The reinsurance domicile debate is raging once again. Uncertainty over US tax rules and Solvency II is causing a ‘Bermuda drift’ to European centres such as Zurich, which has prime conditions for hub status
The Bermuda versus London debate is long over. Now it is Bermuda and London versus Zurich, Dublin, Luxembourg and even the Netherlands. Companies carrying out group restructuring activities ahead of Solvency II and seeking tax and capital efficiencies are increasingly aware that the world is their oyster – particularly if they can maintain underwriting operations in all the key markets for international (re)insurance.
Choice of domicile was a hot topic at the industry’s meeting in Baden-Baden in October, as European reinsurance buyers, brokers and reinsurers gathered to discuss renewal rates and terms. The Guy Carpenter-hosted symposium chose to focus on the relative merits of (re)insurance hubs in Bermuda, London and Europe, highlighting the drivers behind new centres such as Zurich and exploring the advantages of a global multi-line strategy.
“Every group must have its own vision of the optimum domicile structure based on its history and legacy,” said SCOR Global P&C chief executive Victor Peignet, contributing to the symposium debate ‘Does domicile matter?’.
“However, this structure is not fixed but is a moving target, and the successful groups will be those that make the right choices at the right times. They will have geared their company structure to their optimum domiciles, with sufficient flexibility to adapt their vision, and to change and manage their structure closest to the optimum at all times.”
A few years ago, everyone was talking about the decisions of a number of London insurers to move their domicile to Bermuda. At the time, the moves by traditional Lloyd’s firms such as Hiscox, Kiln, Hardy and Omega inflamed the London versus Bermuda debate and made many fearful that London was losing its edge as a result of the UK’s uncompetitive tax regime.
But the moves were strategic and in no way intended to suggest the companies were looking to reduce their London presence. “What they were looking for was an optimal place to deposit their assets for underwriting,” Deloitte insurance partner Ian Clark explains.
“What Lloyd’s allowed was to hold your assets overseas and to secure a letter of credit on them to underwrite in the UK. If you held your assets in the UK, you were subject to UK tax and if you held your assets in Bermuda, you were subject to a much lower level of tax. Provided Lloyd’s could get its hands on the assets when needed, it was agnostic as to where these businesses were domiciled.”
Now all talk is of a ‘Bermuda drift’, where companies are keeping their operations on the island but moving their headquarters elsewhere.
Many recent moves have seen traffic going one way, from Bermuda or Cayman to European centres,
Zurich in particular. Ace was one of the early movers – choosing to redomesticate from Cayman to Zurich in 2008, while fellow Bermudian heavyweight XL chose a path from Cayman to Dublin.
It is telling that both firms are still strongly associated with Bermuda, while Brit Insurance is still considered a London market firm despite its redomicile to the Netherlands. And the only home for Swiss Re has to be Switzerland, despite the global reinsurer’s decision to redomesticate to Luxembourg.
It is the feet on the ground that count, not where a holding company is based, thinks Alterra chief executive of reinsurance John Berger. Speaking at the Baden-Baden symposium, he said domicile was not important. “It is what you are doing around the world and what markets you are in. Just being in a place doesn’t mean anything ... it’s what you do in the domiciles where you are.
“To a degree, the choice of domicile can be largely irrelevant, as what will effectively determine the level of success for any organisation is the quality of its leadership, its underwriting talent and the overall financial strength of the company.”
One city that continues to attract company headquarters and operational centres is Zurich. Allied World and Amlin have taken the route set out by Ace, in redomiciling their legal carrier to Zurich and setting up reinsurance operations there. Other firms – including Catlin, Tokio Marine and Novae – have not moved their holding company, but have set up dedicated reinsurance businesses in Zurich to access European business.
Even within Switzerland, Munich Re has moved its headquarters from Geneva to Zurich to, it said in 2009, deliberately take “full advantage of the opportunities offered by the Swiss reinsurance and labour market” and 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”.
Looks like a hub
Zurich has all the hallmarks of a successful reinsurance hub: well-developed infrastructure and transportation, an existing reinsurance market with brokers and service providers, access to a pool of French, German and English-speaking (re)insurance talent, a sophisticated regulatory regime, favourable tax conditions and all the softer qualities that attract senior industry executives, including excellent schools and low personal taxes.
“The economic substance, quality of regulation and business values of the headquarters’ domicile become part of your global brand,” said Swiss Re European division head Martin Albers, speaking at the Baden-Baden domicile debate. “Switzerland is a world-renowned financial centre with great benefits and strengths, including a highly developed and reliable infrastructure, excellent talent, an open market and a close relationship with the EU.”
While not all domicile decisions are based purely on tax – if they were, all companies would opt for zero-tax regimes – Switzerland has one of the more favourable tax environments in Europe. “Switzerland remains a very attractive territory from a company’s tax perspective,” PricewaterhouseCoopers tax partner Colin Graham says. “It remains possible for groups to structure in cantons in Switzerland and to achieve very low effective tax rates. And from a US tax perspective, Switzerland has good tax treaties and is not seen in the same light as such territories as Bermuda.”
Access to business is another important driver behind the decisions to set up in Zurich. A large proportion of Continental European business does not find its way to the London or international markets. This strongly relationship-focused market, which still places a lot of business on a proportional basis with the big direct reinsurers, prefers to do business with its reinsurance partners on home turf.
A Bermudian company, with its perceived cultural differences (a stronger focus on catastrophe excess-of-loss being one example) is unlikely to get much of a look-in. But an international company, with its holding company or European operations in Zurich, has a much better bet.
“We’re seeing a lot of businesses thinking about where they should be positioned to maximise their distribution,” Deloitte partner Stephen Ross says. “In the reinsurance market, that used to be about having an operation in Lloyd’s and in Bermuda. Over the past year, we’ve seen the requirements for many of these businesses to access European markets to establish operations in Switzerland.
“That’s what we’ve seen over the past year with Amlin, Catlin, Tokio, Aspen and others,” he continues. “That is very much a distribution play – a recognition that you’re unable to access European business as effectively from Bermuda and London as you would be if you were based in Zurich.”
Solvency II as catalyst
Many of the recent movers to Zurich note Solvency II among their reasons for setting up shop there. In a statement, Catlin said the formation of its Zurich business – Catlin Re Switzerland – was to underwrite speciality high-quality European risks and take advantage of opportunities in the European reinsurance market, including those created as a result of the coming Solvency II regime.
While Switzerland is not part of the EU, it is widely expected to be one of the first countries to gain equivalency with the new regime and has developed its Swiss Solvency Test with that in mind. In July, the Committee of European Insurance and Occupational Pensions Supervisors (Ceiops) recommended Switzerland, along with Bermuda and the USA, to be considered for a first wave equivalence assessment. It is the first time Ceiops has set out the countries it considers important.
With Solvency II pushing groups in Europe to consider restructuring their businesses and convert subsidiaries into branches, this is also encouraging many to look at the pros and cons of changing their domicile. “Domicile is very much an area of discussion in boardrooms at the moment based on my firm’s experience,” Graham says. “This is driven by a desire for capital efficiency and Solvency II has been a more recent catalyst.”
The group capital rules in Solvency II are a further encouragement for companies to look at a simpler structure, continues Graham. “Solvency II encourages you to reduce the number of legal entities you have for capital reasons. Once you start to look at that type of restructuring and thinking about where your operations and capital are going to be based, that drives a further decision around where you want the group domicile to be.” GR