Financial Regulator wants the highest standards for reinsurance industry at the IFSC, writes Liam O'Reilly.
The importance of the International Financial Services Centre (IFSC) to Ireland cannot be understated. In an era of intense global competition, the success and the attraction of the IFSC depend to a very large degree on its reputation.
A major contributory factor to that reputation is the perception of the regulatory regime that oversees the industry.
In questioning this, and thereby questioning the reputation of the industry here, in his Agenda article in The Irish Times (January 9th), Justin O'Brien made a number of inaccurate and misleading statements of an adverse nature about our regulatory regime and the IFSC.
Mr O'Brien has never had briefings of any nature from the offices of the Financial Regulator. Had he requested such, his article may have given a more realistic and accurate portrayal of the regulation of the IFSC and international financial services in general.
Since its inception, the IFSC has been regulated to the highest international standards for all financial activities. Moreover, the regulatory standards applied in the IFSC are no less stringent than those that apply generally in the industry.
One of the activities that is carried out in the IFSC, and which formed the focus of Mr O'Brien's article, is that of reinsurance. It is important to put the regulation of reinsurance into both a historical and global context. Reinsurance involves the passing of risk or exposure from an insurance company to a reinsurance company. It is essentially a wholesale business, with reinsurance companies transacting business with insurance companies and not members of the public.
Up to relatively recently, the conventional international wisdom was that reinsurance was an inter-professional market that did not merit regulatory intervention.
However, the importance of reinsurance in protecting the financial system in the aftermath of the September 11th, 2001, attack on New York caused the international regulatory community to decide that reinsurance should be subject to a full regulatory regime.
The Financial Regulator is always concerned about, and has always acted to ensure, the good reputation of Ireland as a well-regulated market. In this context and, contrary to the impression given by Mr O'Brien, we have played a full part and have been actively engaged in the process of developing a reinsurance regulatory regime at EU and international level.
In 2001, the European Union decided to introduce a regulatory regime for the reinsurance industry through the development of the reinsurance directive. Since our inception in May 2003, the Financial Regulator has fully participated in the framing of this directive at European level, in close liaison with the Department of Finance. We have also been centrally involved within the International Association of Insurance Supervisors (IAIS) in the development of the IAIS standard for regulation of reinsurance, issued in October 2003 and its guidance on risk transfer, disclosure and analysis of finite reinsurance, issued in October 2005.
The EU reinsurance directive was finally published last month. Ireland will be among the first countries in Europe to implement it, resulting in a full solvency regime for reinsurance companies here. Indeed, the Irish regime will go beyond the strict minimum requirements of the directive by requiring adherence to explicit standards of corporate governance and by requiring particular disciplines in relation to finite reinsurance, in line with IAIS standards.
The issues that arose last year with the Irish-based reinsurance firm Cologne Re Dublin related to transactions that had the effect of overstating the capital position of AIG in the United States and HIH in Australia. Mr O'Brien's article does not make clear that the transactions were orchestrated in the US in the case of AIG, and in Australia in the case of HIH.
There is no tolerance in this jurisdiction for such activity. Our work on this case has fully reflected that conviction. This is something that we publicly and forcefully stated at the time these matters emerged. A large element of our approach has involved us working closely at the highest levels with the regulators from the other jurisdictions involved in these transactions. Our objective, and that of other regulators involved, has always been to ensure that all the issues are dealt with and all the necessary actions are taken, including ensuring that any involvement in such activity no longer has a place in the industry.
We pride ourselves in matching best international practice in all aspects of financial regulation.
All regulated entities, whether engaged in international activities or domestic activities, are required to comply with best international practice. Ethical behaviour, including transparency in business dealings, is a key value expected of boards and senior management of all financial entities operating in Ireland.
They must in turn instil these values throughout their organisations.
It is our strong belief that the regulatory regime is robust and appropriate, and that the watchwords must continue to be reputation, integrity and transparency.
Liam O'Reilly is chief executive of the Financial Regulator.