1 February 2011Re/insurance

Switzerland: Bermuda's European outpost

Switzerland has been attracting a lot of interest of late, with a host of international reinsurers opting to either redomicile their head offices to the country, or else set up regional offices in the Alpine state. The moves have prompted some commentators to suggest that the emerging centre represents something of a threat to Bermuda, but talking with players on the Island, it is evident that most perceive Switzerland as a source of potential opportunity rather than one of competition.

As Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers (ABIR) made clear, Bermuda reinsurers were “created to be internationally diversified insurers and reinsurers—part of their original business plan was to be active in multiple markets around the world and achieve the diversification benefits and business strategies as a result”. And Switzerland fits very nicely into this plan, providing diversity, access to the European market and a level of growing critical mass that makes it the ideal outpost for Bermudian reinsurers in Europe. Yes, it would be nice to be able to access European and other international markets from the easy shores of Hamilton, but it is evident from speaking to a number of commentators that it is a presence on the ground—particularly in Europe—that is key to accessing new markets.

Still not the place for your ‘opco’

It is this access to market that has been the major allure of Switzerland, rather than it being an alternative to Bermuda, with reinsurers considering a move for predominantly operational reasons. A few reinsurers have relocated their headquarters to Zurich, but in these instances, they may well have moved their ‘topcos’ to Switzerland, but they nevertheless continue to maintain their ‘opcos’ in Bermuda, according to Charles Dupplin, chief executive officer at Hiscox. For Dupplin, although some senior personnel and the nominal headquarters (or ‘topco’) might be footloose—relocating to the likes of Switzerland or Ireland if the conditions are conducive—the essential operational elements of Bermuda-based reinsurers will remain on the Island.

“Bermuda remains the place to be as an ‘opco’, even if people are thinking that other markets might have a good run for whatever reason, and I think that it’s important to make that distinction. Except for a few special cases, I think that it’s very difficult to be a credible player in world terms unless you have a market stall in Bermuda,” said Dupplin. But as Dupplin made clear, even when considering the ‘topco’, Bermuda takes some beating. Other jurisdictions might be able to offer a suitable location for the reinsurance board to meet, a decent local regulatory regime and a conducive tax environment, but “if you put down a map of the world, Bermuda remains the right sort of place to be”.

Dupplin indicated that the recent announcement from the Bermuda government that it intends to extend its tax agreements “so far out, is a clear statement that Bermuda remains friendly to business”. Apart from a limited number of movers, it seems that most Bermuda-based reinsurers continue to place their faith in the Island’s critical mass, exemplary tax and regulatory environment, and its depth of expertise. Switzerland, for most, represents a means to complement an already impressive portfolio.

Gateway to Europe

A number of Bermuda players have been drawn to the attractions of Switzerland, but what is it that reinsurers see in the European state? Yes, the regulatory environment and critical mass help set Switzerland apart from most European jurisdictions, but talking with reinsurers, it is evident that whilst attractive, movement into Switzerland is only really the logical extension of ongoing geographic diversification. Talking with James Few, president of Aspen Re, it is clear that the reinsurer’s establishment of a Swiss office a few years ago was essentially part of this process. “We deliberately set up our network to have local access to business—not just in Europe—but in Asia, Latin America and the States.” Their Swiss offices formed a part of this strategy, with Switzerland representing a point of access, rather than a competing hub, for Bermuda.

Canopius—the latest in a line of Bermuda reinsurers to announce its entry into the Swiss market—expressed similar motivations behind itsdecision to establish offices in Zurich. Sally Coryn, head of business development at Canopius Managing Agents, said that whereas for others, the move had “in part been driven by fiscal or political considerations”, for Canopius, the move “represents an opportunity to continue to develop our reinsurance account globally beyond business placed in the London, Bermuda or Singapore markets, and enables us to extend our footprint into continental Europe”.

It seems that the allure of writing European business has been the major draw. As Few indicated, “in terms of underwriting opportunities, I believe that Switzerland is a very sensible place to base a European reinsurance business. The advantage of being on the ground in Europe is that the closer you are to the ceding insurance customer, the more likely you are to see what I would consider to be the less volatile and more standard local market business which helps round out any portfolio.”

Whilst some of the larger and more volatile business will undoubtedly find its way to specialist reinsurance centres such as Bermuda and the Lloyd’s market where there is “international capacity and expertise... the less volatile, local business doesn’t tend to go very far before it’s placed,” Few said. And with the European market predominantly characterised by smaller, less cat-orientated business, Bermuda players are looking to get boots on the ground in order to access European lines that tie in nicely with their efforts to diversify the business, utilise excess capital and mitigate risk. Pressure from the likes of Solvency II looks set to increase the attraction of geographic additions to Bermuda’s portfolio. Switzerland looks likely to remain high on just such a list.

