Since 2005, a notable shift in reinsurers’ domiciles has taken place. Europe’s transition towards risk-based capital requirements has prompted global regulators to call for some level of equivalence in key markets. This has, in turn, prompted carriers to reassess corporate structures, with a particular eye to the location of group balance sheets.
Bermuda was long the preferred location for fresh capital entering the reinsurance industry after market-changing losses that included Hurricane Andrew in 1992, the terrorist attacks of September 11, 2001 and Hurricane Katrina in 2005. The island’s attraction was owed to its speedy regulatory approval process combined with its favorable tax system and geographical proximity to the United States. But the industry has seen an increasing number of insurers and reinsurers moving back to Europe. The Republic of Ireland and Switzerland have been particularly successful in attracting new arrivals of late (see Table 2).
Several factors are driving this trend. European domiciles have become more attractive due to the relative ease of obtaining work permits, accommodation and education in the region. Ireland is especially attractive because of its low corporate tax rate (of 12.5 percent) combined with EU membership, which provides cheaper access to all EU countries under the EU reinsurance directive. Switzerland is also in close proximity to the EU and has been confirmed by CEIOPS as a candidate for first-wave assessment to obtain Solvency II equivalence approval.
However, this migration certainly does not herald the demise of Bermuda. It too has been authorized to undergo Solvency II equivalency assessments, and the island remains a well regulated (re)insurance domicile. Bermuda also continues to offer one of the most competitive tax systems in the world, with no levy on profits, income, dividends or capital gains. Although such low-tax domiciles have been threatened with new tax measures by governments burdened with large fiscal deficits following the financial crisis, it remains to be seen whether any legislation will be passed.