Switzerland: centre stage
For all its neutrality, Switzerland has found itself courting controversy as more and more international re/insurance companies—including many major names in Bermuda—are drawn to Zurich and Zug, with some even opting to redomicile to the Alpine state. Among its attractions are access to business in the wider European market and the anticipated reinsurance boost from Solvency II. Allied World is the latest to reveal its intention to make Switzerland its home after it unveiled plans to redomicile from Bermuda to Switzerland on September 30.
A well-established European re/insurance centre, Switzerland has been home to big names such as Swiss Re, Converium (which was bought out by SCOR in 2007), Winterthur Insurance (now part of the Axa Group) and Zurich Insurance, among others, for many years. Among the Bermuda and international players with a presence in Switzerland are Amlin, Allied World, Ariel, Arch Re, Aspen Re, Amlin, Catlin, Endurance, Flagstone, Novae, PartnerRe and XL.
Anticipating Solvency II
One of Switzerland’s attractions is the upcoming Solvency II regime that will govern insurers and reinsurers in Europe. While it sits outside the EU, the country’s regulator has long kept pace with the coming directive, introducing the Swiss Solvency Test and seeking equivalence with the new regime. The recent announcement that it is being prioritised—along with Bermuda and the United States—as a jurisdiction to be granted ‘third country’ equivalence is a significant step forward. Demand for reinsurance is widely anticipated to increase under Solvency II—which is due to come into force in 2012—and if it does, Zurich should prove to be an attractive staging post to access this business.
In its latest report on Solvency II, Aon Benfield notes that Solvency II is “likely to result in a significant increase in regulatory capital for most companies in the market”, with its overall estimate being that the average solvency ratio for the non-life industry will reduce from about 250 percent to about 140 percent. For insurers whose capital requirements are likely to increase under Solvency II’s standard formula, reinsurance purchasing is one way to bring them down. The most capital-efficient reinsurance products include non-proportional catastrophe covers and traditional excess of loss contracts, notes Aon Benfield.
“If you believe that Central and Eastern Europe represents a significant opportunity for growth then [Switzerland] is a good place to be,” says Chris Klein, director of reinsurance market management at Guy Carpenter. “Likewise, some people may believe there’s an opportunity arising from Solvency II, which may increase capital requirements for many companies across Europe. So there may be an opportunity to provide reinsurance products that can provide a relief to some of these higher capital charges that are going to come in, in 2012, assuming companies are going to be using generic standard capital requirement formula.”
It is therefore unsurprising that many of the key non-European players in the reinsurance universe are lining up to provide such cover, precisely at a time when the pool of industry-wide premiums is shrinking in developed markets. Europe under Solvency II provides a lucrative opportunity for early movers, and Switzerland has the necessary infrastructure.
Klein thinks moving closer to the action will benefit Bermuda companies from a diversification perspective as well as bringing them more in line with the European reinsurance culture. “A lot of this provincial market—particularly in the German-speaking companies— has been bought on a proportional basis and often with the big direct reinsurers. Bermuda tends to be more of an excess of loss market— particularly for catastrophe business—and you could argue that, in the past, there’s been a certain wariness about dealing with Bermuda because culturally it’s very different, it’s a long way away and the type of business is also very different.
“Look at some of the companies that have announced or established operations or subsidiaries in Switzerland this year,” he continues. “They all have very substantial London market/Lloyd’s operations. The London market is a specialty lines type market, whereas in Zurich, they’ll write that as well, but there is this perception of easier access to Continental European business.”
"Europe under Solvency II provides a lucrative opportunity for early movers, and Switzerland has the necessary infrastructure."
Access to Continental Europe will be further facilitated once Switzerland receives the green light on Solvency II equivalence.In July, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) recommended Switzerland, along with Bermuda and the US, to be considered for the first wave of equivalence assessment. It is the first time that CEIOPS has set out the countries it considers important. “Both the Bermuda regulator and Swiss regulator are looking for equivalence, and both are on the first wave of review from CEIOPS, so it’s important for both regulators to look to facilitate business,” says Mark Humphreys, insurance partner at PwC Zurich.
Enter stage left
For companies seeking to gain a foothold or increase an existing presence in Europe, Zurich appears to have the upper hand. In the latest bold move, Allied World announced that its board had approved a move of its holding company from Bermuda to Switzerland, although it emphasised that its Bermuda business would “continue to operate and service business in Bermuda, where the company was formed in 2001”.
In the ongoing debate over reinsurance domiciles (see September’s edition of Bermuda Re) industry experts are divided over whether the movement of a holding company from one location to another is significant. Most argue that it is where an organisation’s operations are based that matters. At the time of its redomestication to Zurich in 2008, ACE insisted that its group of companies would “continue to operate as they do currently”.
