A year ago, Bermuda was beset by the fear that the Organisation for Economic Co-operation and Development (OECD) might destroy its reinsurance and financial services sector. Today, thanks to the OECD, demand for Bermuda companies has never been stronger, as the Cayman Islands and other smaller jurisdictions wrestle with enforcing OECD regulations which Bermuda largely had in place.

The number of international insurers in Bermuda had risen to 1,564 by the end of last year. Of the 94 new insurance companies registered in Bermuda in 2000, 38% were Class 3 insurers, typically rent-a-captives, finite reinsurers and third-party reinsurers. Classes 1 and 2 – the smaller captives – represented 37% of new formations. The balance, comprising 24 companies, fell in Class 4; the giants.

Bermuda is wrestling with its own success. A tourism advertisement for Bermuda in the New York Times carries the strapline, “You can't experience road rage at 10mph”, superimposed over a photograph of a quaint horse and buggy. The line could not have been written by anyone struggling with fierce traffic on the way into Hamilton from any of the outlying parts of the island.

The problem Bermuda faces, to coin a phrase, is: “What would you do if you gave a party and everyone came?” While the tourism business has been steadily contracting for 20 years, Bermuda's financial services industry, notably the insurance sector, is wallowing in success.

Bermuda enjoys essentially full employment, bar a tiny number of people who prefer not to join the rat race, thank you very much. Schools are full to bursting point; those private schools adding locations and buildings at a roaring clip are unable to keep up with demand. Rush hour traffic is not dissimilar from that anywhere else, a relatively new phenomenon in a land with a 20mph speed limit. At the same time The construction industry employs more foreign labour than the insurance and reinsurance industry that is paying for the buildings under construction.

Yet the Progressive Labour Party Government, in its third year in office, is fighting a rearguard action to right a set of social ills that existed 35 years ago, when the party came into existence, but which have less relevance today. At no time was the conundrum better illustrated than in April, when reports indicating that Bermuda would require an additional 7,000 foreign workers in the coming decade were made public just as new work permit regulations came into force, limiting the tenure of the current 8,000 non-Bermudian employees to a maximum of six years. However, an ill-defined set of exemptions took the sting out of the bad news this represented for international employers.

The strain is immediately apparent to anyone who flies in to Bermuda. Twenty-five years ago, the view of the island from the air was of an isolated band of green in the middle of the ocean, sporadically dotted with white, lime-washed roofs, designed to trap potable water and carry it to underground tanks. Today, the band is white, interrupted only by occasional patches of green. Twenty-five years ago, the competition was perceived to be the Cayman Islands, Jersey and, potentially, London. Today, the competition is, unequivocally, Dublin. Twenty-five years ago, reinsurance accounted for perhaps 5% of Bermuda's economic activity. Today, that figure, including primary insurance, is more likely to be 50%.

Dodging bullets
Bermudians have a way of dodging bullets. Less than 30 years ago, Bermuda turned down a proposal for Harvard's medical malpractice captive and the Cayman Islands' insurance industry was born when Harvard looked to the south-west. The move of Scottish Annuity & Life, the Caymans' largest reinsurer, to Bermuda, announced in April, was driven, in the words of the company's chairman and chief executive officer Michael C. French, by the simple fact that “Bermuda is the capital of the global insurance industry.”

The statement is hyperbolic, certainly, but is put in context by Robert Clements, chairman of Arch Capital Group, which itself relocated to Bermuda from the US late last year. “There is more insurance capital in Fairfield County (in Connecticut, where Arch Capital has its US offices) and in New York City and in Switzerland, than there is in Bermuda; but those places don't have the feel of a marketplace. Insurance is not what people at the next table are talking about at dinner, as is the case in Bermuda and in London,” Clements said.

Reinsurance executives in Bermuda have the status enjoyed by rock stars anywhere else in the world.

