Guy Carpenter Ponders Bermuda’s Future

Despite the fact European countries are attracting an increasing number of (re)insurance companies and their subsidiaries Bermuda is likely to remains a leading domicile for the global industry, says a recent report by analysts at Guy Carpenter & Co.

The study by the (re)insurance intermediary firm — a subsidiary of Marsh & McLennan Companies, the world’s largest insurance brokerage firm headed by Bermudian Brian Duperreault — said while the island’s preeminence is currently under threat from regulatory changes in Europe, an ongoing US crackdown against off-shore domiciles deemed to be tax havens and internal considerations such as work permit term limits, its days as a global (re)insurance hub are hardly numbered.

“Bermuda continues to be a well regulated (re)insurance domicile and, regardless of any tax changes, it has proved its worth to the industry and is, therefore, likely to remain one of the preeminent centers of insurance business in the world, especially for property catastrophe reinsurance,” said the Guy Carpenter report. “Indeed, Bermuda is itself looking to compete with other territories, the Cayman Islands particularly, by targeting opportunities in the insurance-linked securities market.

“Moreover, Bermuda has taken the lead in addressing some of the external concerns, meeting with US officials and tightening money laundering regulations.”

The relevant section of the report on major developments in the world catastrophe reinsurance market in 2010 is reproduced below:

Solvency II, tax legislation and more general regulatory changes have prompted some(re)insurers to reassess their domicile. The importance of Bermuda to the reinsurance industry grew during the last decade as the speed in getting regulatory approval to start trading combined well with the island’s favorable tax system and geographical proximity to the United States and Europe.

However, potential regulation changes have since prompted some (re)insurers to question whether Bermuda can maintain its status as the number-one location for (re)insurance companies. The emergence of other viable alternatives has seen the issue of domicile become an important consideration for businesses.

For years, Bermuda has been the domicile of choice of (re)insurance companies, attracting start-up companies in the wake of market-changing events, including Hurricane Andrew in 1992, the terrorist attacks of September 11, 2001, and Hurricane Katrina in 2005. However, rival domiciles have taken note of Bermuda’s success and implemented their own business-friendly policies in an attempt to attract operations away from the island. The Republic of Ireland and Switzerland, in particular, have lured several (re)insurance companies over the last couple of years.

It is fair to assume that taxation is a key consideration when companies move. However, Bermuda continues to offer one of the most competitive tax systems in the world, with no levy on profits, income, dividends or capital gains. Although Ireland’s standard rate of corporation tax is among the lowest in the world (12.5 percent), it is still considerably higher than Bermuda’s. The UK’s corporation tax rate of 28 percent was instrumental in Brit Insurance’s decision to decamp to the Netherlands in 2009.

So what has prompted this wave of redomiciling from Bermuda? Tax is in fact an important reason. Following the global bailouts of financial institutions after the credit crunch, governments around the world are now looking to crack down on territories carrying the ‘tax haven’ stigma. In the United States, proposed legislation that seeks to prevent reinsurers from moving ‘excessive’ portions of their U.S. premiums to offshore affiliates to lower their tax burden is currently being debated in Congress in the form of the Neal Bill. A watered-down version of the bill has also been incorporated into the Obama Administration’s 2010 budget plan.

The debate has split the industry, with US-domiciled insurers in favor of the legislation and foreign reinsurers against. Indeed, although the bill is primarily aimed at the Bermudian market, the European insurance and reinsurance federation has stated its opposition, as it estimates the measure would double tax rates for European reinsurers that operate in the United States, significantly increasing costs and rates.

Therefore, the uncertain regulatory environment, combined with the increasing difficulty of obtaining work visas in Bermuda and the shortage of accommodation, offices and schooling on the island, has prompted some (re)insurers to move. Ireland and Switzerland have emerged as the new domiciles of choice with Beazley, XL Capital and United America Indemnity moving to Dublin, and Zurich welcoming ACE, Amlin Re, Catlin Re and Novae Re.

What has attracted these companies to Ireland and Switzerland? Both countries offer relatively stable tax systems and their corporate tax rates are below the European average. In uncertain times, larger countries can offer more security and capital-raising potential than smaller offshore territories and both Ireland and Switzerland have tax treaties with other major markets, including the United States. Their location is also
crucial as it allows companies to move closer to their clients. In addition, Ireland’s EU membership and stable regulatory environment makes it a very attractive destination. The role played by Solvency II is also relevant. In explaining its decision to establish a reinsurance platform in Zurich, Catlin highlighted opportunities arising from Solvency II as a key factor in setting up the operation.

However, all this does not necessarily mean we are going to see a mass exodus from Bermuda and other low-tax domiciles. Clearly, much depends on what, if any, legislation is passed in the United States. If no changes are implemented, Bermuda will continue to attract businesses. There are also subtle differences between the provisions of the Neal Bill and what the Obama administration has proposed. One key difference is over the definition of excessive reinsurance. The Obama Administration has proposed to use a 50 percent threshold while the Neal Bill would use an industry average. Paradoxically, if the Obama Administration’s proposal were to become law, US-based (re)insurerscould be encouraged to open operations in Bermuda as it could significantly cut their tax burden.

But favorable tax rates only tell part of the story. Bermuda continues to be a well regulated (re)insurance domicile and, regardless of any tax changes, it has proved its worth to the industry and is, therefore, likely to remain one of the preeminent centers of insurance business in the world, especially for property catastrophe reinsurance. Indeed, Bermuda is itself looking to compete with other territories, the Cayman Islands particularly, by targeting opportunities in the insurance-linked securities market. Moreover, Bermuda has taken the lead in addressing some of the external concerns, meeting with US officials and tightening money laundering regulations.

Yet despite this, the financial crisis and the subsequent governmental push to close the tax gap have hit Bermuda’s dominance in attracting reinsurance business. The rise of alternative domiciles such as Dublin and Zurich pose a credible threat in becoming the destination of choice for (re)insurers. Although their rise is unlikely to herald the demise of offshore territories, Ireland and Switzerland will undoubtedly look to consolidate their recent success and challenge Bermuda’s established (re)insurance supremacy over the next decade.

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