The hurricanes that battered the Caribbean and southern US this year have been among the worst in memory. Although Bermuda escaped the storms this time, a financial whirlwind hit the tiny mid-Atlantic island in the shape of heavy pay-outs for the insurance and reinsurance companies based there. But it is a measure of the strength of Bermuda’s insurance market – it ranks third in the world after London and New York – that the sector is still in buoyant shape in spite of facing pay-outs estimated at between $20bn and $35bn.
“Bermuda is an incredibly stable place to do business,” says David Ezekiel, head of the Association of Bermuda International Companies. “And the economy is still doing well. Insurance companies have taken a big hit with the recent catastrophes, but the business they are writing, even in this market, is good.”
Market leading position
How did a 22-square-mile island of just 65,000 people manage to position itself as not only a world leader in insurance and reinsurance, but also as the market leader in captive insurance?
Bermuda’s business leaders, who began to tentatively grow the financial sector in the 1930s, were conscious from the outset of the need to position the island as an upmarket, respectable and reputable jurisdiction that should not be confused with offshore islands with more dubious reputations.
Significant growth began in the 1960s and continued until the 1970s, focusing mainly on the UK and other countries in the sterling currency area, and mainly providing tax-effective structures for individuals and companies. With Bermuda’s move to the dollar in 1970, focus shifted away from the UK towards North America. It was then that the country started to grow its offshore captive insurance industry.
The island is home to 1400 captive insurers that account for about 30% of the worldwide total. There have also been three waves of large insurance companies setting up shop to fill a gap in the market resulting from Hurricane Andrew in 1992 and, most recently, the capital crunch caused by the 9/11 terrorist attacks on the US. Moody’s reported after 9/11 that the industry had “more than adequate liquidity to face the large losses caused by the event”. Indeed, after the attacks, 10 new, large insurance companies set up shop on the island.
The industry continues to expand: 89 new insurance companies set up in 2003, bringing the total number of insurance businesses to 1600.
The latest wave of catastrophes may eventually do Bermuda more good than harm. Charles Gosling, chairman of the Chamber of Commerce in Bermuda, says: “I remember that after 9/11 at a Bermuda International Business Association Forum, one of the spokespeople for one of the large insurance companies said, effectively and more diplomatically: ‘We are not going anywhere – in other words ‘bust’. We specialise in catastrophe reinsurance, this was a catastrophe, and we were prepared’.
“That is my take on the hurricanes. The Bermuda reinsurance sector has been actively following the global weather dynamics – especially the Caribbean, because virtually everything heading west bumps into some part of the US – since Hurricane Andrew, and some of the better companies were at it before that time. While this will affect their income for the short term, I do not believe this will have any lingering effect,” he says.
Multiple attractions
The main attraction for insurance companies to locate in Bermuda is the regulatory environment, which offers relative commercial freedom to insurers and is designed to minimise government interference for companies that are solvent and liquid.
“Bermuda has a history of maintaining and implementing legislative and regulatory provisions that encourage innovation from business while sustaining the highest standards of conduct,” says Deborah Middleton, chief executive officer of Bermuda International Business Association. “Bermuda’s know-your-customer policy, which existed long before the US Patriot Act and the events of 9/11, is vigorously enforced by both businesses and government, ensuring that only legitimate business is conducted on the island.”
More than 30 years ago, the Bermuda Monetary Authority (BMA) established an international standard for providing effective regulatory oversight of Bermuda’s financial sector. The BMA is accountable to the government, although it is not a government agency. This has fostered an effective framework for disciplined co-operation between the public and private sectors, and has become a benchmark for other jurisdictions.
The large pool of expertise accumulated in Bermuda in both the insurance and financial services sectors means that there is a well-trained workforce on the company’s doorstep, in the capital city of Hamilton. The Institute of Chartered Accountants of Bermuda has 700 members; 250 lawyers and all the major accounting firms are represented in Bermuda.
In general, companies are also attracted to the country because of its favourable tax regime. There is no profit tax, dividend tax, withholding tax or other form of direct corporate tax or personal taxation. The only tax is a 4.75% payroll tax that both employees and employers pay.
Although there have been fears over the years that the government might create an income tax, the island’s leaders have stated time and time again that this will never happen. All companies and trusts have a signed undertaking from the government that if any such taxation were to be introduced, any company and its non-resident shareholders would be exempted until 2016.
There are now 13,500 exempt companies, as they are known locally that have chosen to set up in Bermuda, attracted in part by the tax benefits. Exempt companies are foreign owned and domiciled in Bermuda, but do not do business directly with the island.
