Bermuda’s standing in world business is deeply rooted, argues Bradley Kading. Therefore, proposed inward-looking legislation from the US could do irreparable damage to global business.
It may be an island, but Bermuda does not exist in isolation. Its thriving financial services industry, of which reinsurance is the core, ensures that it is intrinsically linked to the rest of the world. The result is a sense of shared interest among insurers on the Island with the international business community, which the Association of Bermuda Insurers & Reinsurers (ABIR) believes should be protected at all costs.
Key global relationships
The relationship between the Bermuda and the US goes back as far as 400 years, when inhabitants of the fledgling state of Virginia were rescued by a ship that had been refurbished in Bermuda following a shipwreck.
Historically, Bermuda’s strategic location in the Atlantic has been important. During World War II, the Island was host to not only President Roosevelt and Winston Churchill, but also to British, American and Canadian troops. Throughout the Cold War, it providedthe American navy base with a key berth from which to monitor Soviet submarines, and given the fact that global politics is ever changing, it will likely become strategically important again in the future.
Bermuda’s UK connections are numerous, including the ability of Bermudians to work in the EU, thanks to their UK-approved passports. In addition, the Island is home to other large working populations of Europeans, including the Portuguese (originally Azores Islands farmers) and hordes of French, Germans, Italians and Brits in the financial services sector.
Perhaps Bermuda’s most notable relationship is with Ireland, particularly on the business side. Of ABIR’s 23 member insurers, 17 have licensed entities in Ireland. For Bermuda’s insurers, Ireland is an important access point to the EU for companies interested in European marketing and, increasingly, Solvency II regulatory equivalence. The connections are strong: quality workers, quality regulation, pre-existing ties to Bermuda companies and tax efficiency.
All is not rosy
However, it is clear that all is not rosy. US politics, particularly populist politics, has often associated Bermuda with two things: job loss and corporate inversions— that is, the practice of a handful of US companies changing their legal domiciles to escape the burdens of the US regulatory or global taxation policy. It is incorrect to assume that ABIR members are largely US “inverters”—they are not.
But companies moving factories offshore have become confused with companies moving legal domiciles, so that offshore companies have become synonymous with offshoring jobs. In fact, the reverse is true. Bermuda has ‘insourced’ thousands of jobs to the US. Bermuda’s global insurers provide extra capacity, extra competition, extra diversification of counterparty risk and extra employees to the US. If these companies didn’t have US subsidiaries, US insurance employment would not grow; it would actually contract.
The Bermuda-based insurers’ economic contribution to the US is 16,000 additional jobs, which lead to 10 times that many jobs—such as contractors and other service providers—via a multiplier effect.
Disconnection issues between Bermuda and the EU stem from ignorance, the involvement of established EU companies in Bermuda, wealthy individuals moving to Bermuda to avoid UK personal taxes and the EU savings directive.
But Bermuda has never been a banking, nor a bank secrecy jurisdiction— there are only three banks. In addition, Bermuda’s 20 Tax Information Exchange Agreements (TIEA) attest to the government’s efforts to fully co-operate with foreign governments on tax law enforcement.
A co-operative jurisdiction
Bermuda’s tax agreements are with all the G8 countries and with most of its major trading partners, and more are coming. The UK, the Office of Economic Co-operation and Development (OECD) and the US have all cited Bermuda as a co-operative jurisdiction with regard to tax law enforcement and co-operation. Bermuda completed its TIEA with Ireland in 2009.
The connection to the OECD’s global forum on tax transparency and co-operation has long been established. Those ties are stronger than ever, since Bermuda is now one of the vice-chairs of the OECD global forum, with a conference in Bermuda planned for 2011. The OECD does not argue that jurisdictions must have a standard approach to taxation; it leaves that with each jurisdiction to determine. The OECD advises that it is up to each jurisdiction to determine what tax system to create and what tax level to apply.
The OECD’s focus is on tax havens that encourage non-residents to avoid paying tax in their country of residence by establishing themselves in a different jurisdiction. Bermuda does not fit that definition. The OECD is also concerned about money laundering. Bermuda was one of the first jurisdictions to embrace anti-money laundering initiativesand has been at the forefront of efforts to bring professionalism and transparency to international banking and regulatory projects. Bermuda is also an active participant in anti-terrorism financing regimes, which include strengthened measures enacted in December to conform to the UK rules necessary to enforce sanctions against targeted regimes, including Iran.
