Bermuda will continue to be a key international hub for reinsurance despite being challenged in recent years, most recently by tax reform in the United States, which fundamentally changed how multinational entities are taxed, according to a new AM Best report, “Global Reinsurance: Optimism Fizzles, It’s Back to the ‘New Normal.’”
Changes in US tax law included the Base Erosion Anti-Abuse Tax (BEAT), which is a minimum tax on deductible payments to foreign affiliates, with the intent of mitigating erosion of the US tax base by corporations that make deductible payments to related non-US parties, as well as impose a minimum corporate tax.
According to the Best’s Market Segment Report, reinsurers have reacted in different ways: by decreasing the size of the inter-company reinsurance arrangements or eliminating them altogether; by moving capital to on-shore balance sheets; and by forming new Bermuda entities that elect to be US taxpayers.
A proactive approach by the Bermuda regulator has benefited its insurance and reinsurance markets in several ways, including the market’s rise to become a leader in the global insurance-linked securities (ILS) market. Competition from other jurisdictions, such as Cayman Islands and Ireland, has intensified, but AM Best believes it will take time for any to catch up with Bermuda.
Insurers’ response to Brexit in the United Kingdom also may affect the Bermuda market, but to a lesser extent as the regulator’s experience and ability to deal with different jurisdictions potentially could make it a more attractive jurisdiction for insurers and reinsurers.
The report also notes that the pool of reinsurers is shrinking due to an active merger and acquisition environment. The US tax law provides yet another impetus for merger and acquisition activity; however, the larger balance sheets of the reinsurers partially offsets any pressure on the Bermuda market. Overall, AM Best believes Bermuda remains a viable market in the face of more challenging market conditions, and its positive response to changes is indicative of the strength and reputation of the island’s reinsurance sector.
Bermuda, reinsurance, report, market, AM Best