Increasingly, the resemblance is becoming physical. Tom Gleason, a co-founder of Imagine Re, a late-2000 Bermuda start-up, has the relaxed air, dress sense and style of Bono or Sting. Imagine, funded largely by the $200m parent Trilon Financial Corporation of Toronto realised from the sale of London Life, proposed to offer a broad menu of reinsurance options.

The success of Max Re in wrapping reinsurance around hedge fund management, with its significant tax advantages to US shareholders, appears likely to encourage imitators. One report suggests that dozens of hedge fund managers have tried to launch Bermuda reinsurance companies in the past couple of years, mostly without success. One exception to that rule has been Select Re, now considered one of the largest hedge-fund-backed reinsurance companies. Former Goldman Sachs mergers co-head Willard (Mike) Overlock is a Select Re director, and hedge fund investors say that a number of former Goldman partners are investors in the company.

The $2.1bn New York-based hedge fund holding company Asset Alliance is expected to start Asset Alliance Re, a Bermuda-based reinsurance company, before summer's end. JP Morgan helped to form Hampton Re, a Bermuda-based start-up reinsurer. Max Re may go public as early as this year, which would likely trigger a rush.

Other branches of the alternative risk transfer market are also thriving in Bermuda: Allianz Risk Transfer, a subsidiary of Allianz Re, has snared a coterie of Centre Solutions employees and operates quietly from Hamilton and New York, while weather insurance is a growing Bermuda specialty.

In the meantime, White Mountains, a Bermuda-based special purpose vehicle, will probably close its $2bn purchase of the property and casualty operations of CGU this summer.

Looking ahead, Bermuda's service menu looks to be increasingly broad. The days when captives and a handful of larger mutuals and cat reinsurers dominated the market have not ended, nor will they soon. But to this core is being added a diverse group of disciplines, with life and finite reinsurance among the drivers. Even the source of Bermuda's captive business is widening: Brazilian, Norwegian, Dutch, French and South African owners incorporated captives in Bermuda in 2000. All are non-traditional sources.

Building blocks
Before XL House and the ACE building opened, Max Re had announced plans to erect its own, smaller, headquarters across the road. XL and ACE will leave behind them empty office space all over Hamilton, but construction continues unabated. PartnerRe and RenaissanceRe have bought and upgraded their own buildings. Zurich Financial Services, which includes Centre Solutions, has partnered a local food emporium in constructing a massive headquarters building a knight's move away from the ACE and XL developments.

Land abandoned by the US and Canadian forces, which left Bermuda in the past decade, is situated at the far ends of the island, and so far no insurers have shown themselves willing to site their operations far from the madding crowds of Hamilton, particularly since operating costs only increase with distance in Bermuda's 22 square miles.

Certainly, the pace of life in Hamilton has increased in the past ten years. Not everyone views that as progress. Government Senator Calvin Smith commented: “People's values are twisted. They're all over the place.” The Minister of Development & Opportunity – who also holds the environment portfolio, which has diametrically opposite interests – offers only utopian vagaries. “There was a time in politics when it was thought that a choice had to be made between environment and jobs – that you could not have both, and there was always a trade-off. We have moved far beyond that,” he said, despite evidence to the contrary.

The problem is exacerbated by Government spending that has reduced the current account surplus by two-thirds in less than three years. Ambitious capital projects will raise public sector borrowing to $250m within the year, or 10% of gross domestic product. Increases beyond that level require approval from Whitehall.

Further limiting its options, Government has issued certificates exempting international companies from taxation until 2016 and promised to extend the exemption to 2020.

The only remaining untapped potential source of Government revenue is income tax, a prospect made even likelier by Government's plans to take Bermuda independent during its second term, sometime before 2008, although economic reality has enforced vacillation on that central plank of its election campaign.

Congress might rain on this parade, were the renewed moves by Chubb and others to close what it calls the ‘Bermuda loophole' – the non-taxation in the US of Bermudian companies' worldwide operations – to gather support.

But even if Congress fails to bite, something is going to have to give. As Bermuda considers its success, and considering the demands likely to be placed on “the capital of the global insurance industry” in the next couple of years, there appear to be no easy answers.