Ireland has become an increasingly important base for insurance companies wanting to sell life and savings products into other EU locations. PricewaterhouseCoopers, in conjunction with Financial Services Ireland, carried out a survey in 2002 to look at how current cross-border operators in Ireland view the market. Seventeen insurers responded to the survey, accounting for almost 80% of the market by new business premium. The findings give an insight into the advantages of Ireland as an international base, the current dynamics of the market, and the likely prospects going forward.
Respondents cited a number of key factors enabling them to develop their international life insurance business.
– Flexibility of Irish regulatory authorities The Department of Enterprise, Trade & Employment (DETE) has made great efforts to promote Ireland as a centre for international life insurance business. The Irish regulatory authorities are familiar with the nuances of the cross-border market and have a constructive attitude towards the development of this business. This is evidenced by the speed with which regulatory approval can be obtained. Authorisation can take as little as seven months from the submission of the business plan.
– Innovative product-development skills Companies operating within the international life sector pride themselves on their ability to offer innovative products specifically tailored to clients looking for sophisticated financial management tools. There is a close relationship between the regulatory authorities and the actuarial profession, which gives companies a high degree of freedom to develop innovative products. This contrasts with a typically more restrictive regulatory environment in other European countries.
– Availability of staff with the requisite expertise in Ireland Irish companies have more than 30 years’ experience in selling unit-linked products. There is a strong domestic pool of insurance professionals available at a lower cost than in the UK, or in many other European locations. There is also an established network of professional services firms located in Dublin, providing actuarial, accounting, taxation, and legal services to both the international and domestic insurance industry.
– Confidence of parent company in cross-border concept For many companies, the commencement of cross border insurance activities represented a significant departure from their traditional business model. An understanding of the nature of the business proposition and a willingness to commit the necessary resources by the parent company are regarded as pre-requisites for a successful venture.
Irish taxation policy
Perhaps surprisingly, only 59% of respondents identified Irish taxation policy as a significant contributing factor in the development of their business. For life insurance companies established in the International Financial Services Centre (IFSC) on or after 23 July 1998, a 10% corporation tax rate applies until 31 December 2002, with a 12.5% rate applicable thereafter. The IFSC also offers gross roll up of investment funds for life insurance companies located there. This was extended to domestic Irish insurance companies from 1 January 2001.
Is Ireland a low-cost jurisdiction?
Over half of the survey respondents felt the cost of operating in Ireland was lower than in the domicile of their parent. Interestingly, a high proportion of respondents felt this would continue, despite the high inflation levels experienced recently in Ireland. Twelve respondents believed Ireland currently was, and would remain, a less expensive operating location than Luxembourg, another centre of European cross-border life insurance.
Freedom of services or freedom of establishment?
There are currently two approaches for companies with their head office in one EU location transacting business in another EU location: ‘freedom of services’ and ‘freedom of establishment’.
To explain the main differences, suppose a hypothetical company, EU Financial Services (EUFS), wishes to write life insurance business in Italy from offshore in Ireland. Under the freedom of services approach, EUFS establishes an office in Dublin as an Irish corporate entity and has no physical presence in Italy. The Irish regulator is responsible for monitoring solvency of EUFS and there is no taxable presence in Italy. The Italian regulator is responsible for ensuring EUFS complies with the Italian ‘general good’ requirements with regard to treatment of policyholders.
Under the alternative freedom of establishment approach EUFS, as a corporate entity of Ireland, establishes a branch in Italy and the Irish regulator is responsible for supervision of the branch. This gives rise to a taxable presence in Italy.
The vast majority of survey respondents currently transact business solely on a freedom of services basis. However, some companies transact business on a freedom of services basis in one state and on a freedom of establishment basis in another.
According to the latest published information from DETE at the time of the survey, foreign-risk life business written from Ireland accounted for new business premiums of e5.3bn in 2000. Based on responses to the survey (and financial statements of non-respondents), funds under management of Irish cross-border life insurance companies were approximately e10bn at the end of 2000. Recipients of the survey were asked to disclose details of new business premium volumes written and predicted up to 31 December 2003, and the funds under management held and anticipated to that date. From these responses and our estimates for non-respondents at that time, the Irish cross-border life insurance sector is anticipated to grow significantly over the next few years with new business premium income and funds under management reaching e8.9bn and e18.2bn respectively by 31 December 2003 (see figure 2).
Single-premium unit-linked savings products dominate the market. Our 2003 estimates at the time of the survey, based on the survey responses, were that new business premiums would be e8.0bn for unit-linked business and e0.9bn for non-linked business (see figure 3). In addition, a number of companies write tracker business, especially those whose primary focus is the Italian market. In the non-linked market, payment protection business has increased in popularity, particularly products sold to UK residents. Few respondents currently offer pensions products, but a number of companies are planning to launch these in the near future, in particular in Germany and Italy.
The most common primary distribution channel of respondents was the parent company’s bank branch network. In total, companies selling primarily through bank branches were selling higher volumes than those companies where the primary channel was brokers/IFAs. Based on total premiums written in 2001, 65% of business was distributed via bank branch networks compared with 33% via brokers/IFAs and 2% via agents (see figure 4).
The vast majority of Irish-based international life insurance companies transact business with policyholders resident in a single EU state, generally the domicile of their parent company. The survey highlights Italy as the most significant host market, followed by the UK (see figure 5).
Ireland is already well positioned as a result of favourable regulatory and taxation regimes, a developed unit-linked infrastructure and ready access to expert resource. These features will continue to fuel activity but the market is likely to be given an extra boost by several external factors:
– impending EU directives on insurance intermediaries and distance-selling;
– expansion of the EU from 15 to up to 27 countries as a result of the Treaty of Nice;
– pensions opportunities in Germany and longer-term desire for a single European pension market;
– continued demand for unit-linked exposure, fuelled by low interest rates across Europe;
– growing interest from North American insurers to diversify into Europe.
For companies wishing to access European life insurance markets from a single location, it is definitely worth the hardship of the green fairways and smooth beer.