Ireland's reinsurance sector has survived the Cologne Re debacle and is in rude good health, writes Fiona Reddan

THE COLLAPSE of Cologne Re’s Dublin operation four years ago incited worldwide opprobrium for Ireland’s regulatory and tax regime. Dublin became a “bête noire” of the international media, and was labelled the “wild west” of European finance. Despite this level of disrepute, however, the Cologne Re debacle does not appear to have hindered the growth of Ireland’s international reinsurance sector.

Latest statistics show that the sector grew by almost 50 per cent in 2008, while opportunities arising from Solvency II – a European Commission initiative that is intended to produce a more consistent solvency standard across insurers and across the European region whilst also resulting in capital requirements that are more reflective of the risks being run by insurers – the US crackdown on offshore jurisdictions such as Bermuda, and the potential to sell across the European market from a Dublin base, means that opportunities abound.

Last March, the Global Financial Centres Index (GFCI) ranked Dublin as the 10th most important financial centre in the world, with a high “reputational advantage”. Even more impressive was its perception amongst international insurance players, who ranked it sixth, ahead of renowned insurance centres such as Bermuda.

Prof Michael Mainelli, director of the Z/Yen Group, which compiles the GFCI, said the Irish regulators “stuck to their guns” in the way they regulated insurance, and it is this stability that is attractive to new entrants.

“While the full impact of Ireland’s economic woes have hit home in the most recent GFCI survey, published in September, in which Dublin dropped back 13 places to 23rd, without Dublin’s reputation as an insurance centre, it would have fallen back even more.”

Although Dublin also fell out of the insurance top 10, Mainelli says it was still ranked highly as an insurance centre, and it was this strong performance, along with funds, that meant it didn’t fall even further than 23rd place.

Dublin has been a base for international reinsurers since soon after the launch of the IFSC in 1987. Attracted by a low corporation tax rate, Ireland’s membership of the EU has also been vitally important in enticing reinsurers, as it allows them to set up in Dublin and sell their products across Europe.

“The success of the IFSC cluster of reinsurance companies was unexpected and extremely important and it did give critical mass to the IFSC itself,” says Prof Ray Kinsella, director of the centre for insurance studies at UCD.

Most recently Everest Re, one of the world’s top 10 reinsurers, chose Dublin for its European headquarters, from where it will target non-marine property/casualty general reinsurance treaty business throughout the European market.

Mark de Saram of Everest Re says his firm’s sole motivation in opening an Irish operation was to have a European subsidiary company.

“We had looked at a few locations in Europe, but wanted to be in a marketplace where the quality of people was high,” he says.

Everest Re is not the only firm to set up shop in Dublin in recent times as, despite the credit crunch, the drive towards increased capital requirements under Solvency II and the global economic downturn, the reinsurance sector continues to motor along.

For example, Canopius, the privately-owned insurance and reinsurance group that operates at Lloyd’s, recently set up a Dublin unit to structure reinsurance solutions for medium-sized clients, while other new entrants include Bermuda firm Aspen Insurance and Bowring Marsh.

Indeed, there has been little fallout from the Cologne Re debacle. Everest Re’s de Saram says that the incident “wasn’t relevant” and “didn’t affect our thinking” in choosing Dublin. Kinsella concurs.

“I don’t think the reputation of the IFSC per se has been impacted by that at all . . . I think events like Cologne Re are seen by the wider global community for what they are – they are the inevitable tensions that occur in what is a global market,” he says.

“I think that increasingly people recognise now that in a global financial environment the tentacles of mistakes that are made in one jurisdiction can and do spread to another, which is why I’ve always believed that neither regulation nor corporate governance, but only a much better emphasis on values-based compliance will nail the problem,” he adds.

While the financial crisis has hit the sector in terms of increasing the cost of capital and damaging the investment side of reinsurers’ business, the blow has not been nearly as hard as that dealt to the banking sector.

The latest survey for the industry, compiled by the Dublin International Insurance Management Association (DIMA), shows that its 61 members wrote in excess of €26.2 billion in gross written premiums in 2008, an increase of 46 per cent on the previous year, while net premiums jumped by 55 per cent up to €21.7 billion.

Also in Ireland’s favour is the declining attractiveness of Bermuda as a reinsurance centre. Traditionally one of the world’s most important, Bermuda is suffering from US president Barack Obama’s crackdown on offshore tax havens, as he seeks to reduce some of the tax advantages Bermuda-based reinsurers have over US competitors.

Already, firms are starting to move their tax bases overseas, with Paris RE, ACE and Flagstone Re all moving their domiciles and headquarters to Switzerland, while Ireland is also benefiting.

Most recently Willis, the world’s third-largest insurance broker, announced its intention to move its global headquarters from Bermuda to Ireland. Willis chief executive Joseph J Plumeri cited Ireland’s “more stable environment” and more specifically, its ability to allow Willis to “maintain a competitive worldwide effective corporate tax rate” as reasons behind the move.

There has also been a string of firms originating in the UK redomiciling to Ireland for tax reasons, many of whom are insurance firms, such as Beazley. While such redomiciliations are largely driven by tax reasons, and usually do not result in either activities being relocated or significant employment being generated, there is always the hope that eventually this may be the case.

However, while companies may continue to relocate from Bermuda, there are signs that the flow of companies from the UK may be coming to an end.

Earlier this year, UK firm Brit Insurance rejected Ireland in favour of the Netherlands, reportedly because of the possible introduction of more stringent taxation requirements such as controlled foreign corporations (CFC) requirements and transfer-pricing rules.

Moreover, in an effort to stanch the flow of tax revenues departing the UK for the emerald isle, the UK revenue is now actively working with companies to stop them redomiciling. Already, it has made UK insurance group RSA, formerly known as Royal Sun Alliance, change its mind. The firm had been considering a move to Ireland for tax reasons, but then decided against it, following discussions with the UK revenue. Instead, it will now establish a reinsurance company in Dublin, into which it will reinsure non-UK risks.

And, while Dublin may have weathered the storm posed by Cologne Re, there are other clouds on the horizon. Kinsella is concerned that the increasingly high concentration of large global reinsurers may pose a systemic risk. “The reality is that reinsurers are now the ultimate shock absorbers in a financial system that is very vulnerable. We know that even with Solvency II, that such cushions that we think are impregnable are often very brittle,” he says, reiterating his call for the creation of a global financial regulator.