Bermuda Market to Stay Key Reinsurance Hub Despite U.S. Tax Reform: A.M. Best

Bermuda will continue to be a key international hub for reinsurance despite being challenged in recent years, most recently by tax reform in the United States, which fundamentally changed how multinational entities are taxed.

How the territory’s market has responded to evolving regulation and adjusted to competition is detailedin the new A.M. Best report, “Global Reinsurance: Optimism Fizzles, It’s Back to the ‘New Normal.'”

Changes in U.S. tax law included the Base Erosion Anti-Abuse Tax (BEAT), which is a minimum tax on deductible payments to foreign affiliates, with the intent of mitigating erosion of the U.S. tax base by corporations that make deductible payments to related non-U.S. parties, as well as impose a minimum corporate tax.

According to the Best’s report, reinsurers have reacted in different ways:

• By decreasing the size of the inter-company reinsurance arrangements or eliminating them altogether;
• By moving capital to on-shore balance sheets;
• By forming new Bermuda entities that elect to be U.S. taxpayers.

A proactive approach by the Bermuda regulator has benefited its insurance and reinsurance markets in several ways, including the market’s rise to become a leader in the global insurance-linked securities (ILS) market, the report said.

Competition from other jurisdictions, such as Cayman Islands and Ireland, has intensified, but A.M. Best said it will take time for them to catch up with Bermuda.

Insurers’ response to Brexit in the United Kingdom also may affect the Bermuda market, but to a lesser extent as the regulator’s experience and ability to deal with different jurisdictions potentially could make it a more attractive jurisdiction for insurers and reinsurers, the report continued.

The report also noted that the pool of reinsurers is shrinking due to an active merger and acquisition environment.

While the U.S. tax law is another impetus to M&A activity, the larger balance sheets of the reinsurers partially offsets pressure on the Bermuda market.

Overall, A.M. Best believes Bermuda remains a viable market in the face of more challenging market conditions, and its positive response to changes is indicative of the strength and reputation of the island’s reinsurance sector.

Source: A.M. Best

Topics USA Reinsurance AM Best