Bermuda’s ILS supremacy transcends tax considerations: Taylor, Ocorian

In August 2023, the Government of Bermuda announced its deliberation on the potential introduction of corporate income tax, pending a series of consultations.

Sherman Taylor, Head of Capital Markets at Ocorian in Bermuda, analyses the implications of this proposal for Bermuda’s insurance-linked securities (ILS) sector if it receives approval.

Bermuda, a prominent player in the global insurance and reinsurance market, is contemplating the introduction of corporate income tax, a move triggered by international tax reform agreements reached in October 2021.

These agreements, encompassing 141 jurisdictions worldwide, were designed to ensure that large multinational enterprises (MNEs) with global annual revenues exceeding €750 million contribute a minimum level of income tax.

Taylor noted that the key element of this transformation is the Global Anti-Base Erosion Rules (GloBE Rules), developed by the Organisation for Economic Co-operation and Development (OECD).

“Pillar 2 of this agreement seeks to guarantee that the global income amassed by MNE’s is subject to an effective tax rate of at least 15%. This approach hinges on the imposition of a ‘top up tax’ on profits arising in jurisdictions where the effective tax rate is below the 15% minimum effective rate.”

“Bermuda’s existing taxes like payroll tax and duties on imports, are unlikely to be considered “covered taxes” under the GloBE Rules. The Bermuda proposal therefore contemplates corporate taxation, ranging from 9% to 15%, applicable to revenue earned on or after January 1, 2025,” explained Taylor.

According to Taylor, should this proposal become law, its impact on Bermuda’s ILS industry would be limited to entities affiliated with MNE groups.

“Notably, the typical structures employed for ILS transactions in Bermuda are ‘stand-alone’ entities, detached from both cedants and investors. These entities are conceived solely to facilitate one or multiple ILS transactions, and in isolation, they are unlikely to meet the criteria for MNE status. This may seem counterintuitive, given the substantial size of ILS deals, often amounting to hundreds of millions of Euros.

“However, the €750 million benchmark is rooted in annual revenue, not assets under management, with premiums falling well below this threshold,” said Taylor.

Bermuda’s move toward corporate taxation aligns with the global push for a minimum 15% global tax, supported by 141 countries under the OECD agreement.

“Nonetheless, this would unlikely deter the demand for and expansion of ILS as an asset class,” continued Taylor.

Instead, he explained, it highlights other critical factors influencing domicile selection for ILS transactions, where Bermuda maintains a competitive edge.

“Bermuda transcends tax considerations – it is fortified by a myriad of compelling factors, including its stellar track record, competitive advantages spanning low operational costs, rapid market entry, an impeccable reputation, and the seamless establishment and operation of ILS vehicles,” Taylor explained.

Furthermore, Bermuda’s regulatory system is firmly established and has proven its effectiveness over the years. The island’s regulations benefit from experienced and approachable regulatory authorities.

Bermuda has a thriving ecosystem that includes significant participants in the insurance industry such as major insurers, brokers, reinsurers, claims processors, actuaries, and insurance managers who are deeply rooted in the region. This makes Bermuda a valuable source of insurance expertise, Taylor noted.

“These cumulative strengths far outweigh any potential tax benefit, positioning Bermuda to maintain its global supremacy in the ILS realm, irrespective of the introduction of corporate taxation,” he concluded.

Ocorian offers a range of services to the insurance-linked securities (ILS) industry.