NYT -- Dublin reporter Brian Lavery is certain to earn the wrath of the Irish Department of Finance with his depiction of Dublin as the "Wild West of European finance" in an article published today by the New York Times. Ireland established a financial regulator in 2003 but questions still lead back to Dublin concerning things such as insurance packages written in the Irish Financial Services Centre. An extract of the article filed by Brian Lavery (Dublin) and Timothy O'Brien (New York) follows.
Inside a sprawling complex of emerald-green glass towers, where derelict shipyards once lined the River Liffey, financiers have helped transform this city into one of the world's most innovative insurance providers. They have also turned Dublin into an unlikely hot spot in a growing insurance scandal that has toppled chief executives and even pulled the investing legend Warren E. Buffett into its orbit.Regulators around the world have followed several trails of suspect financial transactions back to Ireland, which more than a decade ago instituted accommodating tax and regulatory standards aimed at encouraging insurers to set up shop here. At the center of those investigations is the General Re Corporation, a unit of Berkshire Hathaway, a holding company that includes Mr. Buffett's insurance operations.
Investigators are exploring General Re in connection with possible financial manipulation at some of the world's largest and most prestigious insurers. General Re, which has a substantial presence here, is just one among dozens of companies that have enjoyed a surge in business since first venturing to Dublin in the early 1990's.
Dublin's insurance boom came on the heels of a natural disaster. In 1992, Hurricane Andrew ravaged southern Florida and Louisiana, causing more than $25 billion in damage and forcing insurers to pay a host of claims. Some insurers, battered by the losses, were hesitant to take on large risks after that disaster. That spawned a new breed of competitors in Bermuda willing to fill the gap. Another crop of insurers chose to hopscotch past the Caribbean and locate here.
The city's insurance industry is based in a 40-acre self-contained business park, the International Financial Services Center, where the Irish government offers a corporate tax rate far below the rates other large European Union members impose on companies. The center is home to hundreds of concerns that employ about 16,000 people. Aided by what even members of the Irish Parliament fondly call the "light touch" of the country's financial regulators, Dublin has promoted an entrepreneurial culture that allows billion-dollar insurance companies to open their doors and begin selling policies in a matter of weeks.
In 2003, the most recent year with data available, 56 international insurance and reinsurance companies in Dublin wrote gross premiums worth at least 14 billion euros ($18 billion), and held around 45 billion euros ($58 billion) in assets, according to the industry's lobbying arm, the Dublin International Insurance and Management Association. Despite handsome compensation, Dublin's insurance executives tend to keep a low profile and disdain stentatious displays of wealth.
"People are working too hard to be caring about their egos," said Sarah Goddard, head of the insurance association.
An educated work force, a good family environment and Dublin's cosmopolitan attractions have also drawn insurers. Despite its wet weather, Dublin has other pluses compared with balmier insurance locales like Bermuda, includng more available housing, parking spaces and long-term visas.
But along with its reputation for innovation, Dublin has become known in the insurance industry as something of the Wild West of European finance, a perception that helped prompt the creation of the Irish Financial Services Regulatory Authority two years ago.
Despite its mandate for stricter oversight, the agency has yet to impose major sanctions on any Irish institution, even though Ireland has recently experienced several major banking scandals. But industry representatives dispute the idea that Ireland may be home to unchecked financial frauds.
"I don't regard this regime as being in any way lax," said Aileen O'Donoghue, director of Financial Services Ireland, a trade group. "We certainly wouldn't be selling ourselves as fast and loose."
Even so, investigators and regulators in the United States, Australia and Europe are examining General Re's role in selling policies that, in some cases, may have helped paper over weaknesses at insurers and other companies.
In at least one case, such policies may have contributed to a major financial collapse. In many instances, financial technicians working for a General Re unit here known as the "alternative solutions group" devised complex, newfangled insurance products that have drawn investigative scrutiny and have come back to haunt Berkshire and other major insurance companies.
"The vast majority of the world doesn't regulate reinsurance because it's a business-to-business operation," Ms. Goddard said. "These are all big boys playing the same game together."
