Corporate Income Tax worries industry professionals

Bermuda:Re+ILS survey participants feel rates will increase at the January 1 renewals. 

Bermuda re/insurance professionals have mixed views on the effect of the Corporate Income Tax CIT) on the industry, with a majority fearing it could discourage new companies from coming to the Island and encourage some businesses to leave. 

They were responding to a survey conducted by Bermuda:Re+ILS. The CIT is due to come into effect next year and will levy a 15 percent tax on the profits of global multinationals with revenues of more €750 million ($819 million). 

A majority of respondents to the survey also felt that reinsurance rates would increase at the January 1 renewals. 

The single largest number of respondents—31 percent—felt the CIT would discourage new companies from coming to Bermuda, while a further 25 percent feared some insurers would look for new domiciles. 

However, some 25 percent agreed the initiative would help as it would remove the tax haven label from the Island, while 19 percent said it would have no effect provided other costs of business fell.

One respondent said: “We are looking forward to the other tax changes (Tax Credits and Payroll tax offsets) that the Bermuda Business Development Agency (BDA) is considering providing some relief to taxpayers with a substantial presence in BDA. 

“This should help the companies doing business here and improve the general social economic conditions within the Island.” 

But another warned: “It could impact US business in a meaningful way if Cayman is successful in its tactic of not signing up.”

One person said some insurers and reinsurers could look for more favourable tax regimes if operational costs rose. 

Another respondent agreed: “If the cost structure beyond taxes does not fall into line with other domiciles, you will see movement of domiciles. At the end of the day, it is about efficient use of capital to finance risk.”

Rate rises 

More than 60 percent of respondents said that rates should increase in the January 1 renewals, although the largest single segment—40 percent—said they should rise only in line with inflation. 

More than a quarter of respondents—27 percent—said rates should rise by more than inflation, while 24 percent said they should hold steady. No respondents said rates should rise moderately, but 9 percent said they need a major readjustment. 

“We would always like to see rates at least in line with loss trend,” said one respondent. “From an inflationary aspect this is key for us. Obviously, there are also other dynamics such as the starting point and the line of business in question, but the general premise should be that if we feel price is adequate one year and the loss trend increases, we would expect rates to subsequently increase to remain adequate.” 

Another said: “Climate and transition risks go way beyond the inflation and market risks.” 

“The volatility and sharp corrections make it hard for business to plan,” said another respondent. 

“The re/insurance industry must go long and not be driven by short-term results.” 

Another maintained there was no need to increase rates substantially after the 2023 reset, when rates were dramatically increased and terms and conditions were tightened. 

But another said: “Emerging torts are presenting new exposures on property and casualty lines. We need to account for this in pricing.” 

Asked whether rates will rise, as opposed to whether they should, 51 percent of respondents appeared to be uncertain, or thought they would be mixed, by answering “3” when asked to rate the likelihood of rates rising, when 1 was the least likely and 5 was the most likely. 

One respondent said: “I feel the casualty market needs to react and this should lead to rate increases whereas the property market (particularly US cat XOL) may see further rate reductions.” Another agreed: “I think property will fall, but casualty will go up.”

Terms and conditions 

One respondent suggested that terms and conditions would be tightened rather than rates increased. 

“The industry is shifting towards stricter terms and conditions and higher attachment points to mitigate risk exposures further, driven by recent high loss years,” the person said. Another predicted that political risk rates in the US would rise, while another simply said: “Everyone I have been talking to has been discussing increasing rates.” 

No respondents felt terms and conditions or attachment points would be weakened or reduced while 13 percent thought there would be significant tightening and increases. However, a majority—54 percent—felt there would be tightening, but it would be minor, while 33 percent felt they would stay about the same.

The state of the market 

The re/insurance professionals rated reinsurance market conditions as better than average. 

Asked to rate the state of the market between 1 and 5, with 5 being the best, 54 percent of respondents to the survey gave it a 4, while 41 percent gave it a 3. Six percent gave it a 5. No respondents gave it a 1 or 2. 

Asked which segments of the market needed a rate increase, the single largest number of respondents—60 percent—said property-catastrophe should increase. 

Other areas gaining support, with about 40 percent of respondents wanting an increase, were political risk, accident & health and professional liability. 

Cyber also led 27 percent of those surveyed to say there should be a rate increase, while excess liability got similar support. 

The areas with the least support for increases were non-catastrophe property, environment and marine. 

On whether the insurance-linked securities (ILS) sector would play an increased role in 2025, 63 percent disagreed, saying they thought participation would be about the same as this year. Thirty-one percent felt ILS would play a greater role while 6 percent felt it would have a reduced role.

Will Blue or Red make a difference? 

More than 40 percent of respondents had a negative view of the effect on the reinsurance industry of a Democratic Party candidate winning the US presidential election (over the course of the survey, the candidate changed from Joe Biden to Kamala Harris). 

Nineteen percent gave a Democrat victory a score of 1, the most negative score, with a further 25 percent giving it a 2. The largest single group of respondents—44 percent—gave it a 3, while just 12 percent were positive, with 6 percent each giving it a 4 or a 5. 

Respondents were more positive about the Republican nominee, Donald Trump, winning the November election. Thirteen percent of respondents gave a Republican victory a 5, while another 25 percent gave it a 4. 

Exactly 50 percent gave it a 3, which suggests no effect on the reinsurance industry, while 13 percent gave it a 2 and no respondents gave it a 1, the most negative.

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