Bermuda continues to hold its niche position in the reinsurance sector despite a number of recent challenges, including U.S tax reform, a shrinking pool of reinsurance companies due to M&A activity, and, to a lesser extent, the uncertainty caused by Brexit, according to A.M. Best.
Bermuda is assessed as a CRT-2 country, with a moderate level of economic risk, a low level of financial system risk, and a very low level of political risk.
A.M. Best said that it continues to view Bermuda’s legal environment and business infrastructure as predictable and transparent with sufficient financial system regulation and a mature insurance industry framework.
Bermuda recently demonstrated its commitment to international tax treaties by joining the effort to tackle Base Erosion and Profit Shifting (BEPS), and A.M. Best noted that the island’s banks have historically maintained strong levels of capital and liquidity, providing an important buffer for unexpected shocks.
Many Bermuda reinsurers reacted to the changes in the tax laws by decreasing the size of the inter-company reinsurance arrangements, or by eliminating them altogether, and A.M. Best observed a continual movement of some capital to on-shore balance sheets.
Some reinsurers have also formed new Bermuda entities that elect to be a U.S taxpayer and have restructured their treaties from a quota share to excess of loss or stop-loss policies, although Bermuda continues to offer tax advantages to multiple jurisdictions, the rating agency said.
Additionally, A.M. Best noted that Bermuda has emerged as a leader in the global insurance-linked securities (ILS) market after implementing a regulatory framework to facilitate the formation of ILS through a new class for insurers.
To a lesser extent, the response to Brexit by insurers and by the Prudential Regulatory Authority may also affect Bermuda, but A.M. Best held that the island’s status as a British overseas territory, its Solvency II equivalence, and its ongoing dialogue with British regulators will help Bermuda to proactively respond to emerging risks.