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Solvency II equivalence has long been hailed as a massive feather in Bermuda’s cap giving it credibility on the international stage. But has it led to an increase in business on the ground? Colm Homan and Damian Cooper of PwC Bermuda spoke to Bermuda:Re+ILS.
A combination of securing Solvency II equivalence, the political uncertainty caused by the UK’s intention to leave the EU has led to a tangible increase in enquiries from companies considering forming operations on Bermuda, according to Colm Homan, partner and assurance leader, PwC.
“We are seeing an increase in the number of enquiries on the ground,” he says. “The fact the regulatory regime is equivalent now has made many companies consider Bermuda as one of their options. It is business as usual for companies already based here but companies from elsewhere are definitely looking at how they can best position themselves in this uncertain environment and Bermuda ranks highly on their lists.”
Homan says the political uncertainty caused by Brexit has forced companies to re-evaluate their plans around how they trade in the EU and the UK going forward; on the other side of the Atlantic, there is angst about what Trump’s tax plans could mean.
Homan praises the regulator for the decade-long journey it has been on to secure Solvency II equivalence. Back then, he points out, the mindset was not that it might provide Bermuda with a competitive advantage; rather, it was to secure the Island’s credibility long term and to remain abreast and ahead of international regulatory agreements.
“Businesses want to be operating in a jurisdiction that has credibility and appropriate level of regulation,” he adds. “Bermuda already has many strengths but Solvency II has really been the icing on the cake. It is not the end of the journey, however, and the regulator recognises that the landscape continues to evolve and it will continue to adapt.”
This is translating, Homan says, into a steady stream of interest from companies exploring the possibility of using Bermuda. While some are driven by the uncertainty in their home markets, others are looking at the Island on the back of positive expansion strategies in specific sectors and see Bermuda as a potential passport to write business in Europe.
One of these is the long-term sector. The number of insurers and reinsurers specialising in this field has grown steadily over the past five years and many US players are now looking at Solvency II equivalence as offering the potential to write business in Europe.
“We are seeing a lot of companies evaluate their options on that basis and we expect that to translate into more companies coming here,” Homan says.
Damian Cooper, partner, PwC Bermuda, agrees that more companies are looking at Bermuda as a result of the uncertainty. He says all firms are seeking continuity in the aftermath of Brexit and planning for all eventualities.
“Some are being decisive and taking action now while others will wait and see but this is an issue for everyone,” Cooper says.
“The UK Prudential Regulation Authority has written to all firms to ask for their plans around Brexit. I don’t expect the larger European carriers to do anything drastic but some of the smaller speciality players are looking at domiciles.
“And remember that many companies already have a Bermuda footprint so it might be more about leveraging what is already there. Either way, expect considerable uncertainty for the next 18 months—it will be an interesting time.”
Commenting on Brexit specifically, Homan notes that this adds another layer of uncertainty for Bermuda. It is unclear at this stage whether the UK regulator will itself attempt to secure Solvency II equivalence, leaving question marks over how Bermuda companies will be viewed by the UK regulator once the departure from the EU is complete.
“That could mean a drastic increase in regulatory requirements or an easing of requirements depending on which way they go. Remember that although Solvency II equivalence has been secured, it has no bearing on whatever regulatory regime exists in the UK after Brexit is complete.”
Cooper adds that the UK’s stance will be interesting.
“In the UK, some would like Solvency II to be watered down and that is possible,” he says. “It is partly due to the reporting costs and the capital limits imposed by the regime. But whatever the UK does, it could play to Bermuda’s strength as a jurisdiction because we could actually have a more stable regulatory regime than the UK.”
Homan also notes concern about the potential policies coming from President Trump, however, noting that any attempt to clamp down on Bermuda would result in hikes in the cost of reinsurance and, therefore, the price of insurance policies in the US.
“There is a level of uncertainty but the industry has historically done a good job of stressing the value of external capital to lawmakers in the US,” he says. “The legislative process in the US is highly complex but a lot of smart people are working hard on it to make sure lawmakers understand the full impact of potential cross border adjustment taxes.”
There have been suggestions that, for some types of companies, Solvency II equivalence could actually hinder Bermuda. Indeed, there have been reports of reinsurers forming in rival jurisdictions such as the Cayman Islands precisely because they do not want to have to deal with Solvency II equivalence. This is usually because they do not plan on writing any business in Europe and the capital requirements are too stringent if that regulatory requirement is not needed.
Homan notes that this will be understandable if not dealing with Europe, but only for very specific types of company.
“It is probably because they are not dealing with Europe and they are looking at the capital relief they may receive. But such cases will be unusual and for very specific reasons I would imagine,” he says.
“Bermuda has enjoyed a strong reputation for so many years. For companies wanting a high-quality regulatory environment that is beyond scrutiny and also the talent pool and critical mass of quality advisers and risk capital, Bermuda is the obvious choice.
“You know when you come to Bermuda that you deal with a regulator that understands the business and can reach the right regulatory outcome without the bureaucracy you get in many countries. Drawing on PwC’s extensive work with insurers and supervisors on the practical application of the directive, we help businesses tackle the strategic as well as the technical challenges of Solvency II.”
Colm Homan is partner and assurance leader, PwC Bermuda. He can be contacted at: email firstname.lastname@example.org.
Damian Cooper is partner, PwC Bermuda. He can be contacted at: email email@example.com.
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