A couple of years back, Hiscox were all for Bermuda.

Now they are pulling out and expanding in the US.

What gives?

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The new administration, struggling to deal with the largest deficit in over 50 years, will have to look into all sorts of ways to raise revenue and plug perceived holes.

One of those is to tax those evil offshore reinsurers who write US business but then, oh horror, reinsure it in Bermuda, one effect of which is to reduce their tax liabilities.

…[A] proposal to crack down on offshore reinsurers gained momentum in September with the introduction of House legislation by Rep. Richard Neal, D- Mass.

The Neal bill is backed by a coalition of U.S.-based insurers including the W.R. Berkeley Corp., the Chubb Corp. (CB), and the Travelers Companies (TRV).

Those companies claim that foreign-based insurers, including the ACE Group ( ACE) and XL Capital Ltd. (XL), avoid taxes on their U.S. business by reinsuring policies written in the U.S. to Bermuda-based affiliates.

“No one wants to impinge upon the free movement of capital. But we don’t want people to use the guise of risk-spreading to avoid tax,” said William R. Berkeley, Chairman and CEO of W.R. Berkely Corp.

Of course not. And if that happens to mean that WR Berkeley et al pick up a little more market share, too, well that would be incidental, though rather nice for domestic US carriers. Umm, except that this leads then back to another problem in that the industry generally believes that US carriers are uncompetitive compared to Bermudian companies, so any move to tax those offshore carriers would lead to a decline in capacity, which would in turn lead to price hikes

“Putting this tax on all U.S.-associated reinsurance products is likely to reduce the appetite of U.S.-exposed business,” said James Livett, a business process development manager with Alwen Hough Johnson Ltd. in the United Kingdom. “In a time of reducing margins and tightening of capacity in the international reinsurance market, adding an additional financial burden on reinsurers can only be detrimental to the capacity being offered by international players, as such rates for U.S.-exposed business will increase due to lack of meaningful competition.”

And presumably those increased prices for US citizens will be precisely something that the new President would rather avoid.

Which rather begs the question whether Obama has really thought through the full impact of this proposal. As Bermuda Premier, Ewart Brown, has said:

I think the Obama camp probably doesn’t have a full understanding how much Bermuda’s operation means to the US. That’s a little known component of this whole equation.”

Dr. Brown said that between 2001 and today, Bermuda-based companies had paid out $30 billion in claims for US catastrophic events and that he believed the tax haven label was “unfair” for the Island.

For a slightly less, um, measured view — or more heartfelt expression of belief, if you prefer — you might also want to consider this.

Whatever, it looks as if we may be in for some more or less radical changes to all manner of financial systems around the world. Times are set to become interesting.

Sources: CNN, and The Royal Gazette.

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Well, this looks like an, er, interesting idea.

> ReSources (Bermuda) provides insurers and reinsurers locally and overseas with a range of management capabilities during peak seasons or whenever extra help is required… [It] will provide production, underwriting, and audit services to Bermuda’s insurance and reinsurance sector, and to companies overseas, on an outsourced basis. The new company might be described as a means of temporarily expanding a client’s abilities to allow them to achieve greater reach when an opportunity presents itself.

Right. I don’t mean to sound cynical and I’m sure that ReSources is run by people of unimpeachable credentials, but you can just see the inherent difficulties and conflicts here.

First, outsourcing your underwriting is, in my view, a Pretty Bad Idea generically. To do it at peak times – i.e. when your regular staff are over-stretched and thus cannot give their attention to any business beyond their own – seems doubly dangerous. God knows, the problems are difficult enough when you have a plain old MGA but when it’s a temporary, expedient MGA I can only see the problems multiplying.

Second, I think the potential for conflict of interest seems pretty high. As a business model, unless they are going to have very few clients indeed, there are almost inevitably going to be times when they are chasing the same piece of business for more than one client. Now that might be OK if there’s enough to go round, but not if not.

Third, one can see perhaps (perish the thort!) that some less scrupulous brokers might target the hired gun underwriter with less than savoury business. Well, it’s been known to happen…

So, all in all, my instinct is to approach the concept of such services with a little care. I am sure that Messrs. Smith and Underwood are of the highest calibre, but all the same the whole notion seems to me potentially appealing to lawyers. Like me.

On second thoughts, Vas y!

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Hello again. There’s an article here from the New York Sun on reasons why shareholders should be cautious about the new wave of reinsurers.

The principal concerns they highlight are those linked factors, rates and capacity:

The primary concern is that reinsurance rates, which popped after Katrina, Rita, and Wilma blew through, may not continue at such high levels. The rise in rates, along with clear memories of the opportunities that awaited the fleet investor the last time around, attracted significant new capital overnight. This came not only from the start-ups, though they alone brought in $8 billion of new capital within three months.

Existing companies, too, were able to raise considerable new money through the issuance of cat bonds and through sidecars. The latter refer to special-purpose pools of capital raised by existing firms that are designated to new investments, and therefore attract those interested in taking advantage of new, higher, rates. That’s bad news for the newcomers, who have previously had the opportunity to compete in a capital-starved industry for a longer period of time.

They also point to the fact that this year’s better than average hurricane season may well lead to a relaxation of underwriting discipline, further falls in rates, general shambolicness. And their tips for the tip – or at least survival – are Validus and Ariel Re. Hmm. Let’s return to this next year.

[Note to self: revisit this page a year today for an update].

UPDATE: 27 Oct 2006 – didn’t even have to wait that long. In an article in yesterday’s Royal Gazette, from Bermuda, Evan Greenberg, CEO of ACE, is reported as commenting that

rates continue to soften around the world at roughly the same pace we have been experiencing throughout the year.

New business pricing tends to be more aggressive and at times undisciplined. There are numerous examples of new business coming to market where the pricing in our judgment is inadequate.

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And now Hiscox have moved their ops there, citing an excess of red tape and a 30% rate of corporation tax here as against a more relaxed regime there and, what was it, oh yes – 0% corp tax.

Not everyone is happy:

> Richard Murphy, of Tax Research, said the plans outlined by the insurer showed “it wanted the best of both worlds” as it continued to conduct business in London but pay tax in Bermuda.

But then you think, well why not? If the govt. is going to mire the country down with bureaucracy and an uncompetitive burden of regulation, that is precisely how the market responds.

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