Introduction

The Irish reinsurance industry, though perhaps not particularly well known to the general public, is large and represents a significant amount of the reinsurance business written worldwide. Though the industry is currently lightly regulated, with oversight limited to the vetting of reinsurers by the Irish Financial Regulator (the "Financial Regulator"), this state of affairs is set to soon change.

The Department of Finance has recently published what is expected to be the final draft of the European Communities (Reinsurance) Regulations 2006 (the "Reinsurance Regulations" or "Regulations"). The Reinsurance Regulations will transpose European Directive 2005/68/EC (the "Directive"), which was adopted at European level on the 9th of December, 2005, and will establish a new prudential regulatory regime for the Irish reinsurance industry. It is expected that the Reinsurance Regulations will be signed into law by June 2006, which would make Ireland the first country to implement the Directive and would provide the rest of the EU with a potential blueprint for their own implementation schemes.

The Financial Regulator has indicated that early implementation will assist Irish reinsurers in moving towards full compliance with the Directive and will provide certainty for Irish reinsurance market. This article looks at the current regulatory regime governing the Irish reinsurance industry, provides an overview of the proposed new regime to be established by the Reinsurance Regulations and highlights the transitional scheme for existing reinsurers, which will allow such reinsurers adequate time to achieve full compliance.

Current Regulatory Regime

Historically, the activities of reinsurers in Ireland were not supervised by the Irish regulatory authorities. Irish reinsurers were not required to submit accounts or maintain a solvency margin, unlike UK reinsurers, but likely maintained both internally as a matter of good business practice. This environment changed, however, with the Insurance Act, 1989 (the "1989 Act"), which introduced the first regulatory measures to the industry.

Section 22 of the 1989 Act required reinsurers to identify themselves to the Irish regulatory authorities but did not require them to provide significant details of their business operations. However, the measure did allow the authorities to keep track of the number of companies operating in the Irish reinsurance market.

Section 22 was amended by the Insurance Act, 2000 and, as amended, provides the legislative basis for the current regulatory regime. The amendments introduced some transparency to the Irish industry by requiring persons who wish to carry on reinsurance business to give at least 30 days notice of such intention to the Financial Regulator. Such persons are also required to submit certain information including details of ownership and share capital, information about directors and senior management and a statement of the risks proposed to be covered and related policy and other arrangements. Section 22, as amended, also provides that the Financial Regulator has the power to direct a reinsurer to cease carrying on business on a number of grounds including where the undertaking is undercapitalised, has an insufficient number of suitably qualified members of management or staff or has engaged in illegal operations outside Ireland.

The Proposed New Regulatory Regime

Those familiar with the regulatory regime for non-life insurers will find similarities in the approach taken with the draft Reinsurance Regulations as the latter are largely based on the nonlife insurance regime. It should be noted that although changes to the draft Reinsurance Regulations are not expected at this stage, they may still be made up until the time that the Regulations are signed into law. It should also be noted that whilst new reinsurers who have not yet set up operations in Ireland will be subject to the new regime in its entirety, established reinsurers will be able to avail of a transitional period, discussed in more detail below, in respect of complying with certain of the obligations required under the new regime.

The Reinsurance Regulations will apply to all persons who undertake reinsurance business or operate a SPRV within Ireland. Reinsurance is defined to mean the activity consisting in accepting risks ceded by an insurance undertaking, or by another reinsurance undertaking, and SPRV is defined to mean a special purpose reinsurance vehicle. SPRVs are typically used in securitisation or structured risk transactions in which the SPRV enters into a contract with a ceding insurance or reinsurance undertaking under which the SPRV agrees to pay such undertaking a set amount if a triggering event, as specified in the contract, occurs.

The Reinsurance Regulations will not apply to reinsurance undertakings or SPRVs that are established not later than the 10th of December, 2007 and are being "run off". This refers to the process by which reinsurers cease to enter into any new contracts and exclusively administer their existing portfolios in order to wind up their businesses. Notwithstanding the nonapplication of the Regulations to reinsurers that are being "run off", the Financial Regulator will be required to prepare a list of such undertakings and provide such list to the competent authorities throughout the EU. This will allow for the monitoring of such reinsurers so as to ensure that they are wound up in an orderly fashion.