Political stability
As well as being attracted by the tax regime, these companies have consistently been drawn to the British colony for other reasons. The number one draw, say international company bosses, is the stable political climate and a long-standing commitment on the part of the government to the financial well-being of Bermuda’s international business sector.
Bermuda remains a British Dependent Territory with internal self-government, having had its own elected government since 1633; it enjoys multi-party politics. After the inception of party politics in the 1960s, it was governed by the centre-right, pro-business United Bermuda Party (UBP), which is heavily supported by the minority white population. When the UBP lost power for the first time in 1998 to the centre-left Progressive Labour Party (PLP), which drew support almost exclusively from the majority black population, there were fears for the future of the offshore financial sector. But these fears proved unfounded; international business has not fled but instead thrived and prospered.
Quality not quantity
The size and quantity of companies registered in Bermuda, however, is not everything. “Bermuda subscribes to a fundamental belief that quality in the international business world is more important than quantity,” says Ms Middleton. “This more substantive approach ensures that Bermuda is well regarded by the international business community, as well as by a number of international regulatory bodies and governments, including the Organisation for Economic Co-operation and Development (OECD), the Financial Action Task Force (FATF), the UK and US governments, as a world-class centre for business.
“Central to Bermuda’s standing and attractiveness in the international business world is a business-friendly environment, a stable and growing economy, and an unmatched collection of intellectual capital and financial resources in key sectors, including insurance and financial services.”
Another big draw is the legal system and the strong regulatory system. In common with other offshore centres, it is a common law jurisdiction with ultimate right of appeal to the Privy Council in the UK. In particular, company laws are essentially based on those in the UK. The government is constantly changing and updating laws in order to make them not only more user-friendly, but also to comply with changing international standards. The main legislation, the Companies Act, prescribes a minimal amount of regulation for Bermuda companies, and this is changed regularly – mostly every year – to keep pace with the times.
Bermuda, which lies 700 miles east of the US state of North Carolina and is a one-and-a-half hour flight from New York and six-and-a-half hours from London, is also in a convenient geographic location. It works with both US and UK time zones with direct air services to the major east coast cities in the US as well as to the UK.
A complete absence of foreign exchange control for international companies as well as top quality office, hotel, conference, restaurant and recreational facilities, are additional attractions.
Good ratings
Ratings agencies give Bermuda a good endorsement. Since 1995, Standard and Poor’s has rated the country AA; Fitch Ratings affirmed its long-term currency rating of AA, and the long-term local currency rating of AAA.
The offshore sector is heavily reliant on foreign finance workers and, although international companies have clashed with the PLP over plans to limit the number of years that work permit holders can remain on the island, the relationship has remained generally good. A new minister was put in place to soothe tempers over the issue. “The heat has died down,” says Mr Ezekiel. “International business is much more comfortable with the tack being taken on term limits. The new minister has done a great job.”
The island has been given a clean bill of health by the IMF, the FATF, KPMG and the OECD.
“Bermuda is a leading international financial centre due in part to the market adaptability of its well-regarded financial services regime,” says finance minister Paula Cox. “Practical legislative innovations are made periodically to stay competitive, while at the same time respecting international regulatory standards of bodies such as the IMF and OECD.”
Health from wealth
International business has made an already wealthy island even wealthier, with gross domestic product standing at $3.14bn in 2003 – all the more astonishing with such a small population. Traditionally, pink sand beaches and clear turquoise ocean made most of the money for the island, but in 2001 international business overtook tourism as the main pillar of the economy.
The expansion of financial services – particularly banking – has been targeted as a new way of making the economy more stable and less reliant on tourism and insurance. “The expansion of the financial services sector has been assigned a high priority by the government of Bermuda,” says Ms Cox.
The hedge fund industry has grown exponentially in the past seven years – by almost 900% – and there is now $72bn under administration on the island, up from $8.13bn in 1997. Bermuda funds have been accepted for listing on a number of prominent stock exchanges, including Hong Kong, Ireland and Luxembourg. The US Securities and Exchange Commission has estimated that there are 6000-8000 hedge funds worldwide, and that overall hedge fund investment could reach $1000bn by the end of this year – a three-fold growth since the end of the bull market.
In the 1990s, Bermuda relaxed its policies in relation to the establishment of trust companies. The government acknowledged the value of this business and has been implementing suitable regulations and legislation for this sector on a regular basis.
Bermudians are rightly proud of what they have come up with in this tiny, remote island. “Why would someone want to come to Bermuda?” asks Mr Gosling. “Infrastructure, language, location, the Privy Council – and let’s not forget the people.”
