US tax reform does not mean the end for Bermuda as a reinsurance domicile — but the new tax rules have sparked changes in the way that some risks are being managed.
That was one of the takeouts from the AM Best webinar on “The State of Global Reinsurance Market”, featuring analysts from the ratings agency and industry executives.
Changes introduced at the start of the year slashed the rate of tax on US corporate profits from 35 per cent to 21 per cent and also imposed a tax on reinsurance transactions in which US companies cede risk to foreign affiliates.
Panellist Greg Richardson, chief risk officer of US reinsurer TransRe, said: “US tax rates going down from 35 per cent to 21 per cent is very significant. It does not have to go to zero for the cost advantage to shift in favour of onshore companies, because the cost of operating in Bermuda is quite high.
“Without a doubt, it helps onshore companies like TransRe. I don’t think it will mean the end of Bermuda though.”
Mr Richardson added that while the Bermuda market had started on the basis of its tax advantage, the island had evolved into a very efficient place for brokers to do business and one with a great concentration of talent that led to innovation.
He gave credit to the Bermuda Monetary Authority, regulator of the insurance industry. “Bermuda has a regulatory regime that understands that reinsurance is business to business — we’re not trying to sell a complex product to your grandparents, we’re selling a sophisticated product to increasingly sophisticated buyers.”
Robert DeRose, senior director at AM Best, agreed with Mr Richardson that this was not the end for Bermuda.
“The way that the risk gets to the Bermuda balance sheets will probably be different because of the tax situation,” Mr DeRose said. “Probably more risk will be written directly on Bermuda paper, as opposed to going through a quota share mechanism, as it had historically.
“The other interesting development is ILS. Bermuda is a hub for that type of activity and having rated companies there alongside alternative capital fuels that potential for partnership, going forward.
“Everybody goes there to do business and it is a centre for getting business done efficiently and I don’t see that really changing.”
John Doucette, chief executive officer of the reinsurance operations of Bermudian-based Everest Re, said there were already signs of companies changing the way they did some business.
“I think you have to break up the issue into internal and external,” Mr Doucette said. “We saw a little bit at year-end and I think we will continue to see how companies that are both onshore and offshore manage risk and premium and capital and how that evolves.
“It will evolve and we’ve already started to see that with some companies. I think new structures will potentially come about.
“Externally, there is going to be a closing of the gap, of the tax advantage that companies in Bermuda had compared to onshore companies. I think that closing gap, especially in an environment of market compression, could impact the relative returns — and therefore the relative attractiveness — of a Bermuda company versus other companies.”
He said that more business being written directly in Bermuda may possibly result, although the higher cost of doing business on the island could be a limiting factor, especially at a time when there was great pressure to reduce expenses.
“What happens with external, third-party business?” Mr Doucette added. “It’s too early to tell, but we need to watch that pretty carefully.”
To view the webinar, visit the webpage www.ambest.com/conferences/webinars.asp