This article first appeared in the March 2006 issue of Reinsurance magazine.
How does Bermuda really work?
Although setting up operations in Bermuda is much quicker than in rival centres, the actual mechanics of tax, regulation and other aspects of conducting business on the island are less clear-cut than you might suppose. Caroline Foulger of PricewaterhouseCoopers puzzles it out for you.
So why go to Bermuda?
Several new reinsurance ventures have been established in Bermuda over the past year, ranging from 'sidecars' of existing businesses to new operations set up by Amlin and Hiscox. The key development since the last major injection of capital following 9/11 is that a significant proportion of the most recent investment comes from hedge funds and venture capital trusts.
It is primarily the speed with which companies can be established to take advantage of market opportunities and available capital that gives the Atlantic island an edge over other reinsurance centres. A company can secure capital, obtain a licence and be up and running in as little as six weeks in Bermuda. The same process could take around nine months in the UK, and over a year in the US. Once there, potential tax benefits and competitive brokerage costs can make the island an especially cost-effective platform.
Another big advantage is that Bermuda's workforce - both citizens and expatriates - already offers a wealth of reinsurance experience and expertise. However, the available resources, market infrastructure and pool of talent are constrained by the relative size of the island (around 65,000 inhabitants and just over 50 square km of territory). Although new entrants are adding to the growing competition for suitable staff, outsourcing services are initially available to help companies get up and running. Another option followed recently by new venture Ariel Re is to take over the operational infrastructure of an established enterprise.
Companies may also, of course, wish to bring in staff from abroad. However, all posts need to be made available to suitably qualified local personnel. When seeking a work permit, employers will also need to explain why a particular position was offered to an incomer rather than an inhabitant. While this tends not to be an issue for the most senior executive positions, it can affect more junior posts. Potential incomers also need to take into account the limited availability of housing, schooling and health care. Indeed, the number of school-age children of an applicant can sometimes prove a factor in judging work permit applications.
What exactly is the tax position in Bermuda?
Companies pay a payroll tax rather than being taxed on profit, income or dividends. However, while tax may be a benefit, it tends not to be the main driver for companies coming to Bermuda, especially as it is only an advantage when the venture is making a profit. If the company makes a loss, as has been the case for many entities affected by Hurricane Katrina, it has the fiscal disadvantage that it cannot offset this against past or future years of profit, as in the UK or US.
Moreover, to take advantage of any tax benefits, the company must meet a 'mind and management' test that includes holding its board meetings on the island. The limited number of flights to Bermuda from Europe can present logistical challenges for companies wishing to fly in executives from abroad.
But if most of the business is coming from the US, will US authorities get annoyed?
On the contrary, US regulators have every reason to welcome the extra cover provided by Bermudian companies, as there is not enough reinsurance capacity in the US to meet current demand, particularly for certain catastrophe risk classes such as Florida wind cover.
The US authorities also levy an immediate 3% federal excise tax on any US business placed with a Bermudian reinsurer, so the benefit to the American tax services is likely to be considerable. It is also important to remember the contribution Bermudian companies have made to the recovery programme in the hurricane-hit areas of the US in 2005 and 2004 by the payment of very significant claims.
And what are the regulators like in Bermuda?
The Bermuda Monetary Authority's (BMA) supervisory approach reflects the fact that policyholders are sophisticated corporations in their own right, rather than being built around the need to safeguard potentially vulnerable retail consumers, as is usual in the UK or US.
However, regulation is no less effective in Bermuda than rival centres. Indeed, the authorities are supremely mindful of any risk to the reputation of an insurance market that is so important to the economy of the island.
All new ventures are subject to stringent vetting. This includes personal screening of executives, and detailed scrutiny of the quality of the capital and viability of the business plan. Approval by the BMA is augmented by independent review by the Insurance Admissions Committee, which includes a number of experienced industry professionals.
The system of enforcement is supported by the presence of a principal representative for every insurance or reinsurance company, who must be a Bermudian resident and who is personally responsible for compliance with local regulations. A local company's auditors and legal counsel must also be based on the island. Moreover, capital safeguards are underpinned by the need to achieve a competitive credit rating - recent start-ups have sought at least an A- rating. In the wake of Katrina, rating agencies have tended to raise the capital threshold for companies that primarily focus on mono-line property/catastrophe risks.
How do transfers between Bermudian holding companies and their foreign subsidiaries work?
Overseas insurers may wish to quota share a proportion of their business to a Bermudian group member. Although this may provide some tax advantages in a profitable year, once again, any losses cannot be laid off against tax. Moreover, the ceding commission will be taxable where the business is sourced.
- Caroline Foulger is a partner with PricewaterhouseCoopers in Bermuda.
