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COMMENT: Bermuda not yet the weakest link
04 August 2010
Bermuda is not going away but it is under threat, says Reactions' editor Michael Loney.
Bermuda is not going away but it is under threat.
For 20 years the market appeared to be getting stronger and stronger. But Bermuda faces some big challenges. Some believe the island is losing its lustre. This may even be causing some firms to back away from Bermuda at a corporate level by redomiciling, as Garry Booth points out in his excellent column.
Its no-tax status and the speed and ease at which firms could be set up made Bermuda the undisputed go-to domicile for new capital for much of the 1990s and early 2000s. This is no longer the case, with alternative low tax alternatives such as Ireland and Switzerland now growing in importance. Unless a firm is setting up specifically to write US cat business it no longer makes as much sense to set up shop on Bermuda, where resources are at breaking point.
There is also some uncertainty over the island’s tax and regulatory structures. On the regulatory side, it is vital Bermuda gains equivalency with Europe under the soon-to-implemented Solvency II regime, lest it be left behind. That Bermuda has been named as one of the three leading contenders for the first round of European Union equivalency testing will have come as a great relief to the island’s firms.
A bigger threat to the island, however, is the prospect of a cash-strapped US striving to force Bermuda firms to pay tax on reinsurance of their affiliates. If some lawmakers – as well as US property/casualty firms – get their way this will be another blow to Bermuda’s attractiveness. It is important, however, to make a distinction between what is going on at a corporate level and what is going on at an operational level. Firms are not yet pulling their insurance operations off the island. It seems unlikely that Bermuda’s place as the catastrophe reinsurance centre of the world will diminish any time soon.
Perhaps a more important trend than the redomiciling craze is firms looking to set up reinsurance operations in Europe, usually Switzerland, including those with Bermuda operations such as Catlin, Amlin and Tokio Millennium Re. This is partly a function of the soft market forcing firms to look for new growth opportunities. It is no surprise that no one is looking to set up on Bermuda when US cat prices are uninspiring – that time past when the post-Katrina hikes faded.
A bigger worry is that the new European moves are partly because of a shift away in emphasis from Bermuda at both a corporate and an operational level. Then Bermuda would have cause to worry.
The best way to view the island in the longer term will be as just one of the vital cogs in the global operations of the modern global insurance and reinsurance firm.
These days it is desirable for the modern medium-sized global player, it seems, to have operations in Bermuda, Lloyd’s, somewhere in the US and – if the latest craze is anything to go by – continental Europe.
Michael Loney
Editor