Switzerland is increasingly home from home for Bermuda reinsurers. David Banks assesses its alpine attractions.
Last year, Swiss Re announced it was relocating some of its operations from Zurich to Luxembourg. This unprecedented move from a reinsurer synonymous with the Swiss market was done in order to maximise its legal structure and take advantage of the EU’s new Reinsurance Directive, allowing “passporting” of funds, according to the reinsurer. Tax benefits are also likely to have been persuasive.
Of late, there have been movements into Switzerland that have captured the attention of the international (re)insurance industry. In February, S&P anticipated that Zurich would be among the domiciles attracting insurers who were “keen to be closer to their customers”. In the last two months, ACE has chosen to redomicile from the Cayman Islands to Zurich and Paris Re has redomiciled from Bermuda to Zurich.
There are tax advantages in opting for Switzerland. In Zurich, foreign reinsurers are not subject to the same tax levels as indigenous entities and have even been able to negotiate favourable terms with regional cantons in order to entice them to relocate. The level of corporate tax varies among the cantons but at present Zug and Fribourg are considered the best. The current tax rate for companies in Zug ranges from 14% to 17%. Andrew Kail, UK insurance leader at PricewaterhouseCoopers says: “If it is a big grown-up company it can get a good tax deal because of the benefits it is bringing.”
The fact that ACE, Bermuda’s largest insurance group, has opted for Europe might make good business sense, but it also raised eyebrows. “ACE is at pains to understate it,” says one industry insider. “The move will cost some jobs in Bermuda. Many companies will look hard at what they’ve done.” It could be argued that ACE’s move is no different to Hiscox, Hardy or Kiln choosing to redomicile to Bermuda from London. Or from Partner Re and XL’s decision to consolidate their European operations in Dublin and Swiss Re’s similar move to Luxembourg. In Dublin, another highly competitive domicile, tax is 12%. As with these other moves, tax has played an important part in ACE’s decision to relocate. An ACE spokeswoman explains: “When we were incorporated in the Cayman Islands in 1985 we were a monoline excess insurer for our shareholders. Now we are a major global insurer. Switzerland has a reputation for being a stable and credible location, home to some of the world’s largest and most respected financial and insurance companies. The Swiss legal and regulatory framework is well established and respected around the world. Switzerland has numerous commercial and tax treaties with countries around the world, which will benefit ACE by creating greater certainty.”
She adds that relocation to Switzerland has allowed ACE to have a holding company closer to its European customers, which accounts for 25% of its business. Choosing to go onshore rather than offshore not only brings companies closer to their potential market, it also brings international tax advantages, particularly since Switzerland enjoys a tax treaty with the US.
S&P analyst Peter Grant explains: “The Swiss market as a hub seems to be gaining momentum. In Zurich in particular there seems to be a lot of people wanting to use it as a beachhead from which to access the European market.” Zurich’s merits, he adds, include good financial infrastructure, access to capital markets and good underwriting infrastructure.
Bermuda reinsurers opting to choose Zurich as their branch office include Endurance, Flagstone, Aspen, Catlin and Arch Re. However, Grant adds that he cannot foresee a “wholesale decampment”, but rather a “trickle”. Relocation might not be the only way in which foreign (re)insurers could have an impact on the Swiss market. S&P anticipates that foreign participants could be involved in mergers, acquisitions and cooperations within the Swiss market.
Saturated primary market
Switzerland’s primary insurance market is the most densely crowded in the world, and also boasts the highest penetration for both life and non-life sectors, ahead of the UK in second place. It is the kind of pressure cooker environment that has served the industry well, enabling it to seek new methods that go beyond the Swiss penchant for order and organisation.
Indeed, a widespread overhaul of the insurance market earlier in this decade (when life premiums in particular were badly hit), has led to greater discipline and reorganised financial profiles. A relatively benign claims level in the last two years has added to the fact that insurance companies have more in their coffers. Even though growth in the life market is in single digits, premium income looks set to rise steadily, evidenced by reflected by figures showing that per capita insurance spend rose from $4,900 in 2002 to $6,650 in 2006.