The tyranny of tax
Bermuda and Ireland are both suffering today from a political disconnect on US tax policy. Current US tax policy is driven by a need for additional revenue, particularly revenue that has fewer political ramifications such as voter discomfort through higher taxes. This budget deficit-driven revenue hunger is nothing new. Ireland has already enacted rigorous budget deficit control mechanisms, which seem to have tamed the beast. The US, meanwhile, is still plucking the perceived low-hanging fruit.
The US administration’s goals—to increase tax collections from international businesses—heavily target Bermuda and Ireland. According to a recent speech by US Treasury international tax counsel Manal Corwin, the $122 billion in President Obama’s budget provisions dealing with international taxation are all items that can be used in the 2010 congressional session as part of the revenue raisers, consistent with the President’s budget goals. Opponents of these measures have argued that they should be rolled forward into comprehensive tax reform in 2011. Although the administration would not be opposed to consideration in the context of reform, the Treasury cautions that it has the authority to apply the proposals immediately.
Included in the international tax proposals are changes to the deferral provisions for US multinationals, the transfer of intangibles to low-tax jurisdictions and the foreign tax credit. The provisions were unveiled as part of the budget and are expected to raise about $122 billion over 10 years. Other provisions under consideration in Congress, some of which were also in the President’s budget, address earnings-stripping, tax treaty override, the Foreign Account Tax Compliance Act provisions and the reinsurance tax proposals.
The administration’s discriminatory reinsurance tax proposals affect all international insurers with US subsidiaries using affiliated reinsurance. Regardless of whether they are an Irish, Bermudian, Continental European, Japanese or Australian company, they are all affected. This idea has been advocated by Republican Richard Neal, the chair of the House Ways and Means Select Revenue Subcommittee.
The reinsurance tax, which is strongly advocated by several large US insurance companies, including W.R. Berkley Corporation and Chubb Corporation, imposes a punitive tax on nearly all affiliated reinsurance transactions between a US subsidiary and its foreign affiliate.
Over the long haul, it would force all capital-supporting affiliates’ US risk into the US and end up ring-fencing most insurance liabilities in the US. The key to insurance success is the ability to spread the risk. Bermuda’s insurers and reinsurers spread their risk globally—about 50 percent of our business is North American, another 40 percent is European and the rest is distributed around the world.
Insurance underwriters understand that modern portfolio theory and traditional underwriting rules mean that you can write more business on the same amount of capital, as long as the risks you write are notinterconnected and subject to the same loss at the same time from the same peril. Bermuda carriers write more volatile business than their peers, according to market research. Embracing risk is what characterises the thriving Bermuda market.
Since we pool our risk and capital in flagship enterprises, we can write more insurance business in the classes subjected to highseverity/ low-frequency events than if we wrote the same business in three different pots of capital, one for the US, one for Bermuda and one for the EU. Of course, this is the business foundation on which our European antecedents have long followed in building out their global empires.
Under the affiliated reinsurance tax, our pools of capital would be diminished, or bifurcated at the least, if not parsed into even smaller pots. The effect would be to reduce our ability to write insurance. Insurance capacity would fall and consumers would pay a higher price, as illustrated in the Brattle Group’s economic analysis.
The group’s economic research, produced with Dr. David Cummins of the Wharton School, shows how the Neal bill would decrease reinsurance supply to the US by 20 percent, thus leading to an increase in insurance prices for US consumers. The annual aggregate increase in US insurance prices would be between $10 and $12 billion. This is why global insurance groups have so vehemently opposed the Neal tax.
This is why US consumers such as the Risk and Insurance Management Society, the Florida Consumer Action Network and the Consumer Federation of the Southeast have also opposed the tax. The letters from European governments and trade experts make it fairly clear that the unwise implementation of a US tariff on affiliated international reinsurance transactions will likely lead to retaliatory action by the US’s major trading partners. The imposition of the tax would basically signal the end of the post-war commitment to crossborder commerce and promotion of international trade.
It’s time for promoters of free trade and global commerce to speak in unison with insurance underwriters, who know about the need to spread risk, in order to reject the politics of protectionism and the calls for global capital segmentation that logically follow from the imposition of the affiliate reinsurance tax.
In conclusion, as we highlight the connections Bermuda has to Ireland, the Eurozone and the US, we want to make sure that there is no disconnect on the need to oppose the reinsurance tax. If we lose this battle, we lose the ability to pool and spread risk, and ultimately, ceding insurers and risk managers will lose access to capacity and competitive pricing. The future of Bermuda’s insurers lies in building stronger ties with its two major markets and bridging these disconnects so that the connections are viewed as positive by all parties.
Bradley Kading is the president of ABIR. He can be contacted at: firstname.lastname@example.org