Sharon Donnery
Insurance Supervision
Sylvia Cronin
Head of Division
General Insurance
Kieran Murphy
Head of Division
Life Insurance
Mark Burke
Markets
Gareth Murphy
Policy & Risk
(vacancy)
Consumer Protection
Bernard Sheridan
Enforcement
Derville Rowland
Organisation of the Central Bank
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Irish Legislative Regime for Captives
Insurance Act 1936
Insurance (Amendment) Act 1938
Central Bank Acts 1942 to 2013
Insurance Act 1989
Insurance Act 2000
Non-LifeEC (Non-Life Insurance) Framework Regulations
1994
LifeEC (Life Insurance)
Framework Regulations 1994
Companies Acts 1963-2012*
Reinsurance EC (Reinsurance) Regulations 2006**
Non LifeEC (Insurance
Undertakings Accounts) Regulations 1996
31* The Companies Acts 2014 is expected to be commenced on 1 June 2015. ** This list of legislation is not exhaustive.
Appendix C
New Corporate Governance Code for Captives came into effect on 1 September 2011 with 9 months implementation period.
The new Code revoked the 2007 Corporate Governance Requirements for Reinsurance Undertakings as it applied to captives.
Main requirements include:
Board must have a minimum of 3 directors
Must appoint a chairman to the board who cannot be a director or employee of the captive manager
Reporting of material deviations from Code within 5 business days
Submission of an annual compliance statement
Putting in place robust governance arrangements
Establishment of a risk appetite statement
Effective operation of key control functions such as internal audit, compliance and risk management
Failure to comply may lead to the imposition of administrative sanctions and a breach of the Code may constitute an offence
Corporate Governance Code for Captive (Re)Insurance Undertakings
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Appendix D
CLS DAC
Minimum of one director Minimum of two directors
Simple constitution Memorandum and Articles of Association
Unlimited capacity Capacity limited by objects clause
May dispense with requirement to hold AGM
Must hold AGM
Must not offer its debentures or shares to public
May offer debentures to the public
Name to end in “Limited” or “Teoranta” Name to end in “designated activity company” or “cuideachta ghíomhaíochta ainmnithe” (Gaelic)
Companies Act 2014: CLS v DAC
Companies Act 2014: Becoming a DAC
“Old” Private Limited Company
Ordinary Resolution within 15 months
Special Resolution after
15 months
Designated Activity Company (DAC)
Directors must resolve to re-register as DAC if-members holding >25% serve written notice within 15 months- Company offers securities to the public
Court
Order
or or orSpecial
Resolution after 15 months
Directors duties – codified in the new Act so much more clear restatement of existing duties.
Shareholders’ written resolutions may be passed by majority.
Directors’ compliance statement – in large companies, directors to annually acknowledge responsibility for securing company’s compliance with its “relevant obligations” under company/ tax law.
New Summary Approvals Procedure – reduces court appearances.
Board meeting – deemed to take place where largest group assembled or where Chairman is located.
Binding authority registration – obliged to notify Companies’ Office of all persons granted power to bind the company.
Streamlines all offences under company law and introduces a new four tier categorisation of offences.
Companies Act 2014 – Other Changes
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