However, due to overcapacity and saturation, growth prospects remain restricted. The latest results have shown growth rates in non-life to be in the low single-digit range, whereas life was stagnant or negative. “In this regard, companies are conscious of the problems that softening rates could cause for them. It’s therefore more likely for them to be looking at whether their prices are at an adequate level, which is appropriate to the assumed risk,” says S&P analyst Hiltrud Besgen.
Total direct insurance business by Swiss companies on home territory amounts to CHF49.4bn ($47.6bn), compared to CHF72.3bn ($69.7bn) from abroad. The difference is even more pronounced in reinsurance, where Swiss companies write just CHF2.6bn ($2.5bn) of business at home, compared to CHF37.5bn ($36.1bn) in the rest of the world. In addition to Swiss Re, Switzerland’s other key reinsurance players are SCOR Switzerland – a result of SCOR’s buyout of Converium last year – and Glacier Re.
Life insurance accounts for 57% of total premiums within the Swiss market at CHF28.1bn ($27.1bn), but abroad life premiums fall to 39%. While life remains the dominant line within Switzerland, it has continued to lose ground in the last four years. Meanwhile, two of the smaller lines seeing significant growth are legal protection and general third party liability.
Switzerland has the sixth highest nominal per capita GDP in the world, ranked higher than the US, Germany and Japan. This means its population of 7.8 million is a wealthy one. But in common with other developed nations, it is also an aging population. By 2050, official figures point to one in three people being of retirement age, rather than the current one in five. In addition, more than one fifth of the resident population are foreign nationals.
Compulsory cat cover
Medical and accident insurance are among the relatively broad spread of compulsory lines in Switzerland. Buildings insurance is also compulsory and insurers are obliged to provide cover for certain natural perils (but not earthquake) under the terms of their fire insurance policies. According to Swiss Re’s Sigma report, 19 of the 25 cantons have their own building insurance providers, and in the other seven, cover is provided by private insurers.
Reflecting the relatively benign claims environment of recent years, the catastrophe of most significance was the flooding of August 2005, which caused insured damage running to a total of more than CHF1.8bn ($1.4bn) to buildings and vehicles. Although the law would have allowed insurers to reduce claims payable in the event of natural catastrophes in excess of CHF500m, insurers paid the claims in full.
While Switzerland does not apply EU standards, such as Solvency II, observers regard the country as being in a more advanced position regarding regulation than EU nations. This is particularly in those areas that serve to guarantee solvency, protect the consumer and ensure a risk management-based approach to insurance supervision.
The Swiss Solvency Test has been up and running for long enough to establish a track record and enable market participants to gather data and make adjustments. As S&P’s Besgen explains: “The test is a very advanced method and its state of development is also more advanced at the moment than the EU’s directives because the Swiss regulator is already implementing it. They have made a number of test runs and are gathering information and improving the approach.”
Swiss Re, the country ubiquitous reinsurance player, continues to claim the title as the world largest reinsurer. However, in May the company announced a 53% slump in profits which it blamed on market turmoil and losses on its structured credit default swap portfolio. Its net profit for the first quarter was CHF624m (?382.61m/$593.86m), down 53% on last year.
Swiss Re’s structured credit default swaps generated an additional mark-to-market loss of CHF819m in the first quarter. While this business is in run-off, the company said it continues to be exposed to market value fluctuations on the underlying securities and estimates a further loss of CHF200m for April.
“The question is whether the subprime losses will have an impact on their franchise,” explains Grant. “As far as I am aware, it will not.” He adds that a more likely challenge to Swiss Re’s leading position as largest reinsurer ahead of Munich Re would come with an aggressive cutting-back on their business compared to their peers.
David Banks is deputy editor of Global Reinsurance.