Bermudan companies can incorporate and set up shop quickly, evidently in just four weeks. Advantages include no income taxes and few restrictions as to how Bermuda companies can invest their assets and deploy capital

Bermuda, with its various incentives, has attracted a number of traditionally London-based companies to make the move to the island – but things are about to change in London which will level the playing field, claims Roger Foord.

Sun, sea, sand, trivial regulation, easy-set requirements, tax haven, insurance and shorts! These all go to make up the idyllic location of Bermuda, founded by the Spanish and colonised by the British. Now it is the haven of US reinsurers and the bane of the Lloyd’s market - supposedly. But is it really so good and is it not susceptible to some of the problems reserved normally for third world countries? I only ask because at the Rendez-Vous de Septembre in Monte Carlo last year Bermuda was facing a five day lay-off because of power failure and the previous year the access to the airport was flooded and nobody could get in or out of the island.

Now two such amusing episodes might smack of Bermuda shortcomings, rather than Bermuda shorts.

However, it is popular and presumably can provide all of the claims services for which Lloyd’s is so well known – that is, getting life back together for clients as early as possible, as well as attracting business.

Levelling the playing field

There is something of an unlevel playing field here, however, I believe things might be about to change!

Some of the history of Bermuda is that 13 of the world’s top- 40 reinsurers are based on the island and it is the fourth largest reinsurance market in the world after Germany, the US and Switzerland. And for the first time in 2004, Bermuda-based reinsurers' total net written reinsurance premiums exceeded those of London-based reinsurers.

To help with creating the unfair situation for Lloyd’s, there is no equivalent to the UK's Companies House. Bermuda incorporates and hosts thousands of international or “exempted” companies - corporate entities owned by nonnationals. Since September 11th 2001, hundreds of insurance companies have been incorporated in Bermuda. Of the top 35 global reinsurers, 11 now call Bermuda home. As US and European reinsurers continue to deal with the lingering ramifications of legacy issues associated with the prior soft market, asbestos losses and investment meltdowns, the financial capacity of Bermuda's reinsurers has soared.

Bermuda companies can incorporate and set up shop quickly, evidently in just four weeks. Advantages include no income taxes and few restrictions as to how Bermuda companies can invest their assets and deploy capital. They are also exempted from Bermuda's domestic company requirements of being at least 60 percent beneficially owned by Bermudans. They can trade anywhere; the regulatory environment is cruelly favourable to Bermuda-based companies and unlike the Sarbanes Oxley problems for CEOs in the USA, to personally certify their company's financial results, Bermudan CEOs only do this by choice.

Exodus to Bermuda

All of this has seen, over the past twelve months or more precisely since Hurricane Katrina, the rather unedifying spectacle of London reinsurers hot-tailing it to Bermuda to take advantage of rates and a local soft approach to regulation. At the same time Lloyd’s has allowed the management of these companies to still serve on the Lloyd’s committees.

However, the CEO of ACE has at last admitted that the rush to Bermuda might not be, in the long run, a benefit. Firstly, the increase in companies on the island will give rise to less professional talent because of the increase in need; and secondly, the obvious point, that Bermuda cannot carry on being regulated like a “banana republic.”

If the London Market is right and clients are demanding a better regulated system, then Bermuda’s clients will be the same and by the time Bermuda gets its local act together the unlevel playing field it has enjoyed will move away hopefully to the advantage of London. Many firms operating in London believe there would be some irony in this as many of the “do as we say” but “don’t do as we do” underwriters who have moved to Bermuda will find themselves once again having to contact a removal firm to take the furniture back to London.

The topic of technology also has a part to play as there has always been the scare-mongering that London is falling so far behind in technology that places like Bermuda and the US, in general, are so switched on with their technology that underwriters in London should, ironically, be able to spend all of their time on a beach working with their Blackberry.

The area where Bermuda could steal a march is in the area of standards as, quite frankly, they do not have any at the moment. London’s company market and brokers have had EDI standards for twenty years, but Lloyd’s has been sadly let down in this area. Their users are now awakening to the fact, like Bermuda, that if they are to have any standards they should go straight for the latest, that is the ACORD formula. The global talent for this type of work still lies in London as personified by the central bureau, Xchanging Insure Services and the Group of 6 who are developing the document-sharing system which was part of the now defunct Kinnect’s remit.

The area of technology for Bermuda is also somewhat confused as its concentration on systems to help with its risk factors and underwriting in general has not been matched with central services the island and its clients.

The London/Lloyd’s Market is often held up as an antique model and that “those Bermudans and their global mates are well ahead of the technology game and London should ‘smarten up’ or expect imminent closure for business.”

Overall the confusion of Lloyd’s versus Bermuda is not about technology or about giving the client a better service, but for UK companies it is about a quick and easy profit for shareholders. However, the factors which really start to come home and could start to make London feel less likely to fall into the Bermudan triangle is that several of the factors which have given it an unfair edge are beginning to fray at those same edges.

For all of Bermuda’s untaxed earnings in some previous years, the 2005 storm results threw up some interesting statistics. Firstly, as ever, Lloyd’s was worried about profit, but were also first to help in the Los Angeles restructuring. Secondly, the financial situation, for the sort of disaster which Lloyd’s takes without blinking, left only one Bermuda company in profit. Bermuda suffered $2.8 billion losses with only Arch reporting double digit combined ration. The average was 118 percent, a new Bermuda record. At the same time and with the same major events to cope with, Lloyd’s suffered £3 billion losses, but had minimal impact on overall losses, in fact there appeared to be wide spread joy with these figures.

Other good news factors for the UK are that the FSA, suddenly and, to many surprisingly, stopped putting pressure on London for contract certainty. Although London will persevere with tidying-up its shabbier areas of the clients’ documented requirements, this was good news and meant that London was now well ahead of what Bermuda will be going thorough with the International Association of Insurance Supervisors (IAIS) regulatory demands.

Finally the government has indicated that the set up time for new business will also change from an average of seventeen weeks to four weeks.

All London needs now is for the chancellor to pay attention to the kind of reinsurance tax benefits Bermuda gets and look at the London insurance market and how much it is losing to Bermuda from what could be in Britain’s invisible earnings. The good news here is that the Lord Mayor of London , David Brewer, has said that he has approached Gordon Brown to encourage him to look at what can be done. I can’t believe Gordon would want to see such large amounts of money leaving the country!

All in all maybe London can start to think that it might not have to look over its shoulder so much to a small island just off the coast of the US, think only of it as a holiday island, don’t travel if it has rained a bit and take your own generator just in case!

This Special item appeared in issue 106 of JTW News - June 2006

Author: Roger Foord