The tax breaks, the talent and the regulatory advantages are attractive, but access to European business is the main appeal of Switzerland as a domicile. As a glut of reinsurers form operations in Zurich, we look at what its growing influence as a hub could mean for other jurisdictions
The news that three reinsurers – Amlin, Catlin and Tokio Millennium Re – have formed new European reinsurance businesses should not be surprising. A solid European base, and the new business and clients that will bring, represent a natural complement to the existing portfolio of each company.
But the fact that all three have moved to Zurich – as opposed to a German or French city – and that Amlin and Catlin have done so partly at the expense of their Bermudian operations, have led their competitors and market observers to ponder on some of the wider advantages that being based in Zurich must bring.
These benefits are not straightforward and cannot be distilled into one or two financial or regulatory advantages revolving around either tax or the well-documented fact that Switzerland is exempt from Solvency II. Other influences, such as talent, personnel and distribution, are at least as significant.
It is also clear that the trend of reinsurers forming Swiss operations is far from new. Switzerland has 70 supervised reinsurance companies, according to Swiss financial regulator Finma, which generate more than Sfr30bn ($30.3bn) of gross written premium a year. Twenty-five of these are so-called professional reinsurance companies, while the remainder are captives.
However, Finma says that, given the international nature of the reinsurance business, it is not possible to talk about a Swiss reinsurance market. “The pure business with risks stemming from Switzerland has always been relatively small when compared with the business as a whole, and many reinsurers have long had a very strong international focus,” the regulator’s website reads.
Rating agency Standard & Poor’s (S&P) points out, in its September report on how reinsurers choose a domicile, that Ace moved its ultimate holding company from the Cayman Islands to Switzerland in 2008. In the same year, Flagstone merged its Swiss and Bermudian operating facilities into one flagship operating facility based in Switzerland, making its Bermudian subsidiary a branch of the Swiss company.
It seems that having a Bermuda facility as a subsidiary to a Swiss-based legal entity is also the intention of Amlin and Catlin. S&P says in its report that this is because of the regulatory capital flexibility the Swiss regime offers.
“Switzerland is also gaining ground as an attractive domicile for (re)insurers,” says the report. “This trend among Bermudian (re)insurance groups of forming European flagship companies while maintaining operations and staff in Bermuda (through either wholly owned operating subsidiaries or Bermuda-based branches) has helped to increase companies’ regulatory capital flexibility while maintaining Bermuda as a key underwriting centre.”
Deloitte insurance partner Stephen Ross believes that Switzerland’s exemption from Solvency II is an important consideration for reinsurers, but not for obvious reasons. He points out that the Swiss Solvency Test is both robust and well established.
Reinsurers moving to Switzerland, therefore, have a greater element of regulatory certainty than some other jurisdictions in Europe. “The Swiss Solvency Test has been developed further and embedded more deeply compared with many regimes,” Ross says. He adds that Switzerland is one of the only countries, along with Bermuda, to be involved in the first round of achieving equivalence to Solvency II, and is on track to be aligned by 2013.
J.P. Morgan analyst Michael Huttner expands on this point. “The Swiss Solvency Test is more advanced in its readiness than Solvency II,” he says. “Although it seems likely that the Swiss will ultimately more or less align their own model with Solvency II, it also seems that companies will be more likely to be allowed to get the use of internal models approved.
“This should mean that reinsurers will be more able to realise the benefits of diversification than they would under Solvency II, which will not allow you to reduce capital because of operations overseas. The Swiss model should mean more flexibility and some benefits as a result, which will suit many companies.”
Being located in Switzerland does also mean some tax benefits, which cannot be ignored. But, again, these might not be the kind of benefits you might assume.
Analysts and accountants are nonchalant about the benefits at a corporate level. While not discounting advantages, they point out that the size and complexity of the reinsurers in question mean that it is almost impossible to directly quantify such benefits and that it depends on which of Switzerland’s 26 cantons (states) a company is based in. Each has a level of autonomy in terms of tax.
Huttner believes, nevertheless, that Switzerland’s tax regime remains more favourable than other parts of Europe. “They might achieve perhaps a 2% difference in terms of the corporate tax they pay. It is not massively significant but it is still lower than in Germany, for example.”
However, some in the industry feel that Switzerland’s favourable personal tax regime may be a greater pull for companies than any corporate tax benefits. “It is a very favourable regime and helps a lot in terms of attracting talent.” Ross says.
PricewaterhouseCoopers (PWC) insurance partner Mark Humphreys agrees that the attraction of talent is a critical factor in companies moving to Zurich. “The tax regime helps when trying to recruit,” he says.
“But it is also helpful that these companies are locating in a place where there is already a pool of talent in every field of reinsurance. I think you will see some of them building teams around the lines of business they want to target, and at least some of those staff will come from rivals already based in Zurich.”
Huttner at J.P. Morgan agrees that the local talent pool is a big attraction. “The talent is strong and there is plenty of office space since Converium moved out. Zurich’s personal tax regime is very favourable, and it is also a nice place to live and work. People want to be located there. That really helps.”
He points out that many Converium staff were keen to remain located in Zurich when the company merged with Paris-based SCOR in 2007.
This sentiment has also been borne out by what the companies themselves have said about the move.
“One of the key drivers was the availability of good-quality, experienced underwriters with an in-depth knowledge of the European markets,” Amlin Re Europe chief executive Philippe Regazzoni said recently.
But while it seems the tax and regulatory breaks do stack up and talent management should be easier as a result of being based in Zurich, all agree that distribution remains a pivotal factor behind the move.
Much of the business placed by European cedants does not leave the European mainland and never makes it to the London market or Lloyd’s, never mind Bermuda or the USA.
As Catlin spokesman James Burcke put it in an interview with Global Reinsurance in July: “Reinsurance business from the smaller European cedants does not typically cross water. People like to buy locally. If you want to write this business, you have to join the market.”
Ross at Deloitte agrees. “The main reason for most (re)insurers going to Zurich will be a distribution play,” he says. “This type of business cannot be accessed through the Bermuda and London reinsurance hubs.”
Echoing this point, Humphreys at PwC says: “This is mainly to do with a cycle of expansion for these players, and Europe is the next natural step for many to expand into. You can’t get the same penetration from London because of the broker market and the nature of the close relationships formed in Europe.
“On the back of those considerations, I am sure companies have looked at things like tax and Solvency II, but there are too many uncertainties and moving parts to make those things the main reasons for going there.”
Humphreys also highlights an additional potential bonus stemming from the implementation of Solvency II. “It could mean that insurers need to buy more coverage,” he says. “They will certainly likely seek a more diverse panel of providers, which will benefit the newcomers.”
Despite the benefits of their new domicile, entrants into Switzerland should not expect an easy ride. “The real challenge will be for these new entrants to differentiate themselves in the market and cope with the challenge of the existing players,” Ross says.
The move of so many companies to Zurich, seemingly at the expense of Bermuda, has also led some to question the island’s future as a reinsurance centre. “We believe other Bermuda-based companies could move to do the same in the coming years, although many remain committed to Bermuda as their primary domicile,” says S&P in its report.
But few are convinced what is happening can truly harm the importance of the Bermuda market. “We are talking about shifting the legal entity of operations. The people and talent and capacity are all still there. Bermuda will remain and important reinsurance hub for the foreseeable future,” says Humphreys. GR