Earlier this year, Bermudian re/insurers were concerned about a US initiative to tax offshore insurers. But priorities have changed.
The events of 11 September changed the landscape of the insurance and reinsurance industry as surely as they changed New York's. Old agendas faded into the background as urgent new problems presented themselves. Chief among them was insureds' ability to purchase coverage against acts of terrorism. Without suitable covers, business might have been crippled; financial institutions will not lend money for infrastructure projects, such as the construction of pipelines, power plants and skyscrapers.
President Bush consulted directly with industry leaders, among them Brian Duperreault and Brian O'Hara of Bermuda's two largest insurers, ACE and XL Capital, at a meeting in the White House. The US Government then announced two packages of aid to the insurance industry, first $15bn for aviation and then a public-private sector co-insurance scheme that would see insurers' liability limited for the next three years, for acts of terrorism.
An ensuing shortage of cover has been marked by temporary and permanent withdrawals from the reinsurance market in Europe and the US, and the formation of new capital in Bermuda.
Bermuda will face claims, according to reported estimates (which are incomplete) of about $2.5bn. But in the wake of the events of 11 September, it became clear that Bermuda might again be used to fill a shortage of capacity, for what would be the third time in the last 20 years. In the mid-1980s, ACE and XL Capital came to Bermuda in the wake of a wave of medical malpractice claims and a resulting shortage of cover. In the early 1990s, $5bn of new capital was introduced to the Bermuda market, largely property and catastrophe-directed, after Hurricane Andrew produced shortages of cover.
By the middle of October, Marsh announced that it hoped to lead a $1bn pool for Axis Specialty Ltd, a new Bermuda reinsurer. RenaissanceRe, Bermuda's market leader in the catastrophe market, said first that it would make $100m available to Glencoe, a subsidiary, and then announced that it would form a pool of a further $500m available for another new Bermuda company, DaVinci Re. Within a month of the catastrophe, Bermuda had replaced more than half the capital it expects to lose from the events of 11 September. One item on the old agenda that seems unlikely to succeed during the lifetime of the Bush administration is the proposal made by several American insurance companies to ‘close a loophole' by levying US tax on the worldwide income of offshore insurance companies. A small group of US insurers, led by Chubb, Hartford, Liberty Mutual and Kemper, persuaded Congressional representatives last year to introduce legislation, subsequently abandoned, which was initially aimed at the larger Bermuda insurers, but subsequently broadened to include all offshore insurance companies with business activities in the US.
The proposed legislation, which would have severely chilled non-US insurers in the name of a ‘level playing field', arose after several US insurers – among them Everest Re, Trenwick and PXRE – relocated to Bermuda in 1999 and 2000. The backers of the legislation hoped to remove from non-US companies any structural advantages they accrue from being regulated in less complex environments and from lower corporate tax rates overseas.
Critique of Congress
The Congressional moves were roundly denounced in Bermuda and considered unworkable, since they would have opened all US companies to tit-for-tat legislation aimed at taxing US interests worldwide. Although the US has never attempted to levy an extra-territorial tax such as that proposed, the introduction of the legislation appeared, for a while, to have achieved the goals of the legislation without the bother of public scrutiny. Relocations to Bermuda all but stopped in the wake of the initial Congressional moves, although Arch Capital Group relocated to Bermuda a year ago and Willis moved its global headquarters to Bermuda last fall, largely for structural reasons.
Industry groups in the US report that the issue is not a priority and that they are focused on addressing a more immediate crisis in the industry. America's reinsurance companies are reconsidering their commitment to reinsurance and have suffered personnel losses not easily overcome. The New York market faces special problems.
European reinsurers retrenched in the days after 11 September, with at least two very large European reinsurers “not answering or returning phone calls for two weeks”, according to a Belgian broker. Lloyd's has taken a $2bn dollar hit at a time when it may have enjoyed less turbulence in international markets. Given its natural advantages, the Bermuda market may be the only one in a position to grow as a result of 11 September.
“It's the way global markets work,” said the chief executive officer of one of Bermuda's largest insurance companies who, like others quoted in this article, asked for anonymity.
“The laws of supply and demand produce ebbs and flows which sometimes, under extreme circumstances, change rapidly to the favour of some markets over others. Bermuda's case is irresistible for a start-up such as Axis, which will arrive with a clean balance sheet.”
Bermudian companies aim to keep a watchful eye on the ‘loophole' situation. “The issue is not dead, it's just going to take some time before anyone revisits ideas that were relevant before 11 September,” said the chief underwriter at a Bermuda reinsurance company. “Doing anything to damage insurance companies, any insurance company, and particularly those in a British overseas territory, at this time is unthinkable.”