Home Knowledge Changes to “80/20 Rule”

Changes to “80/20 Rule”

The “80/20 Rule” refers to the application of a regulatory requirement that was originally introduced by the Central Bank of Ireland in the aftermath of the collapse of Insurance Corporation of Ireland, a direct writer which had also been writing large amounts of reinsurance business.

The perceived need to limit an insurer’s ability to write reinsurance within the classes for which it is authorised to write direct business resulted in the introduction of the 80/20 Rule.  This was generally understood to mean that direct insurance companies (whether life or non-life) had to limit their inward reinsurance business to 20% of the total gross premium income. As a result of this rule, a number of international insurance groups establishing a dual company structure in Ireland, writing business through two different carriers (i.e. a direct insurance company and a reinsurance company).

What has Changed?

In 2008 a submission was made by An Taoiseach’s IFSC Insurance Group to have the rule abolished. Arising from discussions with individual companies, many non-life companies were permitted to write up to 50% of gross written premium as reinsurance. 

In March 2010 a further submission was made to the Central Bank by a number of industry participants.  This submission focused primarily on the effect of the 80/20 Rule in the context of Solvency II.

In December 2010, the Central Bank wrote to companies to advise them that the Central Bank has decided to remove the specific 20% limitation on inwards reinsurance. Any direct insurance company that wishes to increase the amount of reinsurance cover that it might write above 20% must, however, submit a business plan to the Central Bank.  In that letter the Central Bank also indicated that any such business plan must not be implemented until the Central Bank has indicated that it has no objection.

Opportunities Created

Insurance companies that wish to transact inwards reinsurance or wish to increase the amounts of existing inwards reinsurance must submit revised business plans to the Central Bank and must not implement those until the Central Bank has indicated that it has no objection.  In addition, groups that currently have both insurance and reinsurance companies in Ireland might now consider merging those two companies.  Any such merger may be particularly prudent given Solvency II’s impending implementation as it could provide a more efficient use of capital under that regime.

Contributed by John Larkin and Eoin Caulfield.