Europe remains the dominant force in global reinsurance. Almost 50 percent of the world’s reinsurance premiums find their way to a handful of multi-line companies with global reach that are based in continental Europe. Whereas Bermuda was the preferred destination for fresh capital entering the reinsurance industry after the large market-changing losses of Hurricane Andrew in 1992, the terrorist attacks of September 11, 2001, and Hurricane Katrina in 2005, the industry is now witnessing a transfer of underwriting capacity into Europe. Zurich and Ireland are particularly popular destinations, with new arrivals being welcomed on almost a monthly basis in 2010.
Several factors are fuelling this phenomenon. Bermuda’s importance to the reinsurance industry grew over the past decade, as the speed in getting regulatory approval combined with the island’s favorable tax system and geographical proximity to the United States. However, more recently, the implications of Solvency II, tax legislation and more general changes to regulation have persuaded reinsurers and insurers to review their domicile.
Taxation remains a key consideration for companies. Bermuda continues to offer one of the most competitive tax systems in the world, with no levies on profits, income, dividends or capital gains. European domiciles have become more attractive despite generally higher tax rates. An important factor has been the threat from governments burdened with large fiscal deficits arising from the general financial crisis to maximise revenues and prevent leakage to so-called tax havens. In the United States, Congress is debating the Neal Bill that is designed to discourage companies from ceding an “excessive” portion of their US premiums to offshore affiliates.
Another factor attracting companies to Europe from Bermuda is the relative ease of obtaining work permits, accommodation and education in Europe. Indeed, for citizens of the European Union (EU), there effectively are no barriers to movement and working within the EU. Ireland is especially attractive because its low tax rate combines with EU membership to provide cheaper access to all EU countries under the EU reinsurance directive. Switzerland is also close to the EU and has been identified by CEIOPS as a candidate for first-wave assessment to obtain Solvency II Equivalence approval.
European domiciles are also attractive for many Bermuda- and London-based reinsurers because it enables them to be closer to their clients. Despite the advances of communications technology, physical interaction remains a vital part of the reinsurance transaction. The “move-ins” also believe that a base in Europe will help them to increase their share of the continental EU market, which traditionally has been dominated by the big, direct reinsurers supplying voluminous quota share capacity. A local presence also may assist in penetration of the burgeoning economies and insurance markets of the erstwhile Warsaw Pact countries.
The growing popularity of Europe does not necessarily presage an evacuation of Bermuda. Companies with Bermuda-based operations have adopted different structures. Some have established companies and moved brass-plates to Europe while maintaining operations and staff in Bermuda in the form of subsidiaries and branches. This enables them to maintain a high degree of capital flexibility and fungibility. So, whilst the pull of Dublin and Zurich strengthens, Bermuda’s over-crowding problem is unlikely to be eased in the short run.