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Wednesday, 17th April 2024
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Establishing captive insurance operations in Ireland Back  
John Larkin and Paul Murray outline some of the attractions of establishing captive insurance operations, some of the main advantages of Ireland as a location for establishing such operations as well as the application process and ongoing supervisory requirements in respect of such operations.
A captive insurance company is an insurer established and wholly owned by an industrial or commercial company, or a group of such companies, for the purposes of underwriting all or part of the insurance risks of that company or that group of companies. Captive insurance companies can also be established by trade associations or unrelated companies with similar business risks allowing them to join together in a cost-effective way to obtain insurance.

It is also possible to establish a captive reinsurance company, where the risks are ‘fronted’ by a company, which is authorised to write insurance in a particular market, and the risk is ceded to the captive reinsurance company in return for a premium.

The growth in the captive insurance industry reflects a change in the way that organisations finance risk. Increasingly, conventional insurance is seen as providing protection against catastrophic risk, with alternative more flexible approaches being adopted to cover lower levels of potential losses.

The considerable hardening of the insurance market over the past two years has led to the increased use of captive insurance operations as companies seek to minimise their insurance costs. The annual survey published by the Dublin international insurance & management association (DIMA) in November 2002 indicated that Ireland’s international insurance sector grew at a rate of 42 per cent in 2001.

Advantages of establishing a captive insurance operation
There are a number of potential advantages in the use of captive insurance, which include the following:-
• The use of a captive insurance company can result in a potential cost reduction. By participating directly in its own insurance business, an organisation can ensure that its premiums reflect its own position, rather than reflecting the cost of insurance of other organisations with an inferior claims record;
• Premiums paid to a captive are retained for the ultimate benefit of the mutually owned business. Therefore, any investment income received from premiums is retained for the benefit of the group’s shareholders until they are paid out by way of claims or reinsurance costs;
• A captive insurance company may have direct access to the reinsurance market. This ability to deal directly with reinsurers can produce additional cost savings;
• The use of a captive insurance company has the effect of smoothing insurance costs over the medium term, whereas the insurance market can be very cyclical in premium cost and cover availability;
• A captive insurance company can enable an organisation to provide insurance for risks not otherwise usually covered in the conventional insurance market; and

Advantages of Ireland as a captive location
There are many advantages to locating a captive insurance operation in Ireland:
• Ireland is a full member of the European Union (EU) and a direct writing captive regulated by the Irish Department of Enterprise, Trade & Employment (DETE) can service all other EU markets without the need for further authorisation;
• The DETE is widely regarded as a responsible yet responsive regulator - a direct writing captive can be established in less than six months and a reinsurance company can be established in four to six weeks.
• An Irish captive is subject to the highly competitive standard corporation tax rate of 12.5 per cent, no Irish stamp duty or premium taxes are payable on policies where the risk is not located in Ireland and no value added tax is payable on the supply of insurance services.
• Ireland has double taxation treaties with most of the world’s leading industrialised nations and an exemption can be obtained from the 20 per cent dividend withholding tax by many companies resident in or controlled by residents in eu member states or countries with which Ireland has a tax treaty.
• An exemption can be obtained from us federal excise tax by irish captives which fulfil certain criteria.
• With a significant number of both international and locally owned captive managers based in Ireland and a plentiful supply of top quality legal, accounting and banking service providers, there is a competitive market to service the needs of captives.
• Ireland’s proximity to London enables close interaction with brokers and other insurance entities operating in the London market.

Approval process
The approval process depends on whether the captive is a direct writing or reinsurance captive. If it is a direct writing captive, the DETE approvals outlined below are required. If it is a reinsurer then the captive must notify the dete of certain key features of the proposed company (including its shareholders, directors, management and business proposed) before incorporation will be permitted. All reinsurance companies are required to have a paid up share capital of at least €635,000.

If a captive wishes to engage in direct writing, it must be authorised by the dete. The dete will need to be satisfied that the shareholders of the captive and with the qualifications, experience and reputation of its management, staff and directors. Furthermore, the dete will need to be satisfied that the company will have sufficient financial resources to meet its obligations. An application fee of €5,079 is payable to the dete.

Ongoing supervision
A reinsurance captive is not subject to any specific ongoing supervisory control by the dete but it must file its annual accounts with the Companies Office. Changes to the information contained in the dete notification must be advised to the dete no later than the end of the year in which the changes took place. Additionally, if the dete has concerns about the activities being carried on by a reinsurance company, it may direct it to cease writing business indefinitely or for a specified period.

A direct writing captive is supervised on an ongoing basis by the dete. This supervision is exercised mainly by the obligation to file an annual return with the dete (more frequent returns are required for newly established companies). Direct writing insurers are also required to comply with various dete guidelines.

IFSRA
A single financial services regulatory body (known as IFSRA - the Irish financial services regulatory authority) is currently being established and this will result in the DETE’s powers of authorisation and supervision passing to IFSRA. Draft legislation relating to the establishment of IFSRA is currently before the Irish parliament and it is anticipated that the transfer of regulatory responsibility will take place in 2003. The interim chairman of IFSRA has stated publicly that he wishes to continue the current regulatory approach, which he describes as being ‘open, accountable and speedy’.

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