Bermuda: Crossing Borders

The world is a dynamic place, with constant economic rebalancing, shifting geopolitical priorities and ideological differences, all in the very human quest for prosperity.

With that constant change comes constant risk, and an unmanaged risk is a threat to prosperity. Hence, insurance and reinsurance.

The risks the world faces are not restricted by jurisdiction, and the most effective solutions for the management of those risks are similarly not restricted by jurisdiction.

Bermuda is a testament to that principle. The island has steadily evolved into a centre for risk management solutions, working alongside – and to the benefit of – the international financial community. Bermuda reinsurers support the Lloyd's and European markets, and are critical supporters of the US insurance market, across all lines of business.

For the US property market in particular, Bermuda reinsurers help foot the bill when major disasters strike – whether natural or man-made.

And the island's steady and sophisticated regulatory framework ensures that the US, and the world, can be confident that they will continue to pay claims when future disasters threaten prosperity again.

So what is the threat posed to the international reinsurance market generally by proposed domestic US tax reforms, and in particular the suggested "border adjustment tax" (BAT)?

While it remains uncertain what form the BAT proposal will take – or if it will be adopted at all – the concern is that, as currently presented, the proposals could have the effect of limiting access to global risk management solutions. And that is a threat to prosperity.

In short, the proposals being put forward in relation to BAT will, if enacted, make it more expensive for a US insurer to purchase its reinsurance outside of the US, by imposing a tax on the "import" of that reinsurance protection.

If the reinsurance protection is made more expensive or, worse, is not available due to a shortage of capital, insurers must pass on the higher risk management costs to their insureds. That will have a negative impact on the effectiveness of risk management strategies by US businesses and consumers, and that, in turn, will necessarily have a negative impact on prosperity.

To be clear, the BAT proposal is not aimed specifically at reinsurance (unlike other previous tax proposals – such as the Neal Bill – that have targeted the reinsurance market). Rather, it appears to be directed at imports into the US generally.

The "import" of reinsurance would simply be caught in that very wide net, along with imports of commodities, manufactured goods, etc.

We are not saying that such an import tax is necessarily bad. Indeed, there may be good reasons for having such a broad import tax implemented, if the politicians see fit. The question is, is it appropriate for reinsurance to be included in the scope of such a tax?

Simply put, there is far more capital to be found outside of any one country's borders than there is inside. It stands to reason, therefore, that when seeking the broadest possible array of solutions, and the capital to support them, there should be no – or at least minimal – hindrances to doing so, wherever in the world those solutions may be found.

Indeed, it would be far more appropriate to view the purchase of risk management solutions (in this case, reinsurance) from a market outside of one's own borders as an export of risk, rather than as an import of protection.

Recognising such transactions as the diversification and transfer of risk that they are, rather than simply regarding them as a service import, can only help in the management of risks, and therefore aid in the quest for prosperity.

Whatever the view of BAT may be generally, only time will tell what final form US tax reform proposals – and in particular the BAT – may take. But it should be our collective hope that those proposals do not seek to limit or penalise the export of risk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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