Brexit and its potential effect on the captive industry in Ireland

Prior to the United Kingdom’s vote to leave the European Union, Tim Scanlon, of Matheson, and Sarah Goddard, of Dublin International Insurance & Management Association (DIMA), explored the effect that a potential ‘Brexit’ would have on the captive industry in Ireland.

Captive Review (CR): What impact would Brexit have on the captive market in Ireland?

Sarah Goddard (SG): It’s fascinating just how much isn’t known about the impact Brexit will have. This is genuinely uncharted territory and there is no previous experience to indicate what may or may not happen should the UK referendum decide to follow the Brexit path. There is, of course, a very high level outline structure of how a country may leave the European Union, including the possible two-year timeline for exit, though even at such as high level there are options. Moreover, in trying to assess the impact of a Brexit on Ireland’s captive market, one has to make certain assumptions. My first assumption is that the access to Freedom of Services for all EU member states will be curtailed for the UK.

Although, there are arguments about whether the UK will be able to get EEA status alongside that currently enjoyed by Iceland, Liechtenstein and Norway, as well as Switzerland’s single market status. It appears unlikely that a UK withdrawal from the EU would positively incline other EU member states to allow it access in this way. Captives for which cross-border access is important may find greater restrictions in the future, and therefore may decide that a new location for this business proves more effective.

It remains unclear how individual European member states will or will not be able to trade with the UK on a bilateral basis should a Brexit take place. Ireland and the UK have a very long history, and a impressively strong relationship, so there could be a good starting point to build on the unique relationship into the future.

Tim Scanlon (TS): Brexit would potentially have a significant impact on Irish authorised captive insurance companies who use their authorisation to carry on business in the UK by insuring UK-based insurance risks. Depending on the nature of the agreement reached between the UK and the EU in the event of a Brexit, it may no longer be possible for those captives to use their Irish authorisation to carry on business in the UK. In such circumstances, it may be necessary for those captives to obtain a licence or authorisation to carry on business from the UK regulatory authorities or to use the UK authorised fronting insurer to insure the risk.

CR: Has the run up to EU referendum caused instability among the captive industry?

TS: In our experience the referendum has not caused instability among the captive industry or any other parts of the insurance industry at this time. We have had quite a number of discussions with financial institutions on the impact of a Brexit. Some of those we have spoken to are actively conducting high-level contingency planning.

Our overall sense, however, is that many financial institutions are conscious that there will be a two-year transition period should Brexit transpire, which would allow them time to formulate a response. Also, given the range of potential scenarios which could arise post-Brexit, it is not possible to plan at this time for a particular outcome regarding the ultimate relationship between the UK and the EU.

SG: I haven’t seen any instability about the referendum with respect to captives specifically, though I am aware that other sectors of the international financial services industry with UK operations have been considering alternative centres for their businesses in the event of a pro-Brexit decision.

CR: If Brexit occurs, Ireland, and Dublin in particular, could significantly capitalise on the relocation of institutions for EU related reasons. How could Dublin draw these institutions in?

SG: We have to bear in mind that the financial services aspect of the ramifications of a Brexit vote are a very small part of the overall picture. There are many potential impacts which would have a profound influence on Ireland, not least the possible construction of a physical border between the Republic of Ireland and Northern Ireland. The UK is Ireland’s biggest trading partner, and it is estimated that up to six million people living in the UK are able to claim Irish nationality.

This also means that both countries have an ingrained connection and there is currently a clearly open door for institutions to visit and examine the options open to them. The Irish Ambassador to the UK, Dan Mulhall, has been vocal in communicating the Irish government’s support for the UK to stay within the EU. The IDA is an Irish government agency which explains the rationale for international companies to establish in Ireland, and has many offices around the world with information for any companies thinking about moving their operations.

TS: A vote in favour of Brexit will undoubtedly impact on the Irish financial services industry. Whether it leads to increased or reduced activity levels over the medium to long-term is very difficult to assess at this point. That being said, we believe there may well be increased demand from UK-based financial institutions for engagement with the Central Bank of Ireland on the issues arising from Brexit both with respect to on-going business and potentially moving authorised activities from the UK to Ireland.

We believe that positive and constructive engagement from the Central Bank in relation to the issues that arise would be very positively received by those financial institutions.

CR: The hostility towards immigration from the EU is a key factor in the reason for the EU referendum, how can Ireland take advantage of the movement laws should Brexit transpire?

TS: To the extent that there is an increase in the number of financial institutions seeking to establish operations in Ireland as a result of a Brexit, this may give Ireland the opportunity to attract staff from UK financial institutions which may seek to relocate part of their business to Ireland. These individuals tend to be highly educated and experienced professionals who would help to build Ireland’s reputation as a leading European jurisdiction in which to locate financial institutions.

Similarly, an increase in the number of financial institutions setting up in Ireland would also give Ireland an opportunity to attract talent from other EU member states who might otherwise have chosen to reside in the UK.

SG: I don’t think there are any particular advantages for Ireland from the EU movement laws within the Brexit environment. Ireland itself has been a country of emigration, and the Celtic Tiger years saw many Europeans relocate to Ireland under the Freedom of Movement provisions. The recession years resulted in a reversion to emigration, though this is re-reverting, as it were.

CR: What key industry trends would be of most significance following a potential Brexit to Ireland?

SG: An extraordinary amount is unclear about the impact of a Brexit and it is nigh on impossible to identify possible industry trends. It is possible that there would be an exodus of international financial services companies from the City of London, but there are likely to be much more fundamental impacts as far as sovereign issues, trade at the highest levels, economic impacts, what happens to people with UK passports living in other European countries. All in all… there’s a lot at stake.

TS: The key trend that would be of most significance following a Brexit is the increasing nature of regulatory supervision in the insurance industry. If Ireland is to encourage UK domiciled financial institutions to relocate some of their business to Ireland, the Central Bank would have to be able to demonstrate to those institutions that it has the resources available to accommodate applications for authorisation of potential new entrants and to ensure dedicated and sophisticated supervision. This will require investment by the Irish State in the resources that are available to the Central Bank of Ireland.

Novea enlists Puerto Rico cell for captive reinsurance

Madison Re I.I., a protected cell company domiciled in Puerto Rico, will reinsure the pure captive owned by Novea Inc. Novea is a financial services software company that...
MORE

JP Morgan captive rated ‘Excellent’

The Vermont captive owned by JPMorgan Chase & Co has had its financial strength rating of ‘A’ (Excellent) affirmed by A.M. Best. Park Assurance Company was formed in...
MORE

Judge Holmes criticises “sloppy” policy language in latest Avrahami exchange

The Avrahami’s move for reconsideration of two findings of fact has been dismissed by Judge Holmes. Captive Review reported in August the US Tax Court had ruled in...
MORE

Paul Schiavone to lead Allianz ART

Allianz Global Corporate & Specialty’s alternative risk transfer (ART) business will be led by Paul Schiavone, taking over from Bill Guffey. Guffey has left Allianz ART after 15...
MORE