The centerpiece of the current round of inquiries is an arcane product called finite reinsurance. Insurers buy reinsurance to limit their own exposure to catastrophic claims. Finite reinsurance is used to soften the impact of claims paid out over a long period. While finite products are at the center of current inquiries, analysts say that the entire reinsurance business, much of it in offshore locales like Ireland and Bermuda, is plagued by poor documentation and weak regulation.
"They are very much handshake, frenzied types of transactions; that has always been the culture of the business," said Keith Buckley, a managing director and head of the insurance group at Fitch Ratings. "It's been something of the good-old-boy type of network, with a somewhat lackadaisical approach to documentation and other things that still exists in the reinsurance departments of too many companies."
Dublin has attracted numerous reinsurers enamored of Ireland's advantages, particularly affiliates of American and German companies. Henning Ludolphs, managing director of the Irish division of Hannover Re of Germany, said that a low cost base was a significant reason reinsurance companies, among other financial institutions, initially set up operations here.
"In the early days of '92 or '93, it was a reasonably affordable place to do business," and an easy place to start a company because of the accommodating stance of the Irish government, Mr. Ludolphs said. The strong euro and Ireland's soaring inflation rate in the late 1990's have eroded those cost advantages, but Dublin is cheaper - "a couple of times" so - than Bermuda as a place to do business, he added.
Cologne Re, another German reinsurer, was among the pioneers of the Irish industry in the early 1990's. General Re acquired a controlling stake in Cologne Re in 1994, and Berkshire, in turn, acquired General Re in June 1998. A Cologne Re executive, John Houldsworth, oversaw the company's business here in the early 1990's and he later became a senior member of General Re's alternative solutions group.
Regulators and investigators said that the group was at the center of two high-profile finite reinsurance investigations, one in Australia and the other in the United States.
Australian regulators said that a troubled insurer named FAI used finite products to feign profitability shortly before HIH Insurance Ltd., a fast-growing Australian conglomerate, bought it in 1998. HIH collapsed four years ago beneath the weight of ill-considered acquisitions like FAI and other problems.
Mr. Houldsworth and five other General Re executives were involved in improprieties related to the FAI transactions, Australian regulators said. In October, the regulators permanently barred all the executives from Australia's insurance industry. Regulators say that Mr. Houldsworth and another executive, Tore Ellingsen, continue to work for another General Re unit in Dublin, where Mr. Houldsworth oversees finite reinsurance operations.
In December, Australian regulators barred another General Re executive, Milan Vukelic, for the FAI deal, but reinstated him on appeal. Mr. Vukelic is now the chief executive of the Faraday Group, a General Re unit based in London. Mr. Houldsworth, Mr. Ellingsen and Mr. Vukelic declined to comment.
In the United States, the Securities and Exchange Commission and Eliot Spitzer, the attorney general of New York, are investigating a questionable finite transaction between General Re and the American International Group that originated in Dublin in late 2000 and involved Ronald E. Ferguson, General Re's chief executive at the time. Regulators say the transaction artificially increased A.I.G.'s premium reserves, ultimately helping its stock price and its ability to acquire another company.
Mr. Buffett will be meeting with American regulators and law enforcement officials on April 11 to discuss that transaction. Mr. Spitzer's office considers Mr. Buffett to be a witness in the investigation, not a target, according to a person briefed on the inquiry. Berkshire has said repeatedly that its chairman had no knowledge of improprieties related to the transaction and that his subordinates are responsible for decisions made by units like General Re.
Regardless of whether the perception of lax regulation is justified in Ireland, the rules governing reinsurance in Europe are due to change soon. A European Union directive currently under discussion and scheduled to take effect next year will establish a regulatory framework spanning the 25-country union. It will mandate closer scrutiny than that provided by the current Irish system, in which one of the chief regulatory requirements is that an insurer notify authorities whenever there is a change on its board.
Brian Lavery and Timothy O'Brien -- "For Insurance Regulators, Trails Lead to Dublin"
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