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GAZETTE
NOVEMBER 1991
The advantages of a captive
There are four major reasons for
establishing a captive. Firstly, to
insure risks not covered by
traditional insurance. Captives are
becoming particularly popular in
Europe as a means of insuring risks
that the market is fighting shy of.
Insurers are unenthusiastic about
covering pollution liabilities,
especially in the context of a move
towards a European-wide strict
liability regime for pollution risks,
and product liabilities, especially
where companies have substantial
US exposures.
Secondly, a captive can provide a
flexible well managed risk portfolio.
The apportionment of risk can be
fully determined by the captive. In
this way, lucrative business can
remain with the captive, whilst less
profitable risk can be handled on
the reinsurance market.
Thirdly, there is the cost advantage
of eliminating the middleman (i.e.
the traditional insurance company),
the captive gaining the benefit of
direct access to the reinsurance
market and its low costs.
Finally, the premiums are held by
the captive for payment to cover
losses as necessary, but more
importantly provide a large source
of funds for investment as required
by the parent.
The attraction of the IFSC for
captives
The major attraction for the estab-
lishment of a captive in Ireland is
the International Financial Services
Centre currently under construct-
ion in Dublin docklands. Dublin is
the only EC domicile w i th
favourable taxation arrangements
where "direct writing" is possible,
(in the other possible domicile
Luxembourg, captive incentives are
all limited to reinsurance). This is
Ireland's big advantage over
Guernsey and Isle of Man. When
the single market is a fact, a Dublin
captive will be able to write one
insurance policy for all EC risks.
The IFSC has also advantages for
reinsurance captives. Luxembourg
allows reinsurance captives to
reduce taxable income by creating
catastrophe reserves. But then to
pay a dividend to the parent, those
reserves must be taken back into
revenue and the Luxembourg tax
paid on it is 37%. A rate of 10% is
guaranteed in the IFSC up until
December 31, 2000 and it may be
extended beyond that date.
There is no premium tax in Ireland
on international insurance and no
capital gains tax on trading income
arising from the IFSC activities.
There is no valued-added tax on
services supplied by firms located
in the Centre.
Ireland has double taxation treaties
with 21 countries. In general they
benefit captives in that dividends
paid from the Dublin captive to
treaty-country owners may receive
up to 100% exemption when
repatriated. Most of the countries
with which Ireland has double
taxation treaties have tax "Sparing
Clauses", so that the dividends can
be repatriated almost tax free.
Setting up in the IFSC is aided by
a package which includes a 200%
deduction of rent expenses to
lessees in the IFSC for 10 years and
a 100% write-off in the first year of
new building costs for lessors. In
addition there is the 100% write-
off in the first year of spending on
new equipment. All these factors
combine to make Ireland the most
attractive domicile in which to
incorporate a captive insurance
company.
Increasing European interest
The concept of captive insurance is
well established in the United
States but is relatively new to
Europe. Many European companies
are now becoming bigger, partially
as a result of the drive towards the
single market, and as a result are
becoming more sophisticated in
their insurance buying. Three
hundred of the top five hundred
American companies already have
captive insurance subsidaries,
while only thirty of the top five
hundred European companies have
captive subsidaries. The advan-
tages of the IFSC will result in
many captives being established
there. The IDA has stated that it
expects five hundred captives to be
established in Dublin by the year
two thousand.
The establishmerft of a captive
In order to gain admittance to the
IFSC, a company must first make
an application to the IDA, which
will in turn forward it to the
Certification Advisory Committee
of the Department of Finance. The
committee will then assess the
principals and will consider their
objectives. A detailed business plan
must be submitted which is
required to deal with such issues as
underwriting, financing and the
capital structure. Projections of
premiums and loss levels and
discriptions of reinsurance arrange-
ments are required. When
Committee approval has been
achieved, a draft tax certificate is
prepared by the Department of
Finance. After approval, the tax
certificate is issued by the Minister
for Finance, specifying the
activities that qualify for the 10%
rate.
Regulatory requirements
The main regulatory authority is the
Minister for Industry and Com-
merce. An Irish direct writing
captive is subject to all the rules
governing Irish insurance com-
panies.
The principal regulatory measure
for the insurance industry is the
Insurance Act, 1936, which has
been amended on many occasions
most notably in 1989. Directive no.
73/239, O.J.L. 228/3 was imple-
mented by the European Communi-
ties
(Non-Life
Insurance)
Regulations, 1976.
Direct writing captives must have
a minimum paid up capital of
£500,000 which is not with-
drawable or repayable to the
company members. All applicants
for an insurance authorisation are
required to 'limit (their) business
activities' to insurance and directly
related activities, to the exclusion
of all other commercial business. A
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