Topping the list

In Aspen’s case, the clients that the company targets from Zurich “are the local, single-territory or smaller regional insurance customers”. As Few explained, multinational European business continues to be written out of London or Bermuda, with Swiss offices looking to capture those cedants placing business in the local market. Tatsuhiko Hoshina, chief executive officer at Tokio Millennium Re—another Bermuda reinsurer to have an established office in Switzerland—echoed Few’s sentiments: “European clients like to place business within Europe”, so in order to access that business, an office in the region has become essential to reach out to those clients. And at the centre of this local market is Zurich, which Few indicated had “pretty much become the reinsurance hub for domestic European treaty business”.

Canopius’ Coryn agreed, indicating that “for a variety of reasons, a certain amount of continental European business does not make its way to either the London or Bermudian markets. These may include client preference to deal locally with local brokers who share a similar culture and language, or broker preference to retain control of local business.” The situation has led Canopius to look to establish itself in the market, with the company’s move designed to “tap into a pool of business we would not otherwise see. We regard this, therefore,as complementary and additive to our existing book of reinsurance business.” It seems that a greater level of European business will become part of the Bermuda reinsurers’ admix.

"The opportunities of capturing European business as a complement to existing Bermuda-based business, far outweigh the possible negative impact of a competing reinsurance hub."

However, despite the draw of Switzerland, not all players have opened offices there because of the opportunities presented by the market. Talking with George Rivaz, chairman of Ariel Re and chief executive officer of Ariel Holdings—who also recently established offices in Zurich—it was clear that the company’s motivations for establishing an office were very different from those of Aspen Re and Canopius. “We set up our Swiss branch last year with the specific objective of writing credit and surety reinsurance business, and for us the motivation was talent,” Rivaz said. He indicated that Ariel Re was able to recruit former Swiss Re people with a “wealth of very specialised knowledge and expertise, as well as existing client relationships, that we saw as an excellent addition to our business and a diversification opportunity”. Unlike many of their peers, Ariel Re’s motivation was a case of personnel, rather than one determined by location and access. Rivaz said that Ariel did not perceive a “broad, multi-line European reinsurance opportunity for our company” in Switzerland, rather the move was one in which it could add talented individuals to its team.

Despite Switzerland not from the outset forming part of Ariel Re’s development strategy, it was clear when speaking with Rivaz that the state nevertheless topped the list of possible European jurisdictions. Asked if Cologne or Paris would represent viable alternatives to Zurich, Rivaz indicated that the tax and regulatory environment in the two locations were not as conducive as those of Switzerland. Like Few, he indicated that the “critical mass” of Zurich, which has snowballed of late, and appears likely to maintain its momentum, has further helped to set the city apart. “If we’d been location-neutral in Europe and were picking a spot for a totally mobile team, I think Zurich would probably be our first-choice pick,” Rivaz said. And it seems likely that Bermuda-based players looking to broaden their portfolio in Europe will be considering Zurich for a time to come.

Solvency II: a further draw?

A further spur in the decision to opt for Swiss offices has been the likely impact that Solvency II requirements will have upon European insurers, said Hoshina. “With the introduction of Solvency II, many insurance companies in Europe will need to buy more catastrophe covers, which present opportunities to us, as well as the wider Bermuda market.” At present, they might well be able to continue with limited cessions to the reinsurance sector, but imminent mandatory capital adequacy requirements will present significant business opportunities for reinsurers with a presence in the European market. As Hoshina made clear, “we want to be present in Europe so that we can support the potential new cat programmes or layers that emerge”.

Rivaz, for his part, was unconvinced that the impact of Solvency II would do much to change the existing dynamics of the European re/insurance market. He agreed that individual insurers would likely look to increase their placements in order to manage capital requirements, but said that he did not believe that there would be enough movement to “materially shift the market balance between supply and demand—I believe supply will remain more than adequate for the European market.” It seems probable that the balance of business generated by preparations for, and the introduction of, Solvency II will provide some impetus to future interest in Switzerland. If cessions increase markedly in response to the directive, Switzerland’s allure might well get that little bit stronger for Bermuda reinsurers.

Complementing Bermuda’s expertise

There have been suggestions that Switzerland might emerge as a potential competitor to Bermuda, but talking with reinsurers, it is evident that the opportunities of capturing European business as a complement to existing Bermuda-based business, far outweigh the possible negative impact of a competing reinsurance hub. As Rivaz made clear, developments to date have not really “removed much underwriting capability, either in terms of the personnel, systems, operations, capital or capacity from the Bermuda market. A number of companies have looked to make domicile and corporate structure moves to perhaps headquarter a reinsurance operation in Switzerland and then operate Bermuda as a branch—that’s been one model that’s emerged in the last couple of years—but in general, those that have done that haven’t relocated underwriting out of Bermuda.” Such moves were related to corporate positioning rather than being dictated by business, he said. Aspen’s Few likewise indicated that although some players had opted to redomicile to Switzerland, their operational heart has invariably remained in Bermuda. It seems that Bermuda has little to fear and much to gain from the new reinsurance hub at the heart of Europe.