“There’s a lot of discussion about Bermuda and how it is going to impact Bermuda,” says Humphreys. “Key players still have a significant presence in Bermuda and still write a lot of business, and Bermuda is still a significant market.”
What is interesting about Switzerland, thinks Klein, is that there are feet on the ground. What really makes a difference is the scope and scale of the operation you have on the ground,” he says. “The brass plate might have been in the Cayman Islands, and I’m thinking of one large company that redomiciled to Europe from the Caymans, but most people thought of that company as a Bermuda company, because the greater weight of its actual operations and underwriting activity took place from Bermuda.” “What’s been interesting is how we’ve seen companies actually setting up operating entities on the ground in Switzerland, whereas we can think of one particular example of a company in the UK that redomiciled to the Netherlands, but all of its underwriting and business activity still takes place in London,” he continues.
Even within Switzerland, Munich Re has moved its headquarters for New Re from Geneva to Zurich in a move that was “deliberately taking full advantage of the opportunities offered by the Swiss reinsurance and labour market”. The key idea behind the move, which took place in the spring, is to “exploit the advantages of Zurich as one of the central financial and insurance marketplaces in Europe, while at the same time enhancing client proximity”, said the German reinsurer in a statement. “The Zurich location offers us a distinct edge, especially if we want to take on additional highly qualified personnel,” added board member Thomas Blunck.
In June, Catlin announced that it would form a reinsurance company based in Switzerland to “significantly expand” its European presence. This followed similar decisions by Amlin and Novae. The new reinsurer—Catlin Re Switzerland—led by Paul Brand, chief underwriting officer of the Catlin Group, will have capital of $1 billion from internal resources and initially underwrite specialty reinsurance business. The formation of the Swiss reinsurer will allow the group to better take advantage of opportunities in the European reinsurance market, including those created as a result of the coming Solvency II regime, the company revealed in a recent statement.
“The specialist classes of business to be initially underwritten by Catlin Re Switzerland will expand the portfolio of similar business now written by Catlin, by focusing on high-quality European risks at a time when market conditions are favourable for these business classes,” says Catlin Group chief executive officer, Stephen Catlin.
Amlin announced a similar decision in May 2010, revealing that it was starting a reinsurer in Switzerland to access “European reinsurance business that does not typically flow into the London and Bermuda marketplaces”. As part of that move, Amlin has opted to redomicile its legal carrier from Bermuda to Zurich. It said however that it “remains committed to Bermuda as a key operating platform”.
In August 2009, Lloyd’s insurer Novae announced that it was establishing a dedicated reinsurance business, with a team of underwriters operating from both London and Zurich to facilitate expansion of the group’s business from Continental Europe. The firm is targeting a premium income of £100 million for 2010. Headed by Gunther Saacke, formerly head of reinsurance at Endurance UK, the new team boasts talent from firms such as Allianz Global Risks and PartnerRe.
Talent is a key reason why Switzerland remains at the top of the list for firms choosing a European base. “Switzerland doesn’t have the absolute constraints Bermuda has,” says Klein. “In Switzerland, you’ve got skilled staff available and there are probably fewer infrastructure constraints as well. There’s an ease of movement— European citizens do not have a problem travelling to Switzerland and working there. So the whole business of work permits and visas is all much easier in Switzerland, and politically it’s very stable—it hasn’t had a war since 1515 and it doesn’t have a great problem with domestic crime.”
The jurisdiction’s other attractions include an existing infrastructure, with good transport links and the service providers necessary to run a reinsurance operation. Then there are the obvious tax advantages and the country’s sophisticated approach to regulation. Tax levels vary depending on whether the holding company or operations are based in Switzerland and depending on which canton it opts for, but are significantly lower than rates in Germany, the UK and the US (and even with the UK coalition government’s pledge to lower corporate tax rates to 24 percent).
Swiss corporate tax rates, including a federal rate of 8.5 percent, range from 11.8 to 24.2 percent, with Geneva setting some of the highest rates. Dublin also comes with a low tax advantage, and this was the choice for XL Group when it announced that it would be redomiciling from Cayman in January this year. Others have opted for the Netherlands (Brit Insurance) and Luxembourg (Swiss Re).
PwC’s Humphreys thinks that companies will continue to be attracted to Switzerland for reasons beyond tax. “Bermuda reinsurers may have a presence in the London market, but there are attractions with having a presence in Zurich, not only with the broker market but also for people, expertise, a location for staff and a base for further expansion into other European countries,” says Humphreys. “It’s about having a bigger footprint and expanding their business.”