The Regulations will make it an offence for a person to carry on reinsurance business without proper authorisation or to carry on a type of reinsurance business that is beyond the scope of authorisation granted. In order to apply for authorisation, an applicant must have both its head and registered office located in Ireland and be a company limited by shares or guarantee or be an European company. Furthermore, the objects of the applicant must be limited to carrying on reinsurance business. In reviewing applications for authorisation, the Financial Regulator will require, amongst other items, a set of three-year pro forma financial statements and scheme of operations (or strategic business plan). Such schemes must address the following: the nature of risks that the undertaking proposes to cover, the kinds of reinsurance arrangements that the undertaking proposes to make with respect to ceding insurance business, the principles that will guide the undertaking when retroceding insurance business, the establishment of an acceptable guarantee fund, and estimate of the costs likely to be incurred in establishing administrative services and obtaining the financial resources necessary to meet those costs.

The Financial Regulator has indicated that it intends to regulate reinsurance undertakings, at least in part, by focusing on corporate governance requirements. Regulation 10 provides that the Financial Regulator will refuse an application if it is satisfied that the applicant is not of good repute or will not be able to fulfil the responsibilities that are imposed by the Regulations. Moreover, the Financial Regulator will refuse an application where it is of the view that the officers do no have the professional qualifications or experience necessary to properly operate the business. To assist applicants with corporate governance issues, the Financial Regulator has recently published on its website (www.financialregulator.ie) Consultation Paper 18 – Corporate Governance Guidelines for Reinsurance Undertakings, on which it aims to complete consultation by the 31st of May, 2006 before finalising by the end of June, 2006.

Once authorised, reinsurance undertakings will be required to establish and maintain sound and adequate administrative and accounting procedures, internal control mechanisms and risk management requirements. Authorised reinsurers will also be required to establish and maintain the following in respect of their entire businesses: technical reserves, a solvency margin that complies with Schedule 1 of the Regulations, and a guarantee fund that complies with Schedule 2. Authorised reinsurers will be required to lodge prescribed annual returns and other statistical documents which will enable the Financial Regulator to verify their states of solvency and that technical reserves are being maintained.

Finally, it is worth noting that the Regulations will introduce a licence that once granted is valid throughout the EU. Regulation 13 provides that reinsurers that have been authorised in Ireland are entitled to carry on the same kind of reinsurance business in every other Member State of the EU, subject to any requirements imposed under the Regulations or by law.

Transitional Period

Regulation 11 is a grandfathering clause which will provide that reinsurers that are established before the commencement of the Regulations will be deemed to be authorised to carry on the same kind of reinsurance business that they had a right to carry on immediately before such commencement.

Such reinsurers will be required to comply by no later than the 10th of December, 2007 with a set of obligations which include the requirement that the officers of the reinsurer are of good repute and have the adequate professional qualifications and experience and the requirement that proper solvency margins, technical reserves and invested assets to cover such reserves have been established.

The Financial Regulator has indicated that, notwithstanding that the transitional period will run until the 10th of December 2007, its goal is to have all existing non-life reinsurers fully compliant by the end of June 2007. To meet this target, the Financial Regulator has requested existing nonlife reinsurers to submit indicative compliance plans by the end of June 2006 and full compliance timelines by the end of September 2006, after which non-life reinsurers will aim to implement their plans by the June 2007 deadline.

It is worth noting as that the Financial Regulator has published documents on its website which might assist reinsurers with the transitional process. These include Consultation Paper 16 - Transitional Requirements for Non-Life Reinsurance Undertakings and a report which documents the work undertaken by Watson Wyatt (Ireland) Limited in connection with the solvency margin and reserving requirements for life reinsurance undertakings, which report will form the basis for developing proposals for the transitional requirements for life reinsurers.

Conclusion

The regulatory regime and the role played by the Financial Regulator in respect of the Irish reinsurance industry is set to soon change. It is expected that the Reinsurance Regulations will be signed into law by June 2006 and will substantially overhaul the current regulatory regime.

Ireland is at the forefront of implementing the EU Directive and it is hoped that the new regulatory regime will result in a balanced and not overly-restrictive regulatory environment for the Irish reinsurance industry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.